Maine employers were encouraged to see progress in Gov. Janet Mills’ supplemental budget with the inclusion of a pass-through entity tax.
For several years, the Manufacturers Association of Maine, working alongside other business organizations and the Maine CPA community, has led the effort to advance this policy to help Maine companies remain competitive with the 36 states that already provide this option. Including the pass-through entity tax is a good first step.
However, if Maine is serious about strengthening its business climate, the proposal requires further refinement to ensure it fully supports the employers it is intended to help.
What’s at stake
Most Maine businesses are structured as pass-through entities. These companies, including manufacturers, contractors, professional firms and family-owned businesses, employ tens of thousands of Mainers.
Without a well-designed pass-through entity tax, business owners face higher federal tax burdens than competitors in neighboring states, leaving less capital available for hiring, equipment, wages and expansion.
More than a tax benefit
The proposed measure is also more than a tax benefit. By shifting the deduction to the federal level, Maine-based owners can reduce their federal tax liability while continuing to pay taxes at the state level. This keeps more federal dollars in Maine’s economy.
Because the current proposal provides credit equal to 90% of the pass-though entity tax paid, the state retains a portion of the revenue. In other words, the policy can improve competitiveness while generating new net revenue for Maine.
Key issues to tackle
The proposal moves the conversation forward, but several key issues should be addressed.
As written, the measure would apply beginning Jan. 1, 2026, with no retroactive option. Without the ability to elect prior years, Maine businesses will miss federal tax relief that companies in other states have already been able to claim — dollars that could otherwise be reinvested here.
The proposal also does not allow credit for taxes paid to New Hampshire, excludes tiered entity structures used by many growing companies and lacks clear guidance on how the election would be made. In addition, the budget does not fully conform to important federal provisions affecting research and development expensing. Each of these issues directly influences business investment and cash flow.
At the same time progress is being made on the pass-through entity tax proposal, another element of the supplemental budget raises concern: the proposed repeal of the business equipment tax reimbursement program.
For manufacturers and other capital-intensive businesses, equipment investment is essential to modernization, productivity and growth. Removing the reimbursement provision while attempting to improve competitiveness in other areas creates uncertainty and may discourage investment.
If the goal is to simplify or modernize the system, a more effective approach would be to transition remaining business equipment tax reimbursement eligible assets into the business equipment tax exemption program. That would provide continuity and send a clear signal that Maine remains committed to supporting business investment.
Ultimately, employers make long-term decisions based on the overall direction and consistency of a state’s policy environment. When progress in one area is paired with uncertainty in another, it can create hesitation about future investment.
Pivotal moment
This is an important moment for Maine’s business community.
The governor has opened the door on the pass-through entity tax. Now is the time to work with the administration and state lawmakers to refine the policy so it reflects how Maine businesses operate.
The relevant policy committees are prepared to engage with the Appropriations Committee, and budget decisions are now taking shape. The opportunity for input is now, while the details are still being determined.
Business leaders across the state should engage through their associations and directly with their legislators and the Mills administration to share their perspectives and help shape a final policy that supports both Maine’s economy and its employers.
Progress is welcome. However, with thoughtful refinement, Maine can ensure this policy strengthens both our economy and our competitiveness.