By MECHELE COOPER
Staff Writer Sunday, March 11, 2007

The retired Bath Iron Works employee, who lives in Hallowell on a fixed income, isn't keen about paying more, even if it's just an extra 5 percent, or $1.25, for a $25 shave and a haircut.

"Leave it the way it is," Tibbetts said of the state sales-tax exemption on barber shops. "We pay way too many taxes now. By the time we get done paying our fuel and electric bills and everything else, there's not enough money left at the end of the month to live."

With the state pinched for cash, lawmakers once again are weighing whether to repeal some of the sales tax exemptions that officials say cost the state around $2 billion a year.

It's a difficult task because the special-interest groups that enjoy the exemptions inevitably oppose any bill that forces consumers to pay more for their goods and services.

Reassessing sales tax has been an uphill battle for legislators. For years, they have been looking at the uncollected, potential revenue as a way to balance the tax burden.

Current exemptions include:

n The cleaning, storage and repair of clothing and shoes. By taxing that, the state could collect an estimated $2.7 million annually.

n Amusement and recreational services. The state could collect $23 million taxing these.

n Barber shop, beauty parlor and health-club services. The estimated "loss" is $6.2 million.

Patty Burnett, owner of Dom's Barber Shop on Water Street in Hallowell, where Tibbetts is a regular, said it costs money to run a business and it costs money to run a state and taxes are "just part of the game."

"Sometimes you have to do things you don't feel comfortable about, but majority rules," Burnett said. "If the majority is in favor of a sales tax (on barber shop services), I guess I couldn't scream about it."

Jim McGregor, executive vice president of the Maine Merchants Association, said he's been around long enough to remember when most of the tax exemptions were created -- and the subsequent battles to repeal them.

"A lot of people laugh about the time they were looking at sales-tax exemptions and talked about (taxing) Girl Scout cookies," McGregor said. "A hundred or so Girl Scouts showed up."

McGregor said his group has been against increases in the sales tax and local-option sales tax. He said just about every legislative session for the past 20 years has had a bill proposed that would grant municipalities, counties and regions the right to impose their own sales taxes.

"We steadfastly oppose those," he said.

Sen. Joe Perry, D-Bangor, who serves as Senate chairman of the Joint Standing Committee on Taxation, said it's silly to exempt goods and services that are considered "discretionary," such as theater performances and ski lift tickets, while taxing essentials such as clothing, medicine and diapers.

"For things like recreation and amusements, we would be collecting sales tax, proportionally more from non-Maine residents -- out-of-state guests and tourists," Perry said.

Perry said Maine has the most narrow sales-tax base -- it's not extended to enough services -- in the country and relies heavily on automobile sales and building materials. Whenever there is a slump in those industries, he said money that comes to the state dries up.

"If we collected sales tax on more things, we wouldn't be so susceptible to these wild fluctuations and cash flows," he said.

Unfortunately, when it comes to moving ahead with canceling exemptions, many members of the Legislature lose their nerve, he said. And that's because there's always a vocal opposition.

And it's not as if business owners are paying for it out of their pocket, he said. Businesses would collect the sales tax from customers.

"I honestly think many of the front-line business people get worked up over it because their trade organizations tell them to," he said. "In the late '80s, they tried (to appeal a tax exemption) on haircuts and you would have thought from the reaction every hairdresser or barber was going to go out of business, and that's ridiculous."

Corporations also receive special tax exemptions, including: manufactured housing, $9.3 million; packaging materials, $14.2 million; watercraft, snowmobiles and all-terrain vehicles sold to nonresidents, each between $50,000 and $250,000; railroad-track materials, $113,760; sales or leases of certain aircraft, $722,186; and transportation and warehousing services, $56 million.

Jerome Stanhope of the Maine Revenue Service, said there are exemptions that have been put into law for good reasons. An example would be nonprofit organizations that run shelters and soup kitchens.

The process for getting items or services exempt is a complicated process, according to Julie Jones, legislative analyst for the taxation committee.

She said anyone can come to legislators -- a constituent, lobbyist, interest group or public official -- and ask them to put in a bill for sales tax exemptions.

It's the legislators' choice, she said, if they want to sponsor the bill, which goes through committees and public hearings, work sessions, readings and eventually a vote.

Sen. Richard Nass, R-Acton, who serves on the Taxation Committee, said every year legislators entertain new proposals for additional exemptions.

"I have one," Nass said. "Mine is to exempt the shipping charges from sales tax."

He said the state of Maine charges people a 5 percent sales tax on items they purchase and also on whatever it costs to ship the merchandise.

"It doesn't sound fair to me," he said.

If the sales-tax base is broadened, he said consumers would have a choice whether to purchase nonessential services.

"The bad thing is it's regressive," he said. "It hurts poor people rather than rich people."

Ultimately, Maine consumers pay the tax, and households with lower incomes are disproportionately affected, he said.

Senate Majority Leader Elizabeth "Libby" Mitchell, D-Vassalboro, is working to broaden the tax base.

"I have voted in the past for the repeal of some of the exemptions in order to reduce other taxes," Mitchell said Thursday. "Most legislators look at repeals to try to reduce the income tax. We looked at the matter when the people of Maine voted and said the state must pay 55 percent of the cost of education. It's always been in conjunction with tax equality, fairness or a mandated program like the 55 percent for education."

She said there has been a proposal to repeal all exemptions with the exception of necessities of life, such as food, and lower the sales tax rate.

Mitchell said there is growing support for tourists to help pay part of the tax burden. She cited fees paid at Funtown/Splashtown U.S.A. in Saco. She said a lot of people from Maine use that park, but many also come from out of state.

Some of the exemptions were put on the books before 1967 and have stayed there even though times have changed, she said.

"We keep adding sales tax exemptions, but rarely do we take anything away," she said. "If we really use it to reduce another tax, I think more people will be willing to make the change. People are worried that we would spend it. We need to assure them that it would be used to reduce income tax or property tax."

Greg Sweetser, executive director of the Maine Ski Association, talking on behalf of the state's ski areas, said extending sales tax to amusement and recreational services doesn't fix the basic problem -- Maine is one of the highest-taxed states in the country.

He said the ski industry in Maine is fragile. It's weather-dependent and at a disadvantage because it can't move to another state with a better tax climate.

Also, the ski industry today is considered a manufacturer because it makes snow. Ski areas are not exempt from sales tax fully because the state charges for their snow-manufacturing purchases, he said.

Mechele Cooper -- 623-3811, Ext. 408

mcooper@centralmaine.com