Obama's tax plan and its effect in Maine | Obama's victory is expected to add $77 million more to the wealthiest Mainers' tax bill
If President-elect Barack Obama’s tax plan is enacted by Congress, what effect will it have on Mainers’ incomes?
A preliminary analysis done by Maine Revenue Services at the request of Mainebiz backs up what Obama said, and what independent analyses have confirmed: Taxes for Mainers in the highest income brackets would go up, while taxes for everyone else would go down.
In real terms, that means the 14,000 Maine households who earn more than $200,000 a year will pay $77 million more in federal taxes under Obama’s proposed plan. That represents 45% of the total $3.4 billion projected income taxes Maine will send to Washington.
Currently, those highest earners — about 3% of Maine’s taxpayers — pay 40% of Maine’s federal income taxes, or $1.43 billion of the $3.58 billion bill.
Michael Allen, the bureau’s research director, cautions that there are many variables in any tax analysis this early in a new administration. Among them: assumptions about restoring certain deductions and exemptions; expanding earned income tax credits and child care credits; exempting seniors with incomes below $50,000 from tax; and raising the top tax tiers to their pre-2001 levels — all pledges Obama made in his tax policy plan.
And perhaps the biggest assumption of them all is that Obama will be able to get his tax plan through Congress.
“It’s fair to say that with the fiscal situation evolving, and getting worse by the day, he may not be able to deliver this ambitious a tax cut,” said Christopher St. John, executive director of the Maine Center for Economic Policy. Nonetheless, St. John expects the tax bill to “follow the outlines” Obama put forward, both in raising revenue at the top end and in providing cuts for other taxpayers.
The impact on Maine’s businesses is also unknown. David Clough, state director of the National Federation of Independent Businesses, said policy decisions are rife with potential.
“A real key matter for Maine small business is what will [Obama’s tax plan] do to encourage capital formation, to allow a business owner to reinvest in the business,” said Clough.
For many small businesses, capital means what’s left over after paying taxes, he said. Other important tax considerations for businesses are whether an Obama administration will extend tax relief for new equipment purchases, and allow them to be written off in one year rather than stringing out depreciation over several years, said Clough.
For Maine’s wealthiest residents, they can expect to move from their current federal tax bracket of 35% to 36% or 39.6% under the Obama plan. Allen’s projections show the above $200,000 income households paying $1.51 billion of the anticipated $3.4 federal income tax bill if Obama’s plan is adopted.
For the 97% of Mainers who are not in the top federal tax bracket, taxes will likely go down. One key variable will be whether increases will be made to the Alternative Minimum Tax exemption levels, similar to a patch made in 2008.
In fact, much of the reduction in current tax liability comes from Obama’s pledge to add another AMT patch, said Allen. The AMT was first adopted in the 1970s to restrict tax dodges from the country’s wealthiest people, ensuring that they would pay at least a minimum income tax. But because the AMT has never been adjusted to inflation, it now applies to more middle-income people. The AMT doesn’t let the taxpayer deduct real estate, excise or state income taxes — all significant factors in lowering most people’s federal tax bills. Fixing it has become a nearly annual exercise for Congress. The AMT repair is the “big driver” in possible savings for Maine families earning $50,000-$200,000, Allen said.
In his calculations, Allen did include restorations of various deductions and exemptions now scheduled to expire, an expansion of the Earned Income Tax Credit for low-wage earners, expansion of child care credits, and a zeroing out of liability for senior households reporting less than $50,000 in income in his calculations.
But Allen elected not to include in his calculations some proposed tax changes such as the “Making Work Pay” tax credit which would provide up to $500 to individuals and $1,000 to two-income working households. Allen said this credit is not included in his analysis because its figures do not segregate one- from two-earner households, but said its effect on lower taxes would clearly be substantial. The “Making Work Pay” tax credit would offset the 6.2% now contributed through Social Security payroll taxes. This is the source both of Obama’s claim that “95% of American families” will see a tax cut, and of John McCain’s claim that it includes those who now pay no federal income tax because their earnings are too low. The “Making Work Pay” credit is fully refundable — meaning the some workers would get a check even if they have no income tax liability.
While some of the Obama tax provisions are aimed at lower-income families and seniors, there are also plenty of provisions that could boost middle class incomes. The biggest one is probably a college tuition tax credit of up to $4,000 a year called the American Opportunity Tax Credit — a kind of GI Bill extended to the entire population. This provision is significantly more generous that the existing deduction for student loan repayments, on federal returns, and a new state program that provides state income tax credits for Maine college graduates who pursue their careers in-state. The tuition credit, too, is not reflected in the MRS analysis, Allen said, because it’s not known how many families would use it.
Other proposed tax changes that are currently too difficult to plug into the computation are the universal mortgage tax credit of up to $500; an expanded “saver’s credit” for those willing to put money in their IRAs; and a substantial expansion of the child care tax credit, up to $600 for two children.
How much of Obama’s campaign tax promises become law will be affected by several things. Allen believes much of the final tax package may depend on the economic team Obama assembles and how the new president responds to the slumping economy.
St. John said that it’s been clear for months that both candidates were engaging in the traditional election-year exercise of promises that please voters. He said a New York Times analysis made last June, at the end of the primary season, concluded that “neither candidate was telling the truth about taxes.”
Now that the elections are over, the real test begins.
“When it comes to doing a budget, we have to recognize that tax cuts are in competition with a lot of other priorities,” St, John said – beginning with a new stimulus package the lame duck Congress is expected to consider in a matter of weeks.
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