New analysis: Home care tax would affect top 3 percent of wealthiest Mainers

The Home Care referendum on November’s ballot would affect 34,442 Mainers at the top of the income distribution, according to a new analysis conducted by MECEP. That represents 3.36% percent of all Mainers with income.[i]

In seven weeks, Mainers will be asked whether to partially close the social security tax loophole to fund a universal home care program. The referendum has been the subject of vigorous debate in the media about who would be affected by the tax, and how.

The initiative would be the first of its kind in the country and creates a new tax structure for high-income earners that picks up where social security taxes leave off. The tax also applies to nonwage income, which is currently untaxed by payroll-type taxes.


 Number of PeoplePercentage of All PeoplePercentage of All People with Income
Total Individuals1,329,923
Total Individuals with Income1,026,334
Total Individuals with Income Over Threshold34,4422.59%3.36%

While low- and middle-income earners pay Social Security tax on all their wages, high-income earners do not. Employers and employees each pay a 6.2 percent Social Security tax on wages and salary up to $128,400. Wage income above that threshold is not taxed, creating a loophole through which high income earners pay a lower percent of their income into the Social Security pool. Income through passive income, such as dividends and rent, are also not subject to social security taxes.

Question 1 on November’s ballot would pick up where the Social Security Tax currently ends by creating a new 1.9 percent payroll tax for employers and employees alike on wage income above the threshold of $128,400. All nonwage and salary income over the threshold would also be taxed at 3.8%, the sum of the employer and employee halves of the payroll tax.

MECEP’s analysis was conducted using American Community Survey 5-year PUMS data, the microdata used to create census estimates. Those affected by the new home care tax are individuals with incomes above the social security tax threshold who would owe home care tax through payroll, their income tax or both. As high-income people are more likely to marry other high-income people, it’s possible that the percentage of households affected would be lower.

Supporters and opponents of the referendum have debated whether the proposed home care tax will apply to individual or household incomes. Cloudy language and differing interpretations of the policy have created some confusion about which income type would be affected.

When the language of a law is ambiguous, courts are often brought in to clarify how the law should be implemented. In the presence of conflicting language, courts typically defer to legislative intent to reach a conclusion about implementation. MECEP provided a memo to the Attorney General’s Office offering our analysis of how the intent is clear in the construction of the legislation, even though the language isn’t as clear as it could be.

While there is some ambiguity in a plain reading of the referendum language and a detailed rulemaking and legislative process would likely be needed to implement the law, the intention of the referendum is clear: The initiative intends to tax wages and salaries above the social security threshold which is determined on an individual basis and to create a parallel tax that taxes nonwage income above the threshold.

Footnotes

[i] 2016 ACS 5-year PUMS data