Maine State Senator Peter Mills





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Articles By Peter Mills

Income Tax Nutshell

For income taxes there are three classes of variables to keep in mind:

1. the standard deduction,

2. the personal exemption and

3. the income limits on tax brackets.

1. Standard Deduction. The Maine standard deduction for a single filer is matched to the federal deduction and both are indexed for inflation. Most Maine taxpayers use the standard deduction and do not itemize. The federal standard deduction for a married person filing jointly in 2004 is $9700, high enough to eliminate a marriage penalty. The comparable state deduction is only $8150, thus creating a small penalty for those who do not itemize. Current and recent levels of the Maine standard deduction are as follows:

 

Year

2001

Year

2002

Year

2003

Year

2004

Single

4550

4700

4750

4850

Married filing separately

3800

3925

3975

4075

Head of household

6650

6900

7000

7150

Married filing jointly

7600

7850

7950

8150

2. Personal exemption. For Maine returns, the personal exemption has been fixed at $2850 since the year 2000, when it was last matched to the federal exemption. Because there is no automatic adjustment to the Maine personal exemption, it has now fallen behind the federal by $200. For federal taxes, the personal exemption was $3000 for 2002, $3050 for 2003 and $3100 for 2004.

3. Tax Brackets. Maine’s tax brackets are now adjusted for inflation each year. For years 2000 through 2004, the brackets are as follows:

Single and married filing separately

 

Years

2000 & 2001

Year

2002

Year

2003

Year

2004

2%

From $ 0

From $ 0

From $ 0

From $ 0

4.5%

From $ 4,150

From $ 4,200

From $ 4,250

From $ 4,350

7%

From $ 8,250

From $ 8,300

From $ 8,450

From $ 8,650

8.5%

From $16,500

From $16,700

From $16,950

From $17,350

Heads of households

 

Years

2000 & 2001

Year

2002

Year

2003

Year

2004

2%

From $ 0

From $ 0

From $ 0

From $ 0

4.5%

From $ 6,200

From $ 6,300

From $ 6,400

From $ 6,550

7%

From $12,400

From $12,500

From $12,700

From $13,000

8.5%

From $24,750

From $25,050

From $25,450

From $26,050

Married filing joint and surviving spouses

 

Years

2000 & 2001

Year

2002

Year

2003

Year

2004

2%

From $ 0

From $ 0

From $ 0

From $ 0

4.5%

From $ 8,250

From $ 8,400

From $ 8,500

From $ 8,700

7%

From $16,500

From $16,700

From $16,950

From $17,350

8.5%

From $33,000

From $33,400

From $33,950

From $34,700

 

A Word on Progressivity

Progressivity is created primarily by the standard deduction and personal exemptions rather than the brackets. For 2004, all Maine single taxpayers are exempt for at least the first $7700 of income ($4850 for the standard deduction plus $2850 for one personal exemption). For married taxpayers with two children, all household income is exempt up to $19,550 ($8150 for the standard deduction plus four personal exemptions at $2850 each).

Although we often say that Maine’s top rate of 8.5% kicks in at only $17,350 for a single person, it really starts at $28,050 calculated as follows for 2004:

Top bracket floor $17,350

plus the standard deduction 4,850

plus one personal exemption 2,850

for a total of $25,050

For a married couple filing jointly, the top 8.5% rate is first applied at $48,550:

Top bracket floor $34,700

plus the standard deduction 8,150

plus two personal exemptions 5,700

for a total of $48,550

EITC. Maine has a small Earned Income Tax Credit equal to 5% of the federal credit. The state credit is non-refundable in the sense that it may be taken only against an actual tax liability. The federal credit, by contrast, is paid back in cash if the credit exceeds the tax. In my own view, EITC is a non-specific income equalizer that erodes the state’s capacity to spend money on the very services that people in this income category so commonly rely upon, Medicaid, welfare, education and many other expensive social services that keep this state teetering on the brink in every recession.

Suggested Income Tax Reforms

1. Personal Exemption. Increase the personal exemption from $2850 to $3050 to match the federal. This is a costly but progressive way to reduce income taxes for all Maine residents.

2. Brackets. Convert from four brackets to three and raise upper limits moderately. There is no reason for four brackets. Three are amply progressive.

2% rate: From 0 to $5000

5% rate: From $5001 to $20,000

8% rate: From 20,001 and up.

Drop the top rate from 8.5% to 8% to ease back on Maine’s reputation for having high rates, to reduce the growing impact of the federal Alternative Minimum Tax (AMT) and to give small businesses a break. They don’t get much else in any reforms being proposed. Because each 1% drop in the top rate costs about $100 million, it is tough to find the money to bring rates down by much.

3. Size of the Brackets. We should continue the symmetry of multiplying the "Single Taxpayer" bracket times 1.5 to yield the "Head of Household" bracket and times 2 to yield the bracket for "Married Filing Joint" and should consider reducing the marriage penalty by adopting similar ratios for the standard deduction just as the federals have.