Taxable interests: The business community's reaction to LD 1495 is far from unanimous

The state’s three largest regional chambers of commerce — in Portland, Bangor and Androscoggin County — supported Maine’s recently passed tax reform bill. The Maine State Chamber, however, a host of smaller chambers and prominent business trade groups did not. The bill offered the overlapping constituencies a tantalizing change they’ve urged for years: a reduction of the state’s personal income tax. But the legislation required tradeoffs that left business groups on opposing sides of the issue: sacrificing previously untouched goods and services to the sales tax and instituting a flat income tax.

LD 1495, the bill that Gov. John Baldacci signed on the morning of June 12, marks the state’s most significant tax reform in 40 years. Among the highlights are the elimination of Maine’s income tax brackets and a decrease in the top income tax rate from 8.5% to 6.5% for those making under $250,000. Mainers earning more than $250,000 a year will be taxed at 6.85%. The bill also gets rid of itemized deductions and exemptions and replaces them with a tax credit for lower- and middle-income filers.

To make up for the loss in income tax revenue, the bill boosts the meals and lodging tax from 7% to 8.5% and expands Maine’s 5% sales tax to more goods and services. Now falling under the sales tax axe are “amusement, entertainment and recreational” services, including tickets to theaters, movies and museums, and fees on activities like white-water rafting trips, and “installation, repair and maintenance services,” including vehicle repair and office equipment maintenance. The bill ups the amount of meals and lodging tax funding that goes towards tourism marketing from 5% to 6%.

Baldacci’s bill eliminates a proposed expansion of the sales tax on some recreation activities, including fees for ski lifts and golf courses, and also gets rid of proposed increase in the real estate transfer tax on home sales of $500,000 or more. Then there are the curiously specific tax targets, like candy that doesn’t include flour or require refrigeration. So, expect to pay more for Reese’s Pieces, but your Kit Kat is safe.

The tax changes go into effect on Jan. 1, 2010, minus the sales and use tax on short-term auto rentals, which takes effect Oct. 1, 2009, according to the governor’s office. As Republicans mount a people’s veto effort, members of the business community, and their accountants, are trying to understand how all the fuss in Augusta will affect their bottom lines.

Wrong bill, wrong time

A roughly 8-hour public hearing on the tax reform bill in April was Rick Snow’s first experience with the state’s legislative process. The owner of Maine Indoor Karting in Scarborough, Snow recalls that Democratic House Majority Leader John Piotti of Unity, sponsor of the original bill, went on for about 45 minutes about how “rainbows would shine” if the legislation were passed. A handful of proponents of the bill addressed the taxation committee. Then, a long line of opponents, so many that some had to wait their turn in a nearby overflow room, approached the microphone. “It seemed like we were getting somewhere,” Snow says.

At about 4 p.m., attendees were informed that public comments would end in 10 minutes, and things got a little unruly, he says. “The room was full of business owners, a lot who had been there all day,” Snow says. There was some gavel-pounding, one man was escorted out, but testimony then continued on into the night. Snow had to leave after a brief recess and never addressed the panel. A follow-up meeting that was promised to allow for further public comment never happened, he says.

That doesn’t mean Snow’s not making his opinion known. He’s been vocal in opposing the new tax bill, and is upset that the Portland Regional Chamber, which he belongs to, supported it. He’s puzzled why no one has reviewed the implications of Baldacci’s last-minute changes, like removing fees for ski lift tickets and golf courses. “No one has, which amazes me,” he said.

Snow’s personal income tax bill will rise by nearly $4,000 annually because he, like many Mainers, itemizes and doesn’t use standard deductions, he says. Meanwhile, the bowling alley and golf course up the street won’t be affected, but he’ll have to pay an expanded tax on his go-kart business, an added cost Piotti advised passing on to consumers, Snow says. “You can’t just go raise prices because you’re told to. We have a competitive industry.” He doesn’t buy that most of the costs will be absorbed by out-of-staters — about 70% of his customers are Mainers — and already struggles to remain profitable with sales off 30% since June of 2007. Snow gets fired up talking about the bill, but his voice quiets and he lets out a sigh. “It’s very frustrating for someone who’s working hard to develop a business in this state,” he says.

Many of the state’s business groups agree. The National Federation of Independent Business, Maine Merchants Association, Maine Tourism Association and a number of others opposed the bill. And, despite the three metropolitan chambers’ support, a number of smaller chambers fought against it. A coalition of trade associations, chambers of commerce and businesses submitted a letter to Baldacci in June urging him to veto the original bill, LD 1088.

