Aidan Davis, senior policy analyst at the Institute on Taxation and Economic Policy, delivered the following keynote address at MECEP’s 2019 Policy Insights Conference. We’re grateful to Aidan for traveling to Maine for our conference, and grateful for ITEP for their continued partnership on data and analysis. For more from Aidan, click here.
Hi everyone. Thanks for having me. I’m here today to talk about taxes. It’s a subject that has a reputation for being a little dry, but it’s also so critically important. Anyone who cares about the health of Maine’s people, or its economy, or its environment and its parks, or its schools and roads, should be really concerned about taxes as well.
If your tax code is poorly designed or if tax cutting gets out of hand, then the money just won’t be there – either today or in the future – to invest in these shared priorities we all hold so dear. Meaningful investment in Maine’s future requires a smart, and fair, tax code that recognizes current economic realities and that can raise a sustainable stream of funding for the long-haul.
Unfortunately, one reality we’re confronting all across the nation is a soaring level of inequality in both income and wealth. Because of this, it’s more vital than ever that states require those families experiencing economic success to give back to funding the education systems, and infrastructure networks, and countless other services that have made their success possible, and that can position more families for success in the years ahead.
But this isn’t happening. At least not to the degree that it should. We see that the vast majority of states – including Maine – are allowing their wealthiest residents to get by paying LOWER tax rates than those faced by the middle-class and by families living at or near the poverty line.
Every couple of years my organization, ITEP, produces a report called “Who Pays?” This report tallies up all the major taxes collected by Maine, and by every other state, and looks at how those taxes are impacting people at different income levels. So I’m talking here not just about personal income taxes, but about sales taxes, and property taxes, and business taxes, and gas and alcohol taxes as well, to name a few.
What we found in Maine is that the top 1 percent of earners, which is roughly the group of people bringing in a half a million dollars or more in income over the course of a year, are paying out about 8.6 percent of their income in Maine taxes. That’s significantly lower than the effective rate paid by wealthy residents in some other northeastern states like Vermont, or New York, or New Jersey. And it’s also significantly lower than what a middle-income family in Maine might pay, which we estimate is closer to 10 percent of their annual income.
If you compare taxes on Maine’s middle-class to taxes being paid at the top, what we see is that Maine’s tax system isn’t just failing to address income inequality. It’s actually making this horrible problem even worse.
The story isn’t much better if you look at how impoverished families in Maine are impacted by the state’s tax system. Our “Who Pays?” study revealed a bizarre and troubling outcome of Maine’s tax systems wherein the state’s richest, most successful families are being faced with tax rates that aren’t any higher than those being paid by families with very low incomes who can barely afford to put food on the table. For both groups, Maine’s tax load amounts to about eight and a half percent of their household budget.
Frankly, this type of tax structure is morally unjust. It makes no sense to charge millionaires the same tax rates as low-income families who can barely keep their heads above water.
But it’s not just an issue of fairness. Failing to achieve true progressivity in Maine’s tax structure is also extremely flawed economic policy and it’s strangling Maine’s ability to adequately invest in its people over the long-haul.
For a variety of reasons, our economy right now is funneling most new income growth to those families at the very top, and yet Maine’s tax system isn’t setup to reflect this reality. Because Maine refuses to ask more of its most fortunate households, when the economy grows and the rich get richer, Maine’s tax revenues aren’t growing in the way they should be. The state’s tax system simply isn’t doing enough to ensure that prosperity is broadly shared, rather than concentrated in the hands of the very few.
Now that’s not to say that there haven’t been notable improvements to Maine’s tax code. And I certainly don’t want to discount the tremendous work of so many of you in this room. Recent reforms like making the Earned Income Tax Credit (EITC) refundable and enacting the Sales Tax Fairness Credit have made Maine’s tax system more just for the state’s most vulnerable families. Plus, Maine has taken steps to broaden its tax base in a progressive way by reforming top-heavy itemized deductions. Credit for a lot of this work goes out to a number of folks in this room. But it’s impossible to ignore that the last several years of rewrites to the tax code have triggered a net revenue reduction that has left the state with substantially fewer resources for vital public services.
