Since 2011, Maine’s tax code has gotten less, not more, fair. Reductions to the top income tax rate and changes to the estate tax cut taxes significantly for Maine’s wealthiest residents. These tax changes significantly reduced state revenues necessitating cuts in education, health care, and other important services while shifting more and more of the costs to property taxpayers.
The cap on itemized deductions is one of the few changes that has actually improved, rather than undermined, the progressivity of Maine’s tax code. Based on analysis by the Institute on Taxation and Economic Policy, the top 20 percent of Maine taxpayers will bear 98 percent of the costs of this proposal. We view this as a good thing.
The deduction cap also raises much needed funds at a time when revenue is scarce. Our inability to raise adequate revenue at the state-level and fund vital programs impacts everyone in this room. For some, it means cuts in state-funding for programs and services they provide to Maine people. For others, it means increased property taxes and reduced services at the local level. Perhaps most troubling, for tens of thousands of Mainers, it has resulted in job loss, loss of much needed property tax relief, or the loss of affordable health care.
I point this out not for dramatic effect but rather to acknowledge the unenviable position we are in. The Maine Center for Economic Policy is a 501c3 organization. The concerns that many of our friends in the nonprofit community have about the cap on itemized deductions merit consideration. Absent an alternative source of revenue that is not predicated on additional cuts to programs and services that benefit low- and moderate-income Mainers or that enhance the fairness of our tax code, we cannot support this proposal.
The potential benefits of this proposal are uncertain at best. As stated above, the direct beneficiaries would disproportionately be Maine’s wealthiest taxpayers who already benefit greatly from favorable tax policies at the state and federal level.
The impact on charitable giving is unclear. For example, based on federal tax returns, New Hampshire which does not have an income tax and therefore no state level deduction for charitable giving, actually has higher average charitable contributions among itemizers than Maine. Efforts to evaluate the impact of recent deduction caps in states fail to account for the recession’s impact on giving. They also assume that reductions in giving subsequent to enactment of deduction caps are related to those caps, not the broader economy. That said, federal tax law does influence charitable giving, and Maine taxpayers will continue to benefit from these provisions at the federal level. In fact, reduced federal tax liability will offset increases in state taxes for those affected by the deduction cap since they can be deducted on the federal return.
Finally, it is unclear what portion of charitable giving claimed by the approximately 30 percent of Maine taxpayers who itemize deductions actually goes to nonprofits in Maine. Let me be clear, I support charitable giving wherever it occurs and have worked in the philanthropic sector domestically and abroad. That said, in regard to this proposal, it is appropriate to ask: to what extent are Maine taxpayers being asked to subsidize tax breaks for Maine’s wealthiest taxpayers that provide no direct benefits to Maine people or communities?
If LD 1664 does not pass, I would be happy to work with proponents of this proposal to monitor impacts on charitable giving in Maine. As I stated earlier, we must evaluate any erosion of charitable giving against associated cuts in programs and services at the state-level to compensate for lost revenue. In the future, I would eagerly work with proponents to identify and promote alternative and appropriate revenue sources to mute the fiscal impact of this proposal. However, in the current legislative environment and absent appropriate alternatives MECEP opposes LD 1664.
Thank you for your time and for your service on behalf of Maine people.
Garrett Martin, Executive Director of the Maine Center for Economic Policy, testifying before the Joint Standing Committee on Taxation in opposition to LD 1664.
