Last Friday, Maine Governor Paul LePage cited Maine’s improvement in our State Business Tax Climate Index ranking in his call for further taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cuts to build on recent progress. Maine’s ranking improved 7 spots this year (from 37th to 30th) due to the elimination of its alternative minimum tax (AMT)The Alternative Minimum Tax (AMT) is a separate tax system that requires some taxpayers to calculate their tax liability twice—first, under ordinary income tax rules, then under the AMT—and pay whichever amount is highest. The AMT has fewer preferences and different exemptions and rates than the ordinary system. in its individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. code and the restoration of net operating loss carry forwards in its corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. code. Maine’s score will likely further improve next year as the top rate of its income tax is scheduled to fall from 8.5 percent and the number of brackets is scheduled to be reduced from four to two. Governor LePage on Friday called for additional reforms and repeal of the corporate tax, which could potentially produce far more dramatic improvement.
Maine’s corporate tax component ranking in the Index improved from 47th to 41st as a result of the temporary ban on net operating loss carry forwards expiring, once again allowing carry forwards up to the common 20 year limit. NOL carry-forwards allow businesses to apply losses in one year to reduce tax liability in future years such that taxes apply to a firm’s average profits. This provides for more neutral tax treatment between industries with more or less volatility of profits over time. However, Maine still does not allow carry backs that would allow businesses to apply current losses to reduce positive tax liability in previous years.
Maine’s individual income tax ranking improved from 30th to 27th as a result of the recent repeal of the alternative minimum tax (AMT) that required many individuals and businesses filing as individuals to calculate two separate state tax returns. Repealing the AMT has greatly simplified and reduced the cost of tax compliance on the individual side. However, Maine retains an AMT on the corporate side.
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