Little noticed amid last Tuesday’s primary races was a Maine referendum, People’s Veto Question 1, in which voters repealed the state legislature’s tax reform package by a vote of 61 percent to 39 percent. Last year, the legislature replaced the state’s progressive income tax (which imposed an 8.5 percent rate on income above $20,150) with a much flatter 6.5 percent tax on income up to $250,000 and a 6.85 percent tax on income above that level. The state recouped lost revenue by expanding the 5 percent sales tax to include new services, increasing the tax on meals and lodging from 7 percent to 8.5 percent, and eliminating various income tax deductions including the mortgage interest deduction.
The legislature passed the law last year amid widespread agreement that Maine’s tax burden was hurting the state’s economy, which has seen a net decrease in private sector jobs over the past decade. Maine’s top income tax bracket was the ninth highest in the country at 8.5 percent, and the Tax Foundation reports the state has the fifteenth highest state and local tax burden in the country in 2008.
At first blush the vote may appear a defeat for conservatives: citizens rejected a measure that would have substantially flattened and simplified the tax code. The right-leaning Tax Foundation notably considered the package a net improvement.
But the reform–developed in large part by Democrat John Piotti in the lower chamber and signed by Democratic governor John Baldacci–was opposed by the Maine Heritage Policy Center. The conservative organization objected that most Mainers would pay an effective income tax rate of 8 percent due to the phase-out of the household tax credit. Many in the business community, particularly in the housing and retail sectors, opposed the package because it scaled back or eliminated their favorable treatment under the former system. The Maine Merchants Association was among the leading advocates of repeal, and the Maine Chamber of Commerce initially opposed the reform out of concern about its disproportionate effects on the tourism industry.
