If you believe the Maine Legislature and Governor’s office, the recently passed LD 1495 is “revenue neutral.” While that very well may be true for a small percentage of people, the bigger truth is that Maine’s small businesses will bear the brunt of this change in tax law.
As you may know, LD 1495 is a bill that (among other things) imposes a flat rate income tax of 6.5% and adds a 5% tax on virtually every service you can imagine. This new service tax ranges from meat-cutting to raft-guiding to juggling — and musical entertainment, the business in which I happen to make my living, and from which I will provide a few examples of this law’s impact.
According to the new law, which goes into effect in the New Year, a venue that hires a band to perform must now pay a 5% tax. Sounds simple, right? Well, there are two major problems with this scenario. The first is called a “budget,” and while Augusta struggles to maintain one, businesses either do so or fail. This new service tax is an immediate increase of 5% on a venue’s music budget. If the venue was previously paying their bands $800 per show, in order to maintain budget they would now only be able to pay $760. Now wait… I know… in the Augusta version of this story, the venue would continue to pay $800 and would worry about their $40 deficit later. But this is reality.
The result: the 5% tax on hiring musical entertainment will cause a loss of income to musicians. This passes the cost of this tax directly back to the musicians themselves. While this law’s proponents could offer many explanations and defenses to this assertion, it does not change the fact that adding a 5% tax to a venue’s entertainment budget will result in a 5% drop in that budget.
As is typical with poorly implemented flat-tax laws, the people who are hurt the most are those with low incomes, and new business owners – those who are already struggling to begin with. A struggling part time musician who made $4,500 last year sees their tax rate explode from 2% to 11.5%. A part-time musician who made $9,500 last year would see a jump from 4% to 11.5%. The full-time musician who makes $60,000 per year is hurt relatively less, seeing a still-formidable income tax hike of 3%.
(For the record, I wholeheartedly support flat-tax based reforms, but they must be implemented properly. Anyone interested in a better model for flat-tax reform, visit http://www.FairTax.org
The effective income tax increase is bad enough, but it does not end there. Musicians will also now be taxed higher when they stay in a motel, rent cars, eat out, or do any of the dozens of other things that their business often requires them to do. It is not unreasonable to estimate that this new tax on music will result in an effective state income tax rate of at least 15% for musicians.
Some might argue that my example is not valid; that the 5% tax will not be completely passed to the musician. Perhaps that is true, but even if only 0.5% of the tax actually passed back to the musician, the principle remains the same. Yet I still maintain that indirectly that 5% will always find its way back to the musician. We can be certain that the 5% will come from somewhere…money does not grow on trees, after all. So either the venue pays, the musician pays, or the customers pay. Regardless, the overall cost of the musician’s performance has increased – a cost which in the end will always have an effect on his income and growth potential.
Augusta would counter that they have included tax credits to offset the disproportionate taxing of lower income people and the overall increase…but let’s not forget that there wasn’t supposed to be an increase at all! This bill was offered by its proponents as “revenue neutral.”
The second major problem with this law change is that there is no infrastructure in place for businesses to collect, charge, report, or pay this tax. Music is just one of dozens (maybe hundreds) of things that will be subject to new taxes, and businesses will need to be equipped to deal with them all. This is certain to add additional expenses to most businesses, expenses that will eventually be passed back to customers. Mark my words, the administrative cost of implementing LD 1495 is daunting, and a serious threat to our economy.
The musician is simply one example. Nearly every small business in the state will experience a marked rise in their tax burden whether it be directly or indirectly calculated. Yet LD 1495 is supposedly “revenue neutral.” Call me crazy, but there is no scenario I can imagine in which a bill with the words “tax relief” in the title should do anything but lower taxes! I struggle to believe that a legislature and governor facing mounting budget shortfalls ever really intended this bill to be “revenue neutral.”
But, they mean well. They really do. Yet with all of the experience and intelligence and zeal our lawmakers may possess, they have lost touch with practical reality. Time and time again we see a law passed that promises to provide tax relief or help businesses. And time and time again, these measures fail to do so. One of my favorite failures in recent times is when the legislature decoupled from certain Federal tax laws in 2008 as a way of “helping taxpayers.” This change to what is known as ‘Section 179 expensing’ now requires “taxpayers to maintain two sets of depreciation schedules, one for federal purposes and one for state purposes. The Legislature felt that…it would be less complicated for Maine taxpayers.”
The true intentions of this law are immediately brought into question we acknowledge that Section 179 law applies to businesses and only to businesses… not to ordinary “taxpayers.” So we are left now to assume that the legislature meant to make expensing less complicated for Maine businesses.
But wait… less complicated? What is less complicated about being forced to maintain two sets of depreciation tables – each with their own complex rules – instead of maintaining one set of tables that apply to both federal and state taxation? This change in law means having to keep track of the 5-7 year depreciation of thousands of business purchases that were previously allowed to be deducted in the year of purchase. Here’s a practical example from the music world. While federally I can take the Section 179 deduction on a $80 microphone purchase, I now have to “add back” that $80 to my Maine tax return, and then put that microphone on a depreciation table and keep track of it and deduct it over the next 5 years. It is likely that by 2016 (when the first items begin to drop off my depreciation table) I will have several thousand items to keep track of). To call this “less complicated” is beyond belief, and nearly beyond reproach.
The true reality of the Section 179 decoupling is that it has discouraged business spending. No longer is there any state benefit for a business to re-invest money to reduce their taxable income in a particular tax period. But for those businesses that must spend, it means paying more taxes up front. So, while the current “tax reform” proponents in Augusta like to throw around the term “revenue neutral,” business owners are wise to be skeptical.
To make matters worse, combine the section 179 decoupling with economic crisis, rising prices in general, and the the array of new sales/use taxes imposed by LD 1495, and the result is simple: businesses are less likely to make purchases to offset their taxable federal income. The result is not only in an immediate loss of sales tax revenue for the state, but a loss of business-to-business spending; one of the most important forms of economic stimulation.
The list goes on and on. Between federal and state tax laws, there are thousands of pages. And not only do the laws change from year to year, they sometimes change quarter to quarter. Maine needs real tax reform, not disguised revenue generation schemes with unfunded administrative mandates. This is an extremely complicated issue only because we have allowed our legislatures in Augusta and in Washington to make it one. In many ways, our tax laws have taken on a life of their own.
It is possible to have true “revenue neutral” tax reform. In fact, I am a proponent of the concepts on which LD 1495 was based. But a true reform needs to be both neutral for the taxpayer and businesses, not just the legislature. This has nothing to do with Republicans or Democrats…all Mainers need to understand that despite their good intentions, our leaders in Augusta have made a mistake. Their version of “tax relief” is one that temporarily relieves their own budget crisis at the expense of doing permanent damage to the small businesses in this state during the most challenging economic period in our lifetimes. Fortunately, the people of Maine hold the final say.
Do not be fooled by the proponents’ ability to justify this bill as “tax relief.” These types of laws are not matters of opinion. Either this law will not raise taxes or it will. And given our legislature and governor’s track record, I am certain of the latter.
Focus on the real world examples of how LD 1495 will impact your community, and ask yourself these questions: Do you think this reform measure was mature and thought-out enough to have been passed and signed into law as it was in June? Are you willing to gamble that this law will be “revenue neutral” and will not result in tax increases on our businesses and citizens? If not, then I urge you to support the People’s Veto of LD 1495.