Most Mainers get the bulk of their income from wages. But those at the top of our economy often earn money in another way: They often have unearned income, from things like capital gains and dividends.
This unearned income helps those at the top build wealth without work. But our tax system treats this income the same way it treats workers’ wages.
A new bill before the Maine Legislature would correct this unfairness in our tax code by imposing a surcharge on unearned income for the top 1 percent — the same group that has gotten a massive boost from tax cuts enacted at the state and federal level while Maine’s schools have gone underfunded and families with low incomes have struggled to get by.
What are capital gains and dividends?
Capital gains are profits generated from selling assets that have grown in value since the time of purchase, such as investment properties, valuable collections, and stocks. Dividends are the annual or quarterly payouts from stocks and other investments.
This unearned income is concentrated at the very top of our economy; About 53 percent of all stocks and mutual funds are owned by the top 1 percent of US households, according to data from the US Federal Reserve.i
LD 570 raises revenue for our communities by taxing the 1 percent’s unearned income
LD 570 is a bill with a long name: “An Act to Provide for Fairness in the Taxation of Extraordinary and Unearned Income over $250,000 for Taxpayers Filing Single or Married Separate Returns and over $500,000 for Taxpayers Filing Joint Returns.”
But while the name is a mouthful, the policy is simple. This bill would create a new 3 percent tax surcharge on the unearned income of the wealthiest Maine households.
The proposal would raise $39 million per year.ii Instead of making the wealthy even wealthier, that revenue could be used to invest in schools, health care, infrastructure, or social support for families in need.
The unearned income surcharge rolls back tax cuts for the top 1 percent
This bill would raise taxes on unearned income from the wealthiest 0.7 percent of Maine households. These are the households who have gained the most from major stock market gains in the midst of a pandemic and job crisis for low wage workers.iii
These are the same households that have seen massive gains as a result of changes to the federal and state tax code that benefitted the top one percent. In 2017, the repeal of the voter-approved surcharge to fund education delivered an average tax cut of $16,000 to Maine’s top 1 percent. That was followed by passage of the Trump Tax Cuts, which created an additional benefit of $31,000 for the same Maine households, on average.iv
Will anyone else will be affected?
While capital gains and dividends accrue primarily to the wealthiest households, it is possible for families with low and moderate incomes to realize capital gains. But virtually all of those families would not owe any tax under the unearned income surcharge.
Most Mainers’ primary asset and means of building wealth is their home.v Families across the economic spectrum build wealth through home equity, particularly as they pay down their mortgage and their homes increase in value over time.
Families can realize capital gains by selling their home. But under LD 570, virtually all such families would be held harmless: Federal and state tax law exempts up to $250,000 of capital gains from the sale of a primary residence for single filers, and up to $500,000 for joint filers, such as married couples. This exemption carries over into Maine law, and LD 570 would not change that.
With a median home price of $256,000 in 2020,vi only the wealthiest households in Maine would be making capital gains — or profit — on the sale of their homes that exceeds the $250,000 to $500,000 federal capital gains exemption. (For example: A married couple who bought their home for the median home price would have to sell their home for roughly triple that price before they’d realize enough capital gains to even have taxable capital gains in Maine. Even in that unlikely scenario, this household would need taxable income from wages or other unearned income of more than $500,000 to own any taxes on their capital gains.)
Taxing the unearned income of the Top 1 percent will help fund Maine’s economic recovery
The revenues generated under this proposal could be put to use getting to fully funded schools and revenue sharing for municipalities or addressing other state needs, such as strengthening our care workforce for Maine’s children, elderly, and disabled adults.
Maine’s tax code is tilted in favor of the wealthiest households and businesses, which pay less in state and local taxes, on average, than middle-class Mainers. By taxing the unearned income of the top 1 percent, Maine can re-balance its tax code and raise sorely needed revenue to invest in all Maine families and communities.
[i] US Federal Reserve. Distribution of Household Wealth in the U.S. since 1989. Updated December 18, 2020.
[ii] MECEP analysis of data provided by the Institute on Taxation and Economic Policy, October 2020
[iii] Shaban, Hamza, and Heather Long. “The stock market is ending 2020 at record highs, even as the virus surges and millions go hungry.” The Washington Post December 31, 2020. https://www.washingtonpost.com/business/2020/12/31/stock-market-record-2020/; Park, Kim, Rachel Minkin, and Jesse Bennett. “Economic Fallout From COVID-19 Continues To Hit Lower-Income Americans the Hardest.” Pew Research Center. September 24, 2020. https://www.pewresearch.org/social-trends/2020/09/24/economic-fallout-from-covid-19-continues-to-hit-lower-income-americans-the-hardest/
[iv] Moretto, Mario. “Two years later, Trump Tax Cuts are a proven failure.” Maine Center for Economic Policy. December 20,2019. https://www.mecep.org/blog/two-years-later-trump-tax-cuts-are-a-proven-failure/; “Fiscal Policy Foundations I: Re-balancing Maine’s Tax Code.” Maine Center for Economic Policy. August 2018. https://www.mecep.org/wp-content/uploads/2018/09/Fiscal-Policy-Foundations-I_Re-balancing-Maines-Tax-Code.pdf
[v] Real estate makes up the largest asset group for the bottom 90 percent of households. US Federal Reserve. Distribution of Household Wealth in the U.S. since 1989. Updated December 18, 2020
[vi] Valigra, Lori. “Hot Maine housing market ends 2020 at record prices, sales.” Bangor Daily News. January 22, 2021. https://bangordailynews.com/2021/01/22/business/hot-maine-housing-market-ends-2020-at-record-prices-sales/