An analysis that ITEP did with MECEP last year showed that personal income tax cuts since 2010 are draining $430 million annually from the state’s coffers. About half of those tax breaks went to the top 20 percent of earners, whereas those in the bottom 20 percent received less than 5 percent of the benefit. This has triggered disinvestment in areas such as higher education, K-12 education, infrastructure, and local services as well. That money is no longer available to pay for these shared priorities that benefit everyone. The bottom line is that income tax cuts, especially for those at the top, are shrinking the pool of resources available to invest in Maine’s communities.
Now to be clear, these problems are not unique to Maine. Most states have regressive tax codes that ask less of the rich than of other families. And since the last recession, too many states across the country have pursued tax-cutting agendas that have made it more difficult to invest in schools, health, and other services.
From our perspective as a national tax policy organization, the biggest mistake we’re seeing made time and time again is an unwillingness to raise revenue through a robust, progressive personal income tax. There are some states, for example, that refuse to levy a personal income tax altogether, and that rely heavily on sales taxes or other levies to keep their services afloat.
Texas, for example, has this reputation as being an unambiguously low-tax state because there’s no personal income tax there. But the reality is much more complicated. Not levying an income tax comes at a cost, and in Texas that cost is partly paid through above-average sales and property taxes, which tend to hit the poor and middle-class much harder than an income tax would.
It’s true that Texas’s richest families are often getting by paying very little in state and local tax. For them, the state’s low-tax reputation is deserved.
But we’ve found that for low-income families, Texas actually has the seventh HIGHEST taxes in the country. The poor and middle-class are not experiencing Texas as a low-tax state. In fact, Texas’s soak-the-poor tax structure is adding to the hardships faced by the state’s most vulnerable families. It’s driving an even larger wedge between the rich and the poor, and it’s failing to generate the level of revenue the state needs to adequately invest in its future.
So what can Maine learn from Texas, and from the experience of other states around the country? One of the key takeaways of our research is that fair state tax policy starts with a robust, progressive personal income tax. The personal income tax can easily be fine-tuned to collect more revenue from families that are most able to afford the tax – meaning families with large incomes. Without a meaningfully progressive income tax, it’s just not possible to balance out the regressive impacts of things like sales and excise taxes, which disproportionately fall on the poor.
Maine, like most states, does levy a graduated-rate income tax. And that’s a great start. But there’s still room for improvement.
For example, honoring the decision of Maine voters to levy higher tax rates on the very wealthy, which they approved at the ballot box in 2016, is one very sensible way to begin ensuring that high-income households are facing overall tax rates more in line with those paid by other Maine households.
On top of that, it would also make sense to begin broadening the income tax base by fully eliminating itemized deductions that wealthy families are using to reduce their tax bills. Maine has taken some steps in the right direction here by recently capping itemized deductions and phasing them out for the high-income earners. Again, thank you to everyone in the room who was involved in making those policies a reality. Yet, despite recent reforms, right now Maine is the only state in New England that still offers a broad package of itemized deductions, which tend to have a regressive effect overall. Vermont just repealed itemized deductions last year, and Rhode Island did so a few years before that. The trend at the state level is very clearly moving away from allowing these types of tax breaks.
These types of reforms are going to become especially important if another recession is really on the horizon, as a growing group of experts are beginning to fear. Inevitably, state revenues will drop if the economy slips into a recession, and the cutbacks in state services that such a drop requires can make life even harder for the families likely to fare worst during a recession.
The last time we experienced a nationwide recession, a large and diverse group of states wisely decided not to balance their budgets solely by cutting back on vital state services. Connecticut, for example, temporarily increased taxes on incomes above $500,000, while New Jersey did the same starting at $400,000, and New York did so for incomes above $200,000. We also saw progressive income tax increases in California, Delaware, Hawaii, North Carolina, Oregon, and Wisconsin. What all these states recognized was that, at a time when so many families were struggling economically, it was only fair that those families continuing to pull in very large incomes should help pay more to avoid some of the deepest cuts in public services that the recession would have otherwise triggered.
