Federal Tax Changes Could Cost Mainers $250 Million - Jon Block Quoted in BNA Daily Tax Report

Reproduced with permission from Daily Tax Report. State. 25 DTRS (Feb. 6, 2018). Copyright 2018 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

By Aaron Nicodemus

A new report from Maine Revenue Services says the state’s taxpayers will fare well under the federal tax changes by paying $1 billion less in federal taxes in 2019.

However, a provision in the federal tax law dropping the personal exemption would generate hundreds of millions more in state taxes, a burden that would fall predominantly on lower- and middle-income earners.

The state’s Office of Tax Policy, part of Maine Revenue Services, released a preliminary report Feb. 1 that said full conformity with the 2017 federal tax act (Pub. L. No. 115-97) could require Maine individual and business taxpayers to pay $250 million more.

“The large majority of that increase--$233 million--would result from repealing Maine’s personal exemption to align with the now-eliminated personal exemption in the Code,” the report said. “Lower- and middle-income families would generally face the steepest relative tax increase as a result.”

Maine tax law currently provides that the personal exemption is equal to the federal personal exemption amount, which was $4,050 for 2017, according to the report. That personal exemption would have risen to $4,150 in 2018. But under the federal tax law, “the federal personal exemption deduction is zero for tax years beginning after 2017 and before 2026,” the report said.

Governor Planning Proposal

Julie Rabinowitz, Gov. Paul LePage’s (R) press secretary, told Bloomberg Tax Feb. 2 that the governor will introduce a bill for Maine to continue to conform with the federal tax code.

“However, while conformity would result in increased income tax revenue because of the elimination of the personal exemption, the Governor’s bill will also include measures to offset the revenue increase and send that money back to the Maine people, ensuring that they benefit from the entire tax cut passed by the Trump Administration and Congress,” she wrote in an emailed statement.

Maine follows a system of static conformity to the Internal Revenue Code and the definition of taxable income, meaning it calculates state taxable income as of a certain date.

The report said LePage “has made clear to the Department of the Administrative and Financial Services that he would not support tax conformity that increases the state income tax burden on Mainers.”

More Auditors Needed?

Jonathan Block, a Portland-based partner with the law firm Pierce Atwood LLP, attended a Feb. 1 legislative hearing at the Maine Statehouse, where the report was released. He said the personal exemption issue “was the most prominent” of the issues discussed.

“Legislators are very anxious to see what the governor’s proposals are going to be,” he said. “They don’t want to see something this complicated come down at the last minute.”

Should the state keep the personal exemption, one wrinkle that will have to be ironed out is how to administer it, Block said.

“As it stands, the state does not have a single auditor that audits personal income tax. That is done by the IRS now,” he said. “They’d have to hire a team of auditors to do what the IRS used to do.”

The report said keeping the state’s personal exemption “would require that Maine Revenue Services establish a method for validating personal exemptions.” Because the state “currently relies on the federal government’s validation of these exemptions, this would require a significant upgrade in audit capabilities,” it said.