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A number of states have had budget showdowns over taxes and tax policy. In this article, the Tax Foundation's Morgan Scarboro discusses the challenges faced in Maine's 2018 budget process.
By Morgan Scarboro
Morgan Scarboro is a policy analyst with the Tax Foundation's Center for State Tax Policy.
After a multi-day government shutdown caused by failure to adopt a budget by July 1st, Maine Governor Paul LePage (R) signed a budget in the early hours of July 4th. There were several points of contention that led to the shutdown: the state's 3 percent individual income tax surtax passed by voters in November, an increase in the state's lodging tax, and public education funding.
Ultimately, the state passed a budget bill eliminating the 3 percent income surtax, a move that improved the state's economy by preventing Maine from levying the second highest income tax rate in the country.
The governor was prepared for a budget fight in January when he released an ambitious biennial budget plan that included several notable tax proposals: a flat income tax of 5.75 percent by 2020, the elimination of the estate tax, a slight reduction in the corporate income tax, and an increase in the state's lodging tax.
Disagreement grew when Democrats released their budget plan and, unsurprisingly, it looked very different than the governor's. Republicans, in response, pledged to eliminate the surtax, with Senate Majority Leader Garrett Mason saying, “We will accept nothing less than a repeal.” This, combined with differences over welfare funding and property tax relief, set the stage for a difficult budget process.
In November, Maine voters approved the income tax surcharge, Question 2, by less than one percentage point. The ballot initiative enacted a 3 percent income tax surcharge on income over $200,000, resulting in a top marginal tax rate of 10.15 percent. A top rate of 10.15 percent gave Maine the second highest top individual income tax rate in the country, trailing only California's 13.3 percent. California's top rate, however, doesn't kick in until the $1 million income level.
The surcharge would have been immensely damaging to Maine's tax code. Currently, the state ranks 30th on the Tax Foundation's State Business Tax Climate Index, a tool to evaluate the structure of state tax codes. Under Question 2, the state would have fallen to 45th in the country.
Question 2 also created a “marriage penalty” in the state. Maine avoided the marriage penalty prior to Question 2 by doubling its bracket widths to ensure that married couples filing jointly didn't face a higher tax burden than if they were single. Question 2, however, didn't differentiate between tax brackets of individuals and married people filing jointly.
The revenue from the tax was to be dedicated to public funding, specifically the Fund to Advance Public Kindergarten to Grade 12 Education. The Office of Fiscal and Program Review estimated that the tax would raise $142 million in the first year and increase by an additional $12 million each year.
The surtax ended up being one of the major sticking points of the budget negotiations. Many Republicans and Governor LePage made it clear from the beginning that they would not pass a budget that kept the surtax in place, citing concerns that “Maine is already having a hard time attracting doctors, engineers, scientists, and other professionals. Slapping them with a 10 percent income tax will guarantee they won't come here. They can go next door to New Hampshire, where there is no income tax.”
After the Appropriations Committee came to an impasse about the budget in June, Senate President Mike Thibodeau (R) and House Speaker Sara Gideon (D) named themselves and four other members of the legislature to a new conference committee to hammer out the budget differences.
On the last day before the shutdown, Thibodeau and Gideon sent a budget to the floor that eliminated the surtax, but included additional education funding and a lodging tax increase. Governor LePage said he would not sign it even though he had previously proposed an increase in the lodging tax in his budget proposal. The governor said that, along with sales tax base broadening, the lodging tax was included in his proposal to help pay for an income tax reduction. The Legislature did not pass the proposal, and the state had officially passed its July 1 budget deadline.
On the third day of the shutdown, the pair again developed a compromise and Speaker Gideon brought it budget to the House floor, but it failed to garner the necessary two-thirds majority needed for emergency budget measures. Later that night, Governor LePage and Speaker Gideon worked out a deal together that was approved by the Legislature and officially signed by the Governor around 1 a.m. on July 4th.
The budget included wins for both parties. For Republicans, the final budget repealed the 3 percent income tax surcharge and eliminated the lodging tax increase. For Democrats, it increased funding for education programs and paused changes to behavioral health funding.
As of July 1, ten states did not have a budget for the 2018 fiscal year. As of July 18th, only Wisconsin, Rhode Island, and Connecticut haven't passed compromise legislation.
For Maine and other states, the budget process is full of challenges and competing policy priorities. Implementing a neutral, transparent tax code that helps to facilitate a stable revenue stream, however, can make the process easier.
Copyright © 2017 Tax Management Inc. All Rights Reserved.
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