David Clough, director of the Maine chapter of the National Federation of Independent Business, says his members overwhelmingly opposed the bill. When he polled his roughly 2,000 members in Maine, 82% of those who responded were opposed to LD 1088, with only 12% in favor. Business owners, some of whom will pay more in taxes, are worried about the unforeseen consequences the bill could have in this tough economy, he says. “They’re worried, they’re scared.”

The Maine State Chamber of Commerce, which bills itself as the “voice of Maine business,” was among the signatures on the letter to Baldacci. As happy as it was to see a reduction in the personal income tax, the state chamber couldn’t support the bill without four things, according to President Dana Connors: An override provision to limit future tax increases, better attention paid to business associations’ concerns, greater clarity on the bill’s definition of business-to-business transactions, and deeper understanding of the tradeoffs amid a tough economy. “It was not a black and white decision,” Connors says. The chamber community as a whole was not divided by the issue, however, and businesses agreed on many other topics during the legislative session, he says. “The business community has been more united than almost any other year.”

Time for change

Despite opposition from some members, like Rick Snow, leadership at the Portland Regional Chamber worked hard to be respectful of differing views on the tax reform bill, according to Chris Hall, senior vice president of government affairs. In the end, the chamber represented the majority of its membership, just as the trade associations did, he says. “We didn’t look at it in those vertical stripes. We looked at it horizontally. What did the whole package do?” The reduction in the personal income tax coupled with exporting sales tax to tourists was attractive enough to warrant the chamber’s support, even though the overall bill could have used improvement, Hall says. “It ain’t perfect, but it’s a lot better than standing still,” he says.

The chamber sent out an email poll in March to 3,300 members and other contacts, asking whether they supported the Democrats’ plan. Reaction was split among the 50 to 75 responses, 55% to 45% in favor, Hall said, and phone and email feedback about the bill at that time was minimal.

Charles “Chip” Morrison, president of the Androscoggin County Chamber of Commerce, got some feedback from his constituency at the public hearing in Augusta. Standing in line to speak for the bill, Morrison endured some good-natured ribbing from members who showed up to oppose it, he says. “Their opposition was grounded in more fear of the unknown.” His organization has pushed for rebalancing Maine’s tax system for at least 14 years, Morrison says. The chamber wanted the bill to include expenditure control and address the non-conformity of the state’s estate tax with the federal estate tax, but “you can’t get everything you want in the Legislature,” Morrison says.

Response to the Bangor Region Chamber’s support of the bill has been overwhelmingly positive but not necessarily unanimous, according to John Diamond, chair of its executive committee. “It was clear when the chamber took its position that it was not a flawless proposition,” he says of the bill, but lowering the income tax and broadening the sales tax were important steps toward stabilizing the Maine economy. The chamber hasn’t lost a single member as a result of its support, he says.

Dan Tremble, for one, isn’t all that worried about the tax reform bill’s implications on his businesses. Owner of the Fairmount Market convenience store and a partner in the Ground Round restaurant in Bangor, Tremble thinks the new tax structure will be good for business, even though he’s facing a higher meals and candy tax. “Already it’s been positive,” he says. “It’s not very often people read international business magazines and read anything positive about the Maine tax rate. “

Even the conservative Wall Street Journal praised the Democrats’ new law in a June 24 editorial titled “Maine miracle,” saying the state improved its “economic attractiveness” more than any other this year. Also unexpected were cautious kudos from the Tax Foundation, a Washington think tank that said the bill was an overall positive change.

The higher meals tax — of which Mainers will pay 70%, according to the Maine Tourism Association — will add only about 75 cents to a typical $50 dinner bill for a couple at his restaurant, Tremble says. He predicts most won’t notice, including the roughly 25% of his patrons who are from outside Maine. “I don’t think that’s going to be a deterrent for people to go out to eat,” he says. Tremble, who is also a director on the Bangor chamber’s board, now awaits further clarification on the bill from Maine Revenue Services. “I think it’s actually going to help business,” he says.

Whether it will remains to be seen. What is clear is why the chambers and business groups came down on different sides of the tax reform issue, according John Mahon, dean of the University of Maine’s College of Business Public Policy and Health. The chambers represent geographic areas and all the businesses that fall within them, from big companies like Unum to “Bob’s Bar and Mary’s Restaurant,” he says. “They have to make decisions that reflect the majority of their membership or the perceived majority of their membership,” Mahon says. The trade associations, on the other hand, represent a smaller slice of business and commerce. “Their membership is more narrowly focused. Different trade associations can see different impacts,” he says.

The more important question is whether Maine’s newly passed tax law, the first of its kind in nearly half a century, will lead to taxing other areas, Mahon says. “We’ve just opened the door,” he says. “Who’s coming through the door next?”

Jackie Farwell, Mainebiz staff reporter, can be reached at jfarwell@mainebiz.biz.