In the years since the recession, we’ve seen more scattered interest in raising taxes on the rich – which, in almost all of the public opinion polling – has been shown to be a tremendously popular policy course. California and Minnesota, for example, have made bold moves to boost taxes at the very top, and they’ve also both had tremendously successful economies in the years following those tax increases. This, of course, flies in the face of tax-cut-advocates who insist that lower taxes are a surefire path to economic growth.
On this question of economic growth, we did a study a couple of years ago looking at the two extremes when it comes to state tax policy: the group of states with the highest income tax rates, and the group that refuses to levy an income tax at all. If having low-income taxes is important to state economic growth, then surely these two groups of states would be charting very different economic courses. And what we found was that yes, these two groups were faring differently. But not in the way that anti-tax advocates would have you believe.
We found that the so-called “high tax states” were actually outperforming the states without income taxes, both in terms of aggregate economic growth and when measured using factors that matter more to ordinary families, like the unemployment rate and growth in average incomes.
For years, there’s been a sustained effort by ideological conservatives and some self-interested members of the business community to craft a narrative that states can’t succeed unless they levy very low taxes. But the actual evidence isn’t bearing this out. In reality, it’s tremendously difficult to foster broadly shared prosperity for the long-haul if the money isn’t there to offer people a high-quality education for their kids, or an infrastructure network that’s safe and efficient, or a safety net that can help people get back on their feet when they fall on hard times. Real economic success requires levying fair taxes that don’t let the rich get by without paying their share, and that raise enough money to allow us to invest in thriving communities.
Kansas, of course, is a case in point. After former Gov. Sam Brownback forced through massive tax cuts for the rich in 2012 and 2013 the state’s education system suffered tremendously, its credit rating was repeatedly downgraded, and its economy grew more slowly than either the national average or most of its neighboring states. The so-called tax cut “experiment” that Brownback pioneered was such an unmitigated failure that it attracted nationwide attention. Eventually, lawmakers could no longer ignore that failure and in 2017 they ended most of the tax cuts, even over Brownback’s stubborn veto.
As an aside, it’s also worth noting that just 48 hours ago Kansas had a new governor take office, named Laura Kelly, who ran on a platform opposing the tax cuts. So it appears as if this particularly ugly chapter in Kansas tax policy is now officially in the history books.
But Kansas isn’t alone in buying into the false notion that low taxes are essential to economic growth. Over the last several years we’ve seen tax-cutting agendas spearheaded by Gov. Kasich in Ohio and Gov. Walker in Wisconsin, for example, enacted with lackluster results. Both states have seen their rates of job growth trail the national average since those cuts took effect.
It turns out that so much of the anti-tax narrative is driven by anecdote and conjecture. As soon as you begin digging into the actual data on state economic performance, the entire fairy tale just falls apart. Tax-induced migration, for example, is one of the most persistent myths that, as a tax policy researcher, I’m confronted with over and over and over again in my work. I’m sure all of you have heard the basic story, wherein this rich person or that rich person decided to pack their bags and move to Florida in search of a lower tax bill. I understand that your former governor just made an announcement along these lines.
But the plural of ‘anecdote’ is not ‘data.’ The impact of state taxes on migration has been extensively studied, and the best study by far on this question was completed in 2016 by a team of researchers using extremely high-quality IRS tax data – the really detailed confidential data that’s not available to the public. Those researchers had access to data on every tax return reporting at least $1 million in income between 1999 and 2011. This is exactly the type of dataset you need to provide a solid answer on questions of so-called “elite” migration.
So what did these researchers find? It turns out that this elite group of top earners was less likely to move across state lines than the general population in any given year, and that with only very rare exceptions the researchers found no meaningful linkage between state tax rates and migration of top-earners. Simply put, high-income taxpayers in Maine and elsewhere have already found economic success and they don’t need to uproot their lives in search of a few percentage points worth of savings in state taxes – particularly in cases where that movement would mean breaking family ties or moving away from longtime business connections. And not to mention having to leave this beautiful state!
