Tax Reform

(from Maine Townsman, July 2007)
By Geoff Herman, Director of State & Federal Relations, MMA

Comprehensive tax reform is like Charlie Brown’s football. Lucy sets the ball in a perfect position for Charlie Brown’s field goal only to snatch it away at the last minute every time. This year was going to be different, though. This year a special process was going to be used to develop the tax reform plan…a process so deliberate, open, careful and genuine that if the Taxation Committee was actually able to develop a comprehensive tax reform proposal using that process, snatching the football away at the last minute would be cruel and unfair and inappropriate.

The process was used and the process worked, but inappropriate or not, Lucy snatched the football away yet again.

The Process. The hero of what has become a biennial Greek tragedy is the Taxation Committee.

Anyone who may need to write a Master’s or Doctoral thesis should consider transcribing the tax panel’s efforts over the last six months. The thesis would become an instruction manual for any governmental committee – federal, state, regional or local – charged with tackling a controversial project of wide ranging impact. The members of the Taxation Committee, spread across the entire political spectrum from one edge to the other, accomplished a great deal more than simply fulfilling their charge, although they did that in spades. They worked tirelessly on their task. They produced an extremely thoughtful, detailed, researched, coherent, balanced and comprehensive tax reform product. They transcended partisan ideologies in a manner rarely seen in the State House, particularly with respect to the issue of taxation. And they vigorously reached out to all interested parties throughout the five-month development stage. This was not a tax reform plan that flew into the Committee room from another corner of the State House all lubricated with some sort of partisan or political juju; it was a plan that was developed genuinely and authentically by the Committee itself on the basis of a set of principles developed and published by the Committee in January (see sidebar).

In February, that set of principles was widely praised throughout the Capitol Building as the appropriate foundation for reform, even by those who would be loading the torpedoes in June.

The product. There is no special magic with respect to the fundamentals of reform. The income tax rate is too high, the sales tax base is too narrow, and property taxes are too burdensome, particularly for Maine residents with limited income in communities undergoing rapid valuation increases. When done carefully, moving the tax burden away from income and onto consumption (i.e., the sales tax) provides an indisputable benefit to Maine residents and resident businesses, who pay all the income taxes but do not pay all the sales taxes. Similarly, by carefully using tax revenue from “exportable” tax sources, such as the lodging tax and real estate transfer tax, real property tax relief can be delivered to Maine residents. Municipal officials have been seriously pushing for a modernization of the state’s tax code for well over a decade. The building blocks of reform are staring us all in the face.

If the building blocks are common knowledge, the special value the Taxation Committee added to this reform proposal was a relentless fine-tuning of the product to make sure that it would deliver the promised relief to Maine residents equitably across all income categories and to both residents and resident-businesses. That task was not easy. Because of its multiple moving parts, all of which impart different impacts on the taxpaying community, fine-tuning the tax reform engine was both tedious, time consuming, and tear-your-hair-out frustrating. Any tax reform proposal is difficult to nurture and easy to kill, and a weaker Committee would have bailed out on the task and had a thousand good excuses to do so.

But to its credit, the Committee persevered, and in early June LD 1925, An Act to Cut Taxes on Maine Residents by over $140,000,000, finally came into full balance and was printed with its companion constitutional amendments (LD 1819) in tow.

The Punch Out. There are a number of ways to kill legislation. When it is good legislation, it generally falls to the lobbyists to accomplish that task, along with some back-stage legislative assistance.

The legislators’ task is to hang the legislation up on a firing range for awhile so the lobbyists can take a good crack at it, and then ultimately smother the bill with kindness. After receiving a strong initial vote of endorsement in the House, LD 1925 was stalled in the Senate for a week, allowing plenty of time for the lobbyists to work it over.

The lobby-ist’s tool is sophistry, which is the art of refram-ing something so that it appears to be either something it is not or something it should not be. It is probably the case that every contract lobbyist in Augusta was hired in some capacity to kill tax reform. They used four basic sophistical arguments:

1) Blame reform for being exactly what it is. Although the tax reform package was expressly designed to be “revenue neutral”, and even though the principle of “revenue neutrality” was widely praised by both lawmakers and lobbyists in January and February, the lobbyists’ disdain in June was that the reform plan is “nothing more than a shift”. Believing the adage to be remarkably clever, they would say: “This reform does nothing more than rearrange the deck chairs on the Titanic.” In truth, the tax reform package included a proposed constitutional amendment that would have limited the ability of the Legislature to increase state tax rates, but approving the constitutional amendment was of necessity a separate legislative decision. The stated goal of the reform package itself was revenue neutrality, which it delivered.

2) Disparage reform for being imperfect. This old stand-by is a first-cousin to the strategy of blaming legislation for being exactly what it is. The idea is to frame a proposal by that which it fails to do, regardless of what it actually accomplishes. In this case, the tax reform plan was roundly faulted for two categories of imperfection. First, the expansion of the sales tax base could not possibly be perfectly executed and would therefore have to be subsequently modified to address any unintended consequences. Second, the reform plan failed to impose an enforceable spending limitation procedure on the Legislature short of a constitutional amendment, which turns out to be something of a Herculean task.

3) Illuminate reform with just the dark side of the moon. Like any municipal revaluation, which is local government’s political equivalent of tax reform, there are winners and losers associated with the effort. The beneficiaries quietly enjoy their winnings; we hear loudly from the losers. Only in Lake Woebegone, where all the children are above average, would tax reform make winners of us all. LD 1925 provided significant positive benefits to the vast majority of Maine’s residents and businesses in the form of reduced income tax rates, reduc-ed capital gains taxes, repealing the “alternative minimum tax”, conform-ing to “Sect-ion 179” of the federal tax code with respect to accelerated depreciation, direct property tax relief for primary residents, a fully open property tax deferral program for all elderly residents, and more. Those benefits were covered by a long overdue expansion of Maine’s sales tax base to recognize the nature of retail transaction in 2007 rather than 1953, when the sales tax was adopted. The proponents of tax reform fully acknowledged both sides of the tax reform equation in the belief that the benefits of the package outweighed in many dimensions the natural resistance to expanding the sales tax base. The opponents of reform excluded from all analysis the positive side of the tax reform package.

4) Act dazed and confused. Feigning an unfamiliarity with the proposal that has been openly developed over a 5-month period, posing questions in the last days of the session that might have constructively been asked in March or April or May, begging for time to more fully understand, implying that business expansions would be threatened, portraying the package as “way too complicated at this 11 th hour”…these are all lobbying postures designed to rationalize a legislative decision to delay action on tax reform until the following (election) year. When it comes to comprehensive tax reform, a delay into an election year is a decision widely recognized as the equivalent of “indefinite postponement”.

Because of the process the Taxation Committee adopted in January, none of these sophistical arguments pass the straight-face test, which is not to say they didn’t work to accomplish the defeat of tax reform. The legislative process itself ensures that the odds are always against a legislative enactment of any consequence. It is probably most often the case that the failure of the Legislature to enact important legislation can be attributed to various mistakes that are made in the development and advancement of the legislation through the process, mistake that can be identified with hindsight.

In other cases, however, the Leg-islature’s failure to enact the legislation speaks for itself, and this is one of those circumstances. The process could not have been executed more professionally, the product could not have been more thoughtfully created. The job simply does not get done any better than this Taxation Committee did it. There’s no sugar-coating it. Acting as consciously as it may ever act, the Legislature said “no” to tax reform.