A political impasse has developed between Democratic and Republican lawmakers over the ordinarily routine task of tax conformity, the annual process of aligning Maine’s tax code with changes in the federal code.
Tax conformity may be an obscure – if not dull – topic for the average Mainer, but it has produced a steady stream of political messaging from the State House, including dueling opinion columns from legislators and the kind of posturing that would lead residents to believe that the fate of the state hangs in the balance.
In reality, the issue has a financial impact on about 100,000 Mainers and businesses and a much less measurable political impact on the re-election bids of members of the Legislature.
Here’s an explanation of the policy and politics fueling the debate in Augusta:
Q: What is tax conformity?
A: Simply put, tax conformity occurs when states change their tax codes to align with changes at the federal level. Such changes happen all the time and could include deductions such as residential energy tax credits, write-offs for moving expenses and charitable donations.
The goal of conformity is to ease states’ legislative and enforcement burden when administering tax law. If the state code is out of whack with the federal code, that can create burdens for the tax man and taxpayers. That’s why some states have laws that automatically align with federal code. Other states, including Maine, require conformity ratification by the Legislature.
Tax code changes are a significant consideration for legislatures. Deductions, write-offs and other tax breaks often cost money. And because states such as Maine can’t deficit-spend like the federal government, tax changes have to be paid for before being implemented.
Q: What does the 2016 conformity bill do?
A: It would incorporate into Maine’s tax code several changes in the federal code made in December, when Congress passed the Protecting Americans from Tax Hikes Act of 2015. That measure revived several expired personal and business tax breaks.
Some of the breaks were extended for two more years, while others were made permanent. The permanent breaks included the teacher expense deduction, tax-free status for charitable donations taken from individual retirement accounts and bonus depreciation. The tax-free treatment of principal-residence mortgage debt forgiven by lenders was extended to 2016.
Q: Who’s affected by the bill?
A: About 100,000 Mainers are affected by the current conformity bill, according to Maine Revenue Services. That includes an estimated 4,000 small businesses and 300 larger corporations hoping to take advantage of the state’s bonus depreciation program, the Maine Capital Investment Credit.
It also includes a number of K-12 teachers who have claimed the $250 deduction for school-related expenses paid for out of their own pockets. According to Maine Revenue Services, about 18,000 teachers utilized the deduction last year.
Q: What is bonus depreciation?
A: The Maine Capital Investment Program allows businesses to accelerate the depreciation of newly purchased business equipment from taxable income in the equipment’s first year of service. It’s a bit like buying a new car, but instead of paying the full excise tax in year one, paying the excise tax as if you had the car for five or six years.
The goal of the program is to encourage businesses to grow and invest in new equipment, and the federal version has been used during recessions – although its efficacy is heavily debated.
The federal program allows a business to deduct 50 percent of the value of newly purchased business equipment from its taxable income. The Maine program allows businesses to claim 8 percent of the federal benefit for 2015 and 7 percent for 2016. Also, the Republican conformity proposal would reward businesses for equipment purchases they made in 2015.
Q: How much would conformity cost?
A: Republicans and Gov. Paul LePage want what they call “full conformity,” or a permanent alignment with the recent changes to the federal code. Their bill would cost $38 million and allow taxpayers to claim the deductions on their 2015 and 2016 returns. The bonus depreciation program accounts for $23 million of the total.
Democrats, specifically in the House, are pushing for one-year conformity at a cost of $16.8 million.
Both sides would use funding sources currently earmarked for other purposes.
Q: Why can’t the two parties agree on this?
A: Because it’s an election year, and both are taking positions that appeal to their base constituencies and are hoping to use conformity as a weapon against their political opponents in November.
Republicans say their proposal will provide stability for businesses and tax relief for Mainers. The position is bolstered by business groups. They’ve also marched out the anti-business, tax-hiking charge against Democrats.
Democrats in the Senate have given preliminary approval to the Republican plan. But House Democrats have labeled the Republican bill a corporate “tax giveaway” partly funded by casino revenue earmarked for local education funding. Under fire from LePage and business groups, House Democrats last week tried to reframe the debate. They passed a conformity bill that ends the capital investment credit after this year and adds $23 million to state aid to schools, which are expected to see funding cuts.
If the two sides are unable to reach a compromise, Democrats can tell voters they fought against corporate welfare and for the schools and Republicans can say they fought for Maine businesses and taxpayers. And the 100,000 or so Mainers affected by conformity won’t be able to claim the deductions on their 2015 state returns.
Send questions/comments to the editors.
Comments are no longer available on this story