Governor’s budget components and “retroactive incentives”

16 February 2015

Dear Friends and Neighbors,

Work has heated up considerably in your state legislature over the last month and many of you have written to me with questions and concerns about the Governor’s budget proposal.

Most legislators prefer, officially, to remain open-minded before public hearings are held.  Certainly most of us will do our best to base our positions on the facts and perspectives raised at these hearings over the next month or so.

Given the potential for division between the Democratically-led House and the Republican-led Senate, please understand that your legislators are deliberately reluctant to express individual reservations as ultimatums.  We all realize this next budget will require real compromise.   So a preemptive offense is not likely to advance the larger public interest in the end.

Even so, as your representative, I believe that I owe it to you to report faithfully on my initial views on some of the more controversial policy components which the Governor proposes.  I welcome your thoughts in return.

Reduced income taxes and expanded sales tax

Along with many in my caucus, I start in favor of a progressive tax structure in which income taxes form an essential core.  With overall prosperity threatened by increasing income inequality, the evidence suggests that the fortunate are not disproportionately burdened in Maine’s present economic system.

However, Maine is distinguished in that a significant part of the state’s public services benefit visitors and non-resident property owners. So, in order to extend public costs beyond just Maine residents, state revenue depends appropriately on a base of consumption and property taxes.

Lodging and meals taxes, sales taxes, and property taxes help export those costs. Expanding those taxes, as the Governor proposes, potentially benefits Maine’s year-round residents.

Overall, I favor any policy which, in total, benefits working Mainers, encourages local businesses, supports Maine communities, and efficiently aids those facing true hardship.  I remain wholly open-minded about any tax structure which may achieve those objectives.

For me, critical counterbalances of any tax package that expands sales and property taxes must include income-adjusted property tax credits such as the Homestead Exemption and the newer Property Tax Fairness Credit. To offset regressive aspects of an expanded sales tax, I favor a refundable sales tax credit as well.

Curtailed municipal revenue sharing and taxing nonprofits

The Governor’s budget proposes eliminating the 43-year-old statutory program which returns five percent of state tax revenues to municipalities in recognition of the services that towns must provide and the economic benefit that accrues to the state in return.

Partially to offset this curtailment of local revenue, the Governor also proposes partially to remove the property tax exemption for ‘charitable and benevolent’ and ‘literary and scientific’ nonprofit organizations.

Under this proposal, tax revenues in MDI towns could substantially increase at the expense of many venerable local institutions such as the hospital, college, libraries, research labs, and charitable and community groups.

Typically these organizations serve functions that are not replicable elsewhere in the public and private sectors and which offer tangible benefits in terms of human services and intellectual capital.

Presumably, removing their tax exemption would directly curtail local nonprofit activities, perhaps ending some organizations’ operations outright and leaving voids to be filled at public expense. The net cost in many communities may well be unfavorable.

Moreover, many Maine towns host no nonprofits.  With no potential for an expanded tax base, these towns stand only to lose revenue under the Governor’s proposal, further increasing statewide inequity to property taxpayers.

A special balance exists between the social and economic benefits that a community receives from local nonprofit organizations and the municipal services that each nonprofit organization receives.  Because this balance point varies greatly by institution and locale, I believe nonprofits properly should negotiate more consistent payments in lieu of taxes and preserve their tax exemptions and that municipal revenue sharing should be maintained.

Reduced reimbursement rates for rural hospitals

As in previous budgets, the Governor again proposes to reduce the Medicaid reimbursement rate to rural hospitals such as MDI’s.  The proposed rate cuts doubly harm these critical access hospitals because they no longer offset the provider taxes that the state charges in order to leverage additional federal funds to the state’s benefit and because every dollar that is cut from a community hospital’s operations is accompanied by a two dollar loss in federal reimbursement.

Unless offset by an increase in Medicaid funding, this proposal will cause grave harm to rural critical access hospitals.

Retroactive bonus depreciation

In the first controversial vote of the session, I was in the minority who voted in favor of an amendment which would have redirected a $10M retroactive tax expenditure for bonus depreciation credit for 2014 and applied it as property tax credits for the poor and elderly.

Unanimously approved by the Appropriations Committee, the underlying bill updates Maine’s tax law to conform to changes only recently made in the federal code, including an extension of the federal bonus depreciation allowance, a provision that stems from the Bush era federal stimulus and which was intended to provide accelerated incentives for business capital investments.

While there is no doubt that the capital investment tax credit would benefit some 4000 Maine business owners and many in my caucus are gun shy of any vote which might be represented as being “anti-business,” on balance I could not square the logic of a “retroactive incentive” as an effective or efficient policy tool to stimulate investment and jobs.

After the amendment failed, I voted in favor of the bill because in total it is necessary for Maine citizens to complete their tax returns.

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