Maine Senate Kills Bill Eliminating State Income Tax

Late last week, the Senate defeated a bill that would have abolished Maine’s state income tax and established a zero-based budgeting system.

The result was a foregone conclusion considering the Democratic-controlled Legislature dismissed the thought of tax reductions earlier this year during debates over the Gov. Janet Mills’ partisan budget.

Had the bill been passed, Maine’s income tax would have been eliminated starting January 1, 2026. The bill, LD 1434, also would have established a zero-based budgeting system in time for fiscal year 2025-26.

In the context of this bill, a zero-based budget refers to a system “in which programs and activities are justified for a budgetary period using cost-benefit analysis without regard to the amount that was budgeted for those programs and activities in a prior budgetary period.”

Zero-based budgeting has long been a tool fiscal conservatives have used to restrain the growth of government spending.

The bill would have required state agencies to be subject to zero-based budgeting once every eight years. During periods in which they would not be using a zero-based budget, agencies would have to establish “targeted budgeting or a similar alternative” and present proposals for 5 percent and 10 percent spending reductions.

Sen. Laurel D. Libby (R-Auburn), the bill’s sponsor, testified that “Maine’s income tax is a penalty on work.”

“In the last 12 months the state of Maine has over-collected and redistributed more than $1.3 billion in tax revenue. Through the first nine months of the 2023 Fiscal Year, the state has nearly $140 million more individual income tax than planned,” Sen. Libby said.

“While this may lead some to conclude that that revenues remain too uncertain to engage in any type of structural tax reform,” she argued, “the reality is this demonstrates the precarious nature of our state’s reliance on higher earning working families.”

Libby suggested that Maine is facing not a revenue crisis, but a spending crisis:

The ability of the State to cut this amount of funding with little impact, shows Maine is not facing a revenue crisis – it is facing a spending crisis. One that has grown state government while failing to fix the growing list of issues facing Mainers. Issues like child abuse, drug addiction, homelessness, and ensuring basic educational competency. These are all issues that have received record funding in recent years while the impacts of those investments by Maine taxpayers make it clear we must reassess the status quo.

Libby also discussed the proposed zero-based budgeting system in her testimony, arguing that it would force a more careful consideration of the items included in the state’s budget year after year.

“Rather than continuing to build layer after layer of spending with no consideration for its effectiveness, the Legislature should be able to examine the underlying programmatic costs where funding is being continued,” she said.

Chase Hewitt, staff attorney for the Maine Revenue Service’s Office of Tax Policy, testified in opposition to the bill, arguing that the state income tax helps to “prevent overreliance on revenue from property and sales and use taxes” and “add progressivity to the overall State tax system.”

Maura Pillsbury, analyst at the left-wing Maine Center for Economic Policy, also testified in opposition to the bill, stating that it “would have devastating impacts on the ability of the state to raise revenue to provide important services Mainers need, like safe roads, good schools, and access to health care.”

Pillsbury argued that it would “result in a tax system that is less fair for low- and middle-income households who would likely see higher sales and property taxes to make up for lost revenue.”

Nick Murray of the Maine Policy Institute offered testimony in support of the bill, stating the Maine’s income tax rate for single filers earning up to $100,000 a year is the highest in all of New England. “That undoubtedly makes the state less attractive to prospective citizens in comparison to other states,” he said.

Murray also discussed the surplus of revenue coming into the state’s coffers. “Recently inflated General Fund revenues are Mainers’ rightful earnings. Why does the state get to benefit while the people are getting fleeced by inflation? The rainy day fund has hit its statutory maximum. Mainers need and deserve a permanent tax cut,” he said.

According to report published earlier this month, Maine’s overall economy ranks 42nd in the nation. The state comes in 38th for economic activity, 31st for economic health, and 43rd for innovation potential.

Disclosure: The Maine Wire is a project of the Maine Policy Institute.