The Smart Money: A question of fairness

Posted Wednesday, February 4, 2015 in Analysis

The Smart Money: A question of fairness

by Gina Hamilton

 Last week we looked at how the current tax scheme would be made even more unequal if the governor’s tax reform measures were enacted, giving the middle class a greater share of the tax burden than the wealthy. His tax plan does eliminate income tax for the very poorest, but given the nature of the current tax bracket schedule, most of those who will lose income tax liability are not working even a full time job making minimum wage.

If it weren’t bad enough that the middle class would be paying at least 5 percent more than the rich in terms of total taxation to the state, the super-rich suddenly will be given another goody — an end to the estate tax, which is being borne now by only about 150 families in the state. Only the wealthiest Mainers — those who die with wealth of more than $2 million — pay the tax now, which is 7.2 percent of the value of the estate over $2 million.

Revoking the estate tax is a very expensive thing to do. It would reduce state revenue by $ 14 million in fiscal year 2017 (July 2016-June 2017) and by $71 million in revenue over the biennial budget beginning in July 2017.

To give you an example of how that money could be used, it is enough to double property tax relief for every low and moderate income Mainer. It would double Maine’s earned income tax credit and make it refundable for the lowest income Mainers. It could be used to pay for the first year of college for every Maine student.

Or it could be used to pay for the inevitable Department of Health and Human Services shortfall, put money toward Maine’s share of the transportation budget, or fill-in-the-blank.

Without the estate tax, Maine’s 150 wealthiest citizens would pay nothing on property they inherit, and capital gains of assets like stocks and bonds would never be collected.

Many in favor of the tax say that it hurts small businesses and family farms, forcing the heirs to sell the property to pay the taxes. Very few family farms or small businesses are subject to such a tax, because a vanishingly small number meet the $ 2 million threshold. They are valued for estate tax purposes by a special valuation that takes account of both assets and liabilities. Nationwide, only 135 small businesses would owe any estate tax, and only 120 family farms if the federal estate tax were similar to Maine’s rules.

In Maine, that would mean about three farms and two small businesses would owe any estate taxes whatsoever, and none would have to sell the business or farm to pay the tax, which wouldn’t be much in any case.

In any case, the estate tax has already been cut, and not that long ago. Governor Paul LePage and the 125th Legislature cut Maine’s estate tax in 2011, eliminating estate taxes for properties between $1 million and $2 million in value. In the same year, they cut property tax relief for low and middle income taxpayers, and took health care coverage away from tens of thousands.

The estate tax is not the only example of an inequity in the tax system proposed by the governor.

LePage’s income tax scheme would create a so-called “bubble bracket”, once fully phased in, for households earning between $50,000 and $175,000 that would be higher than the marginal bracket paid by the top earners. For instance, in 2017, the middle income bracket would pay 6.95 percent from $ 50,000 up to $128,100, at which point the percentage would drop to 6.50 percent. In 2018, the top bracket would rise to $143,726 while the amount the rich would pay would drop to 6 percent. Meanwhile, the amount the middle bracket would pay would be 6.75 percent. By 2019, the middle bracket would fall to 6.5 percent, but the upper bracket — now at $175,000 and up — would see its percentage of the income tax fall to 5.75 percent — the same as people earning $9,700.

The bubble bracket forces middle income taxpayers to pay a higher marginal rate than the wealthiest earners, but according to the administration, it is a way to offset the $ 9,700 in exempt income that middle and upper income residents get, while keeping the exemption intact for low income workers.

However, that doesn’t explain why the upper income workers aren’t paying the same rate as middle income earners.

Nor does it explain how increasing sales taxes, on services that will affect lowerincome Mainers, such as car repair labor charges and movie tickets, won’t cause a general regressing of the overall taxation structure in the state.

In addition, the property tax structure, also highly regressive, would most likely rise for many communities as revenue sharing is eliminated. Without exemptions for the middle classes and the poor, and without property tax fairness credits for any but the elderly and veterans, the percentage of the tax burden will fall on the middle class.

The LePage tax plan appears to be a tax shift from the wealthy, and the poor, to the middle class.

blog comments powered by Disqus