Pandemic-fueled inflation was surging and the state had a revenue surplus three years ago when Gov. Janet Mills backed a proposal by Maine Republicans to give retirees a tax break.

Lawmakers passed a budget that gradually increased the amount of pension income that is tax free. The exemption increased from $10,000 of pension income to about $46,000 last year and is scheduled to rise again this year.

“We provided significant tax relief, reducing income taxes for retirees and property taxes for seniors,” Mills said in a February 2023 speech to the Legislature that highlighted the previous year’s “bipartisan progress.”

Now state revenues are flattening out and Mills wants to scale back that tax break or eliminate it entirely for about 22,000 retirees in Maine with more than $100,000 in annual pension income.

It’s one of several tax increases included in the proposed two-year budget, an austerity plan Mills says is necessary now that the federal pandemic stimulus has worked its way through the economy, and revenues can’t keep up with the costs of state programs. Some of those programs were added or expanded when revenues spiked, despite Mills’ efforts to temper spending proposals from her own party and warnings of tough budgets to come.

Among the other tax increases, Mills has proposed increasing the cigarette tax by $1 per pack to $3 per pack and making streaming and videoconferencing services, such as Netflix, Hulu, Spotify, Pandora and Zoom, subject to the state’s 5.5% sales tax. It’s expected those proposals would generate $80 million and $10 million, respectively.

She’s also proposing a 6% tax on non-municipal ambulance services and 70-cent fee on prescriptions – moves the administration says will unlock federal funding that can be used to reimburse providers under MaineCare, the state’s Medicaid program.

Negotiations have barely begun on the next two-year budget, but Republicans have already said they will oppose any tax increases, including the rollback of the pension tax credit that was one of the party’s few successes in a Democratic-controlled state government.

Gov. Janet Mills, center, speaks about her budget proposal as Sara Gagne-Holmes, Commissioner of the Department of Health and Human Services, stands with her during a press conference at the State House on Jan. 10. Joe Phelan/Kennebec Journal

A Mills spokesperson suggested that the pension tax cuts approved nearly three years ago are not sustainable, noting that the deduction had been increased only once over the 14-year period from when it was first set at $6,000 in 2000. It was increased to $10,000 in 2014.

“That is a $4,000 increase over 14 years, compared to a $36,000 increase over three years,” spokesperson Ben Goodman said in a written statement. “These increases also do not take into consideration income levels, which means that higher-income individuals receive the full deduction. The Governor’s proposal maintains the full amount of the deduction for low- and middle-income retirees while reducing it for higher-income people and phasing it out entirely for the highest earners.”

Republicans, however, have drawn a red line on new taxes and instead called for Democrats, who have controlled both chambers and the governor’s office since 2019, to cut spending to balance the budget.

“Republicans are not going to be supporting any budget that’s going to be raising taxes on Maine people,” Senate Minority Leader Trey Stewart, R-Presque Isle, said at a news conference last week. “It’s not a taxation problem. This is a spending problem.”

The tax break approved in 2022 gradually increased the pension deduction from $10,000 to $45,864 last year. Going forward, the deduction amount will be set at the maximum annual Social Security income benefit for an individual eligible to retire at the retirement age, which increases this year to $48,216.

Now, Mills wants to target that tax break to lower- and middle-income retirees, while phasing it out entirely for the wealthiest pensioners.

Under her proposal, an individual with a taxable pension income of more than $200,000, or a couple filing jointly with a taxable pension income of up to $300,000, would no longer be able to deduct any of their pension benefits from income taxes. And individuals making between $100,000 and $200,000, as well as couples earning between $200,000 and $300,000, would see a reduced tax benefit.

As a result, a total of about 22,160 retirees would pay higher taxes, according to the governor’s budget office.

According to state projections, individuals earning between $100,000 and $150,000 in taxable pension income would see an average increase of $320 a year in taxes, while those earning $150,000 to $200,000 would see an average increase of $1,241. Those with more than $200,000 in income would see an average increase of $1,484. For joint filers, those increases would be $423, $1,520 and $1,900, respectively.

Another 99,050 retirees would receive the full benefit, which is projected to cost $104.5 million this year.

Military retirement income and Social Security income would remain exempt from state income taxes.

House Minority Leader Bill Bob Faulkingham, R-Winter Harbor, was the original sponsor of the pension tax break and criticized the proposed rollback.

“It’s disappointing that a good policy to let people keep more of their pensions without taxes is now gutted to fund reckless spending,” Faulkingham said in a written statement.

Assistant Senate Minority Leader Sen. Lisa Keim, R-Dixfield, left, Senate Minority Leader Sen. Harold ‘Trey’ Stewart, R-Presque Isle, House Minority Leader Rep. Billy Bob Faulkingham, R-Winter Harbor, and House Assistant Minority Leader Rep. Amy Arata, R-New Gloucester, meet with reporters after Gov. Janet Mills released a budget proposal January 11. The Republican leaders vowed to oppose any budget with tax increases. Joe Phelan/Kennebec Journal

Stewart, the Senate minority leader, also criticized the proposal, calling it “moronic,” and saying the changes could drive wealthier retirees out of the state. He said, “$100,000 isn’t as much as it used to be thanks to the rampant inflation brought on by Democrats.”

“Couple that with the fact that Maine is already one of the most expensive states in the country to live in and the temp was -20 in some parts of the state today,” Stewart said during last week’s cold snap, “if we make it even more expensive to live here, why would these folks stick around when they can go elsewhere and pay less to live in a place with more sunlight and higher temps this time of year. Then we get zero tax revenue from them. That’s moronic.”

House Democratic leaders did not want to comment on the governor’s proposals, while Senate Democrats did not respond to a reporter’s request for an interview or comment.

Advocates for progressive tax reform support the change. Shortly after the increased pension deduction passed, the Maine Center for Economic Policy said the expansion would disproportionately benefit wealthy retirees.

Maura Pillsbury, MCEP’s state and local tax policy analyst, said most pensioners will not be affected by the proposal. She said the income guidelines for the pension deduction apply to only taxable income, so individuals are actually earning more than those numbers suggest, given Maine’s other tax deductions, including the personal exemption and standard deductions.

“We don’t expect folks like retired teachers and firefighters to be impacted by this pension change because it’s focused on phasing out the deduction for wealthier retirees while preserving the deduction for folks with low and moderate income,” Pillsbury said.

Diane Bailey, executive director of the Maine Association of Retirees, which advocates for public service retirees, said her legislative committee doesn’t think the proposed change impacts her members.

“Committee consensus is that these changes appear to minimally affect most public service retirees based on their pensions received from the Maine State Retirement System,” Bailey said.

Goodman said the revenue is needed to maintain commitments that drew bipartisan support in previous budgets, including 55% of public education funding, free school meals for children, fully funding revenue sharing with municipalities, and free community college.

“If Republicans have concerns about the proposal, they can and should engage with their Democratic colleagues to offer their own specific ideas for debate and discussion during the upcoming discussion,” he said. “I am sure Democrats in the Legislature would welcome their participation in a productive discussion about how the state can find spending reductions and non-broad based revenue enhancements to preserve the core, vital programs we all support.”