June 27, 2023

Maine Senate Overturns Bill to Abolish State Income Tax

Recently, the Senate quashed a proposed bill which aimed to eradicate Maine’s state income tax and implement a zero-based budgeting system.

This outcome was predictable given the earlier dismissal of tax cuts by the Democrat-led Legislature during discussions over Governor Janet Mills’ contentious budget.

If the bill, known as LD 1434, had been approved, it would have eradicated Maine’s income tax from January 1, 2026, and simultaneously put in place a zero-based budgeting system for the fiscal year 2025-26.

Under the provisions of this bill, zero-based budgeting implies a system where programs and activities undergo justification for each budgetary period using cost-benefit analysis, without consideration of past budgeted amounts. Fiscal conservatives have long used zero-based budgeting as a strategy to curb governmental spending growth.

The proposed legislation would have mandated state agencies to implement zero-based budgeting every eight years. During non-zero-based budget periods, agencies would be required to adopt “targeted budgeting or a similar alternative,” and propose 5% and 10% spending cuts.

Sen. Laurel D. Libby (R-Auburn), the bill’s promoter, stated that “Maine’s income tax is a work penalty,” pointing out that in the past year, the state of Maine has collected and redistributed over $1.3 billion in tax revenue, with individual income tax receipts exceeding projections by nearly $140 million in the first three quarters of the 2023 Fiscal Year.

Libby argued that Maine’s problem is not insufficient revenue but excessive spending. This excessive spending has enlarged the government, yet failed to resolve pressing issues such as child abuse, drug addiction, homelessness, and ensuring basic educational competency. Libby advocated for the proposed zero-based budgeting system, arguing it would necessitate more careful scrutiny of budget items.

However, the bill faced opposition from Chase Hewitt, staff attorney for the Maine Revenue Service’s Office of Tax Policy, who stated that the state income tax helps to offset overdependence on property and sales taxes, and introduces progressivity to the overall State tax system. Maura Pillsbury, analyst at the left-leaning Maine Center for Economic Policy, echoed this opposition, warning of devastating impacts on state revenue and essential services.

Nick Murray of the Maine Policy Institute spoke in favor of the bill, stating Maine’s income tax rate for single filers earning up to $100,000 a year is the highest in New England, making the state less attractive for prospective residents. He argued that surplus state revenue belongs to the people of Maine and advocated for a permanent tax cut.

As per a recent report, Maine’s overall economy ranks 42nd in the nation. The state stands at 38th for economic activity, 31st for economic health, and 43rd for innovation potential.