It is important to understand how each of the tax policies in the budget plan work together, not only to understand that concerns over homeownership and charitable giving are over stated, but also to understand that the impacts of LD 1519 would be a giveaway to wealthy Mainers for which low- and middle-income Mainers will pay the price. Most low- and middle-income Mainers will be choosing the standard deduction under the new tax plan. Half of the $52 million dollars that this bill will cost will go to the wealthiest 1% of Mainers. Nearly all of the other half goes to the remaining wealthiest 20% of families in Maine.
Good afternoon Senator McCormick, Representative Goode, and members of the taxation committee. My name is Garrett Martin; I am the executive director at the Maine Center for Economic Policy.
I am here this afternoon to testify against LD 1519. The itemized deduction cap is an essential part of the budget agreement struck last year that funds our schools, continues popular programs like prescription drug assistance for the elderly, and preserves a portion of revenue sharing for communities across the state. These programs and services funded by the 2015 budget agreement are essential for helping families afford their homes, getting Mainers to work, training tomorrow’s workforce, and ultimately strengthening Maine‘s economy. They reflect the values and needs of Maine people. Repealing the itemized deduction cap will jeopardize funding for these and many other state priorities.
The tax changes within the budget agreement begin to take effect in tax year 2016 and phase in fully by tax year 2017. Once phased in, 86% of Maine families will receive an income tax cut and 83% of Maine families will pay less in combined state and local taxes. LD 1519 threatens these achievements before they fully take effect. Upsetting the balance struck last session between spending priorities and tax cuts will likely result in a less progressive tax system and higher taxes for low- and middle-income Mainers.
Last year’s budget made changes to many areas of the tax code, not just the treatment of itemized deductions. It expands tax brackets and lowers the top rate, nearly doubles the standard deduction, and caps and phases out deductions. I include a summary of these as an attachment to my testimony. These changes will work together to lower income taxes for 86% of Mainers and prevent harmful budget shortfalls. LD 1519 begins to pull at threads in the budget agreement and threatens to unravel the delicate balance struck between fulfilling the collective needs of our communities and helping working Mainers keep more of what they make.
One of the most significant changes to the tax plan is the near doubling of the standard deduction which means many Mainers will switch from claiming the itemized deduction to claiming the standard deduction. The Institute for Taxation and Economic Policy estimates that the percent of Maine taxpayers who itemize on their state income taxes will drop from 22% to 11% after the higher standard deduction is in place.
For most low- and middle-income folks who have itemized in the past, it is mortgage interest that has tipped them into the itemizing camp. This is because most Mainers in this income category do not have other large yearly expenses that qualify for the itemized deduction. However, most Mainers do not have mortgage interest high enough to make itemizing worthwhile once the standard deduction increases.
With my testimony, I am including an attachment that depicts typical mortgage interest expenses for different home values assuming a 30 year fixed mortgage at 4% interest and a 10% down payment. According to Realtor.com, the average closing price in Maine is $153,000 for a single family home. At that price, the first year’s interest expense is approximately $5,000. That means, under the higher standard deduction, a married couple would need more than $18,000 in other deductions for it to make sense to claim the itemized deduction. For mortgage interest alone to exceed the new standard deduction for even just the first year of a 30-year mortgage, that same couple would have to purchase a $660,000 home. A single tax filer would have to purchase a home valued at $325,000 for their mortgage interest to exceed the standard deduction value for just the first year. While these examples represent one end of the spectrum – where mortgage interest alone triggers the use of itemized deductions – they also make it clear that itemized deduction limits contained in last year’s budget agreement are unlikely to have a significant impact on the average Maine homeowner. In fact, for the average homeowner, the doubling of the Homestead exemption that was part of the budget is much more important in supporting homeownership for new and long-term homeowners.
Proponents of LD 1519 also claim that the itemized deduction cap will discourage investment in communities. This concern is misplaced. First and foremost, the cap ensures that legislators can keep their promises to fund the important state programs that strengthen our communities and economy. Secondly, the research they cite fails to account for the combined effects of other tax changes contained in the budget deal.
At the end of the day, more Maine people will actually have more, not less, to give to charitable causes or to spend on household needs. This is confirmed by Maine Revenue Services distributional analysis of the income tax changes and all tax changes contained in last year’s budget agreement that I have included with my testimony. Furthermore, according to analysis by ITEP, 71% of families who are affected by the cap on itemized deductions contained in the budget agreement will actually be able to afford larger, not smaller charitable contributions. That’s because, unlike the previous cap that was introduced by the LePage administration in 2013, the current cap is part of a comprehensive bipartisan plan that included other important changes to the tax code.
Mainers (and those from away) who generously give millions of dollars annually to a wide range of Maine non-profit organizations do so primarily because they strongly support the work these organizations do, not because of how their contributions are treated at the state level. For example, the recent $10 million gift Bates College received came from a family in Massachusetts, a state which offers no benefit for itemized deductions.
It also bears mentioning that even though Massachusetts will not be subsidizing this gift to a college in Maine, this donor will still receive a significant tax benefit of as much as $3.17 million on their federal taxes.[1] This example highlights that federal treatment of deductions already provides a large incentive to give and will always be more powerful than a state incentive because state income tax rates are lower.
It is important to understand how each of the tax policies in the budget plan work together, not only to understand that concerns over homeownership and charitable giving are over stated, but also to understand that the impacts of LD 1519 would be a giveaway to wealthy Mainers for which low- and middle-income Mainers will pay the price. Most low- and middle-income Mainers will be choosing the standard deduction under the new tax plan. Half of the $52 million dollars that this bill will cost will go to the wealthiest 1% of Mainers. Nearly all of the other half goes to the remaining wealthiest 20% of families in Maine.
While last year’s budget agreement prevented deep funding cuts. It does not increase revenue to account for the rising costs of education and health care, the aging of our transportation infrastructure, or other important priorities. Cutting out an additional $52 million dollars in revenue will leave the state scrambling to fund these priorities into the future. We cannot let the budget unravel before the benefits for Maine families and communities are realized. And we cannot give tax breaks to wealthy Mainers at the expense of our kids and our future.
[1] This assumes that the $10 million deduction is claimed in one year at 80% (per the Pease amendment) and offsets taxable income taxed at the highest federal rate (39.6%). $8 million X 39.6% = $3,168,000 tax savings.
