Tax headache or good deed? New 3% surcharge raises fears of exodus out-of-state
Photo / Tim Greenway
David Erb, head of the tax consulting and compliance group at BerryDunn, says a double-digit tax rate is a 'deal breaker' for some Maine taxpayers.
For years, working professionals with mobile careers and retirees with the financial resources to relocate have fled Maine for friendlier environs like Florida, which has no income or estate tax. The exodus is gathering pace in light of a new levy critics warn could do long-term harm to Maine's economy.
As of Jan. 1, 2017, households earning $200,000 or more are subject to a 3% surcharge to raise funds for education. It comes top of the 7.15% regular income tax rate for everyone, putting the top marginal rate at 10.15%. That's a new high for Maine and No. 2 in the nation after California, which applies its top 13.3% rate only after $1 million.
“The tax surcharge reinforces the perception of Maine as a high-tax state and adds to the reputation as a bad place for doing business,” says David Robinson, a senior financial adviser and co-managing member of Robinson Smith Wealth Advisors LLC in Portland. “Many of us are pro-education, but it is unclear if this additional tax is needed or will ultimately hurt education by causing Maine to lose higher-income taxpayers. The concern is that it's very short-sighted.”
The surcharge took effect after voters approved Question 2 in a November referendum by a tally of 50.6% to 49.4%.
Up to $157 million a year in expected revenues from the new tax are to be earmarked for public schools. The Stand Up for Students ballot initiative was billed as a way to help Maine meet a 55% funding obligation mandated by voters in 2004 by “asking the wealthiest Mainers to pay a little more.”
That's not how those in the top income bracket —16,823 households, or 3% of the total, according to 2015 U.S. Census data — see it. Many already feel put upon by the 7.15% tax rate compared to 5.1% in Massachusetts, which recently shed its tax-happy image, and zero in a handful of states including Florida and New Hampshire. The surcharge comes a few years after Maine imposed new limits on itemized deductions, including for charitable giving.
The growing tax headache has prompted high earners to seek an escape route, led by retirees who spend much of the year away already.
“You see many people nearing retirement spending time in Florida or elsewhere, maybe three to four months a year at first for climate reasons, then sooner or later after they retire it becomes longer and longer, until it makes sense to spend six months and a day to avoid paying Maine income taxes,” says Robinson.
With the surcharge now on the books, the flight to Florida and elsewhere has taken on a greater appeal, say financial and legal advisers who are seeing an uptick in queries since January.
“In my own practice, I've seen a steady stream of people leaving for the past 17 years or so,” says Pierce Atwood LLP tax partner Jonathan Block. “Since the referendum it has definitely accelerated. What I'm getting is two kinds of calls: from clients who want advice on relocating, changing their domicile to another state, and from companies who are very concerned about attracting the workforce they need, people with scientific pedigrees and qualifications in high demand that can work anywhere. They aren't going to want to work in a state paying that high of an income tax. That's a very big concern.”
David Erb, a principal and practice group leader of BerryDunn's tax consulting and compliance group, is seeing the same trend.
“For some people who were able to cope with 7% or higher in taxes on their business income, double digits really got their attention. For some I would call it a deal-breaker,” he says.
Cutting ties
While the decision to cut ties with Maine can be difficult, many feel they have no choice, says attorney Brian Dench of Skelton, Taintor & Abbott who chairs the Auburn law firm's board of directors. As an example, he points to a retired couple from Maine who spend part of the year in Florida. They recently decided to move their domicile to the Sunshine State for good, despite all the hassle that awaits them, after seeing their taxable income for 2017 rise to $250,000 based on Social Security, pensions and an increase in their net worth as a result of a recent inheritance. That puts their estimated tax bill at nearly $19,000.
Contrary to common belief, giving up Maine residency is not as simple as getting a new driver's license or registering to vote in another state, or spending more time in a vacation condominium — it entails a complete separation from life in the Pine Tree State, down to switching one's doctor and dentist.
“In order to make the change,” says Dench, “you have to really make it. You can't just fake it. You have to disengage yourself from all of your significant contacts in Maine and establish yourself elsewhere.” He says the break is often painful. “I've had people sitting in my office literally in tears at the thought of having to abandon their Maine residence,” he notes. “It's a very emotional issue for a lot of my clients, people who may have lived here all their lives.”
Lest anyone try to outsmart the Maine Revenue Services by maintaining two residences, the agency aggressively pursues alleged tax evaders, forcing some to go to great lengths to prove they were not in Maine for more than 183 days of the tax year, by showing proof like electricity bills, airline tickets, calendars, diaries and credit card receipts. While non-residents are allowed to maintain a permanent abode in Maine, they must keep records to verify they spent more than half the year in another state, according to MRS guidelines.
While the surcharge has raised the anger level for many top earners, several legal and financial advisors say there's not much someone can do to cut their tax bill here short of leaving. One said people could buy municipal bonds, but there's a limited supply in Maine and the return is limited.
Those that leave also take their tax dollars for education and other causes elsewhere, along with their charity allegiances.
“When someone leaves we don't just lose the 3%, we lose the 7.15%,” says Pierce Atwood's Block. “We don't get anything from them. It's going to take a lot more people paying that surcharge to make up that entire amount that Maine is losing by driving people out. That only makes it harder to raise money for education.”
It's not just wealthy philanthropists being stung by the new surcharge. It also hurts couples in well-paid professions with a combined income of $200,000 and owners of small businesses responsible for paying taxes on the company's profit, as so-called pass-through entities, and who may not be able to move their business. This, in turn, could have a detrimental long-term impact on Maine's economy, population and private-sector employment, the conservative Maine Heritage Policy Center and the state Office of Policy and Management warn in separate reports.
The OPM estimates a loss of up to $160 million in economic output in the first year alone, and up to $320 million within three years, according to a letter presented to the Joint Standing Committee on Taxation in Augusta on March 8. At a microeconomic level, the Heritage Policy Center warned that the surcharge will keep primary care doctors and other high-income professionals from considering Maine as a place to live and work, “threatening Maine's ability to provide medical services to its aging population and further exacerbating our demographic challenges.”
Call for repeal
Despite Gov. Paul LePage's pledge to keep lowering income taxes for everyone, a handful of bills have been introduced to either scrap the surcharge or mitigate the effects, including one that would require another referendum in 2018. A public hearing is due to take place in Augusta on March 20.
One bi-partisan business group, called Keep Maine Competitive and led by the Maine State Chamber of Commerce, is calling for a repeal.
“We are not opposed to increasing funding for education, because in effect education goes hand in hand with a successful economy,” says Dana Connors, president of the Maine State Chamber of Commerce. “Let's find another funding source that does much less harm and helps us to grow.” The coalition hopes to have the issue resolved by June.
“This is all in the hands of the Legislature,” says Phil Harriman, a former state senator and co-founder of Lebel & Harriman LLP in Falmouth who is involved in the Keep Maine Competitive coalition. He says that while some legislators are receptive to the group's concerns, he urges citizens to get in touch with their state representatives and senators, saying, “To persuade those legislators is going to take the constituents in their district to reach out.”
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