Taxation Committee votes to close business tax loophole
The Legislature’s Taxation Committee on Thursday gave unanimous support to a revised version of a bill that would amend the Maine capital investment credit to ensure that Maine businesses benefit to the same extent as out-of-state businesses.
As amended by the committee, LD 1671 would fix an unintended loophole of the Maine Capital Investment Credit that provides disproportionately large benefits to businesses with out-of-state income, compared with companies who conduct all their business in Maine.
The bill would use the revenue generated by closing the MCIC loophole to expand Maine’s Earned Income Tax Credit, a refundable tax credit that gives low-income working people a larger refund when they file their Maine income taxes, according to the Maine Center for Economic Policy, which encouraged lawmakers to support the bill at a May 15 public hearing. The bill would more than double Maine’s credit for working families, and expand eligibility to working, independent 18- to 24-year-olds without children.
Sarah Austin, tax and budget policy analyst at Maine Center for Economic Policy, released the following statement in reaction to the Taxation Committee’s unanimous vote Thursday for LD 1671:
“The Maine Earned Income Tax Credit is common-sense tax policy that recognizes and rewards work and makes it easier for low-income Mainers to make ends meet. That benefits individual families and our entire economy.
“Maine’s EITC is among the smallest in the country, and this expansion is long-overdue. LD 1671, as amended by the Taxation Committee, will more than double the credit for working families and benefit roughly 100,000 Maine households. It will also make our lopsided tax code, in which the wealthiest pay less than any other group, a little fairer for working families.
“This bill pays for itself by closing a loophole that allows multi-state corporations operating in Maine to pay lower taxes than our Maine-based companies that do business only within state borders. MECEP endorses this common-sense tax reform bill and urges the Legislature to enact it this year.”
Closing the loophole
In her testimony before the Taxation Committee at the May 15 hearing, Austin said the loophole within the existing Maine Maine Capital Investment Credit can benefit multistate businesses several times more than in-state businesses.
She provided two hypothetical examples to make that point.
Example 1: Corporation with 100% Maine-based income
"An in-state corporation with a $2 million piece of equipment would get an income tax credit equal to $180,000 ($2 million X 9%), which approximates the same value
as shielding $2 million in income from the top corporate tax rate of 8.93%.
"However, the company ends up paying back this credit by paying higher taxes later, because they've already used up all their depreciation in the first year.
"Assuming this company has about $5 million in taxable income, after seven years, the difference between using normal depreciation and the Maine Capital Investment
Credit is only about $14,527, even though the company's initial tax savings is $180,000."
Example 2: Multi-state corporation with 50% Maine-based income
"For a multi-state corporation with the same profile, the benefit is much different.
"Imagine a company that receives 50% of its income in Maine and the other half elsewhere and makes the same $2 million equipment purchase as the entirely Maine-based company in Example 1. Their benefit after seven years relative to normal depreciation is $102,823 — seven times the benefit available to a company of the
same profile, making the same investment, and strictly doing business in Maine."
“We support LD 1671 because it would at least close a loophole in the program and level the playing field for all businesses making large capital purchases,” Austin said in her May 15 testimony.
The bill faces additional action by the Maine House and Senate. The fiscal status of the bill, according to the Legislature’s website, is not yet determined.
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