Maine Lawmakers Debate Whether to Keep Voter-Backed Tax on Wealthy

By Jon Kamp Features Dow Jones Newswires

As Maine lawmakers try to avoid a government shutdown, they are debating whether to keep a new tax on high-income earners that voters backed seven months ago.

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If lawmakers can't hash out a deal during budget negotiations before the fiscal year ends Friday night, the state known as "Vacationland" risks shutting down just ahead of Independence Day.

So lawmakers in Maine, where the legislature is closely split between Democrats and Republicans, will have to decide soon what to do with a 3% additional tax on household income topping $200,000 that voters endorsed in November to help pay for education. The tax went into effect Jan. 1.

State House and Senate Republicans as well as Republican Gov. Paul LePage want to eliminate the tax, while Democrats want to retain it but have offered to lower the rate.

Mr. LePage said Tuesday he was willing to risk a shutdown to avoid passing a two-year budget he believes would cause lasting damage. In his weekly message Tuesday, Mr. LePage called it a "job-killing surtax" that he said was already affecting small businesses. "I believe we're going to shut down Friday night," he said on a radio show.

"We're in a very precarious place right now," said Sara Gideon, the Democratic speaker of the Maine House, in an interview late Monday. "We still haven't been able to land on an agreement."

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A spokeswoman for the speaker said the impasse continued on Tuesday after a morning meeting among a conference group including leaders from both legislative chambers.

The debate over taxing the wealthy is also percolating in other states. In Massachusetts, lawmakers recently voted to put a proposed surtax on income over $1 million on the 2018 ballot. Meanwhile, in Connecticut, Democratic Gov. Dannel Malloy has backed off from additional taxes on higher income earners because previous increases haven't solved the state's persistent fiscal problems.

In Maine, the conflict goes back to a ballot referendum last November in which voters endorsed adding the high-income tax with the goal of raising $320 million for education funding over two years. The National Education Association, a union with more than three million members, was a significant financial backer for the campaign.

Detractors of the tax, including the Maine State Chamber of Commerce, which urges an outright repeal, say the tax will hurt small businesses and harm a tight labor market. The tax pushed Maine's top marginal individual income-tax rate to 10.15%, the second highest state rate after California, according to data compiled by the conservative-leaning Tax Foundation. Many businesses pay taxes through their owner's individual returns instead of through the corporate tax and thus would be affected by the increase.

"This tax gives our competition in other states an edge in recruiting," said Melissa Smith, chief executive at Wex Inc., a payment-processing firm based in South Portland, Maine.

Supporters, meanwhile, argued it would force Maine to finally live up to another voter-backed measure from 2004 that the state keeps missing: a requirement that state government cover 55% of the tab for education.

When the state misses its education-funding target, "you either cut back on programs for kids, you don't maintain your schools, or you raise property taxes, which is a real regressive burden for middle-class families," said Ethan Strimling, the Democratic mayor of Portland, Maine's largest city. He supports the new tax.

Proposals to scrap the tax irk supporters who say this violates the will of Mainers who went to the voting booth last November.

"We're going to defend what the people voted on," said John Kosinski, the campaign manager at Stand Up for Students, the ballot-initiative group. He is also legislative director for the Maine Education Association.

The situation remains fluid as both sides negotiate.

The House GOP said their recent proposal would repeal the 3% tax altogether while raising $125 million in new education funding over the two-year budget. A recent Democratic offer would lower the tax to 1.75% while raising the income threshold to $300,000 with a goal of raising $200 million over two years, said Ms. Gideon, the House speaker.

There is room to negotiate and close the gap, "but we have to be in the realm of fulfilling the spirit of what the voters" supported, she said. Democrats are also pushing for a stable funding source.

A spokeswoman for the Senate Republican Office -- the GOP holds a narrow majority in that chamber -- said they have presented a budget proposal that includes a $110 million education-funding boost without the 3% tax. The Senate GOP plan also includes $65 million in funding for other priorities that could also be applied to education, she said.

The Senate Republican Office is confident lawmakers can meet the Friday deadline and avoid a state shutdown if all parties remain willing to negotiate, the spokeswoman said.

State rules require the budget pass with two-thirds majority, which means enough to override a veto from Mr. LePage, but if he waits long enough to issue that veto, the shutdown could still happen. The state's next fiscal year starts Saturday.

--Richard Rubin contributed to this article.

Write to Jon Kamp at jon.kamp@wsj.com

(END) Dow Jones Newswires

June 27, 2017 14:04 ET (18:04 GMT)