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.
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