The April tax filing deadline is near, and the law of unintended consequences is about to set in to the tune of approximately $65 million, frustrating if not angering unsuspecting Mainers.
More than 12,000 tax filers are about to get a rite of spring passage from the state of Maine in the form of additional taxes. Many charitable organizations may bear the brunt of the fallout in the form of donors cutting back or terminating their giving.
This tax comes as a surprise to many. It results from Gov. Paul LePage’s administration and well-intentioned lawmakers who unceremoniously inserted a few words into the state budget that will, in my opinion, motivate some taxpayers to action. I believe they didn’t have an inkling of the chilling message their actions have sent in time for tax filing.
The target? Mainers who donate generously to needy citizens and taxpayers watching their life savings burn away because of health care costs, like nursing home care. What lawmakers have done amounts to a 7.95 percent tax on their generosity or medical bills.
How could this happen? In an effort to conform Maine’s income tax law to the federal tax code after several changes were made at the end of 2012, the LePage administration proposed and lawmakers agreed to cap itemized deductions at $27,500 to keep the state budget in balance.
So the taxpayer who has mortgage interest, medical expenses, charitable contributions and more in excess of the cap can no longer deduct that amount from taxable income. In effect, the taxpayer pays a 7.95 percent income tax on that amount. For the example the taxpayer who donates say $527,500 to various charities will pay an additional $39,000 in income tax!
Take the case of a spouse in need of long-term care who spends $10,000 per month on care, therapy and prescriptions. This taxpayer could see more than $7,000 in additional income tax.
I can hear some say, “Well, if they have the money, they can afford to pay more.” While that may be true, this message has serious implications. We’ve all heard the rhetoric about people who move out of Maine for tax reasons, usually cast aside as anecdotal political hyperbole. With this action, the Legislature has told 12,000 individuals and families affected by the cap to pay up or move out.
My experience with these situations is based both on my professional experience as a financial planner and from my time serving on the Legislature’s Appropriations Committee while Angus King was governor. Tax policy does in fact influence behavior. In my financial planning firm, we are asked to compare projected after-retirement income based upon remaining here and leaving Maine.
Indeed clients do sometimes choose to take up residency in other, more tax-friendly states. The numbers are often compelling. Accountants and attorneys will tell you their clients seeking legacy and retirement planning advice often discuss the savings on taxes by changing residence for six months and one day. As retirement-age baby boomers implement their plans, we’ll see more of this behavior unless Maine changes direction.
Shouldn’t we encourage people who have a generous heart and a healthy net worth to stay here? Shouldn’t we fix this problem so that we don’t chase more people at a faster pace out of Maine?
Meanwhile, in the State House Democrats continue to claim the Republicans gave tax breaks to the wealthy. The reality proves otherwise, however. And while Republicans claim they have lowered the top income tax rates from 8.5 percent to 7.95 percent, the cap on itemized deductions proves otherwise.
The Legislature still has time to address this before it adjourns and its members run for re-election in November. First, though, everyone should stop pointing fingers at each other. Both parties had a role in creating this problem. They should have a role in fixing it, too.