While lots of people might talk about moving because of taxes, this research showed beyond any doubt that those movements are exceedingly rare in the big picture and are not a sensible rationale for taxing the rich more lightly than everyone else. The rich can afford to live anywhere they want, and they’re not going to let a tax bill that does not meaningfully impact their standard of living be the deciding factor.
So let’s look ahead for a moment. Where do we go from here? Looking around the country in 2019, I’m as optimistic as ever that we’re about to see a real national movement toward more rational state tax policy. Some of this is going to be driven by the ongoing teacher movement, for example, where underpaid and overworked educators are demanding robust investments in education after years of tax-cutting.
Last year teachers across the country demanded higher wages, additional resources for their students and, in many cases, the end to harmful tax cuts that have impeded adequate funding of key state priorities. The national teachers’ movement is an amazing example of the importance of public engagement in demanding and ensuring adequate funding for public services. And there are signs that this movement is continuing with momentum into 2019. The extent of disinvestment in recent years – particularly in education – has been a driving force behind policy discussion and state legislative action. Educators and education advocates continue to speak out against low-tax agendas. And their relatable stories go to show that indiscriminate tax cuts do not make for sound fiscal policy and have harmed the necessary investments that we should be making in our communities.
Looking around to other states, we know now that New York will be revisiting its millionaires’ tax this year and is likely to opt for either a temporary or permanent extension of this progressive policy. New York may also take steps to improve tax policy for lower-income folks by enhancing its Earned Income Tax Credit or its Child Tax Credit.
In Massachusetts, it’s possible that we could see movement toward a new ballot initiative proposal that will include a high-earner surcharge of 4 or 5 percent. We likely would have seen a similar proposal passed by Massachusetts voters last year if it weren’t for a last-minute court decision that stripped a hugely popular millionaires’ tax proposal from the ballot based on a technicality.
California’s governor has made clear that investing more in early childhood education will be a top priority, and lawmakers have been exploring options such as raising their top personal income tax rates. There’s also been discussion of how best to expand the state’s Earned Income Tax Credit.
In Illinois, the state could soon implement a graduated-rate personal income tax for the first time in its history. Illinois is one of just nine states that currently levies a flat tax, and the governor has made transitioning toward a more progressive tax a top priority. In all likelihood, we’ll see something on the ballot next year to begin levying higher tax rates on higher-income earners, and it’s possible that this transition could be accomplished in a way that raises substantial revenue while still holding harmless 90 percent or more of the state’s population.
There’s also ongoing discussion of progressive tax improvements in Minnesota, New Mexico, Oregon, and Washington State, to name a few. As I said, we’re very optimistic about the direction that states will be moving in this year.
One argument that we’re expecting to get quite a bit of traction is that, in the wake of a hugely unpopular federal tax cut for the rich, it’s entirely sensible for the states to seek to claw back some of that windfall. We’ve estimated that in Maine, for example, the top 1 percent of earners received an average federal tax cut of $28,000 each last year. Even if Maine were to increase taxes substantially on its top earners, this group would still be paying less in combined federal and state taxes than they did as recently as 2017. Put another way, this is a very opportune time for the states to begin undoing some of the damage created by the Trump Administration and Congress’s decision to begin backing away from progressive taxation. And if it eventually turns out that the federal government is going to have to begin cutting back on grants in state aid because of its decision to enact a massive, unpaid-for tax cut, then these types of progressive state tax policies will become all the more important in order to protect state and local services.
And so let me conclude with this. We’re at a moment right now where progressive tax policy priorities are far from the minds of most of our leaders in Washington. And if this issue is important to you – which it should be – then, for now, it’s up to state governments in Maine and elsewhere to continue carrying the torch. Fair and sustainable tax policy that asks more of those at the very top, and that doesn’t tax the poor deeper into poverty, is not just a noble goal in its own right. It’s essential to economic prosperity and to Maine’s ability to invest in thriving communities. And so I hope all of you that care so much about Maine’s economy, and its education system, and health care, and the environment, and every other issue confronting Mainers today will continue to be champions for fair and adequate tax policy in Maine. Thank you.