Governor Janet Mills proposed Thursday that Maine adopt only portions of the federal tax changes enacted in President Donald Trump’s spending package, rejecting provisions that would eliminate state taxes on tips, overtime pay, car loan interest, and senior deductions. The decision sets up a partisan clash over how Maine should respond to sweeping federal tax policy shifts that took effect retroactively for the 2025 tax year.
Mills’ proposal would cost the state an estimated $51 million over the 2026-2027 budget cycle, compared to roughly $400 million if Maine adopted all federal changes. The difference matters because Maine, unlike the federal government, must balance its budget by law.
“Tax policy is kind of like squeezing a balloon,” said Rep. Dan Sayre, the Kennebunk Democrat who chairs the Legislature’s Taxation Committee. “You can make a change here and it just makes the problem worse somewhere else when you’re operating in a balanced budget environment.”
Proposed Conformity Changes
The governor’s plan, outlined in her supplemental budget proposal and a separate conformity bill designated LD 2010, would align Maine with federal increases to standard deductions. That change would benefit an estimated two-thirds of Maine filers, predominantly those in low- and middle-income brackets who don’t itemize deductions.
But Mills drew a line at four specific federal provisions enacted in Trump’s “One Big Beautiful Bill” passed in July 2025. Under federal law, workers in tipping occupations earning less than $150,000 annually can now exclude the first $25,000 in qualified tips from federal income taxes. Another provision allows taxpayers to deduct up to $12,500 per person in overtime pay for hours worked beyond 40 in a week.
The federal package also created a $10,000 deduction for interest paid on loans for new American-made vehicles purchased between 2025 and 2028, and added a $6,000 deduction for taxpayers 65 and older. All of these changes apply to federal returns for tax years 2025 through 2028, but Maine taxpayers would still owe state taxes on that income under Mills’ proposal.
Republicans and business groups immediately criticized the selective approach. House Minority Leader Billy Bob Faulkingham argued that full conformity would provide more meaningful relief than Mills’ separate plan to send $300 “affordability payments” to an estimated 725,000 residents.
“Affordability is not a $300 check that will pay for one fancy meal at a restaurant or maybe one electric bill,” the Winter Harbor Republican said at a February press conference. “Affordability is being able to pay rent. It’s being able to pay a car mortgage. It’s being able to pay your bills.”
Compliance and Administrative Effects
Tax professionals emphasized the practical complications created when state and federal tax codes diverge. John Block, a tax attorney representing the Maine Society of CPAs, testified at Thursday’s public hearing that conformity reduces errors and administrative costs for both taxpayers and state revenue officials.
“Conforming makes things easier, less expensive, reduces the opportunity for mistakes, reduces compliance burdens for both Maine Revenue Service and taxpayers,” Block said.
The argument carries weight in a state where roughly half of all revenue comes from tax collections, with personal income taxes generating the largest share followed by general sales taxes. When federal and state rules differ, taxpayers must calculate their income twice using different methods, increasing the likelihood of mistakes and the cost of professional tax preparation.
But Sayre questioned the fairness of the federal provisions themselves, particularly the tips exemption. “If you make beds in a hotel or motel, you’re going to get a tax break. If you make beds in a nursing home or hospital, you don’t get a tax break,” he said. “What’s the sense in that? I’d much rather see us do something that provides tax relief for everyone that makes beds for a living.”
How Conformity Is Determined
Maine, like most states with income taxes, uses the federal tax code as its starting point for calculating state taxes. When Congress changes federal tax law, those changes don’t automatically apply to state returns. Instead, state legislatures must pass conformity bills deciding which federal provisions to adopt and which to reject.
In typical years, this process involves minor technical adjustments that generate little controversy. The 2026 session is different because Trump’s spending bill made substantial changes to federal tax policy, forcing states to weigh significant revenue implications.
Some states called special legislative sessions to address the issue last fall. Mills issued preliminary guidance in September but determined under existing Maine law that she could only direct temporary conformity on certain items. Her current proposal represents the full scope of changes she’s recommending the Legislature approve.
About 40 states use federal adjusted gross income as their tax base, meaning they face similar decisions. Massachusetts projects losing between $460 million and $660 million in revenue from full conformity and is considering selective decoupling from provisions like the auto loan interest deduction. Another state passed a House-level conformity bill estimated to cost $155 million in the current fiscal year.
Budget Context And Federal Policy Effects
Maine’s decision comes as the state manages an $11.65 billion biennial budget for fiscal years 2026 and 2027, with Mills proposing an additional $275 million in spending. That supplemental budget includes the $300 affordability payments, which would cost $218.5 million and draw from the state’s Budget Stabilization Fund, which reached a record $1.03 billion balance.
The governor also proposed $70 million for 825 affordable housing units and $46 million to maintain the state’s commitment to funding 55 percent of local education costs. Recent revenue forecasts added $248.4 million in projected collections over the two-year budget cycle, giving lawmakers more flexibility than anticipated.
But federal policy changes in Trump’s bill extend beyond tax provisions. New work requirements and penalties for improper payments in programs like MaineCare and SNAP threaten to shift costs to states. Maine officials project the SNAP changes alone could cost $49 million by fiscal year 2028.
“The Governor is fighting to address rising costs… delivering balanced budget after balanced budget… with a sharp focus on improving lives,” said Elaine Clark, commissioner of the Department of Administrative and Financial Services, in a statement accompanying the budget proposal.
Progressive groups testified Thursday that the Legislature should go further by raising tax rates on corporations and high earners rather than conforming to federal cuts they characterize as benefiting the wealthy. Several proposals to alter Maine’s tax brackets remain in limbo after initial floor votes or getting caught in the Legislature’s funding process.
“Instead of repeating that there isn’t funding for programs, we could instead be making needed changes to how we grow revenue for our state,” said Lily James, advocacy coordinator for the Maine Women’s Lobby.
Filing Implications For Taxpayers
For the 2025 tax year, Maine taxpayers will file federal returns using the new provisions but must calculate their state taxes differently if Mills’ proposal becomes law. That means tips, overtime, car loan interest, and senior deductions that reduce federal tax liability will still count as taxable income on Maine returns.
The phased adoption of increased standard deductions would provide some offset for low- and middle-income filers who don’t itemize. Mills also proposed adding a state-level charitable deduction for non-itemizers, though at a lower amount than the federal provision.
The affordability payments would go to residents earning less than $75,000 annually, building on $1.3 billion in similar payments distributed in previous rounds. Eligible residents would need to apply through a state process similar to earlier programs.
The Legislature’s Taxation Committee will review both the conformity bill and the broader supplemental budget in coming weeks. Republicans hold minority status in both chambers, meaning Mills’ proposal is likely to advance unless Democrats break ranks or the governor agrees to modifications.
Sayre said full conformity remains a “non-starter” without identifying $400 million in budget cuts. “There is no simple way to strike $400 million out of the state’s budget without doing real harm,” he said.