People with low- and middle-income fare better under Maine’s tax system

The Institute on Taxation and Economic Policy (ITEP) released its updated Who Pays? report today, highlighting how state tax systems across the country, including Maine’s, impact income inequality.

ITEP finds that most states have upside-down tax systems where families with low and middle income pay a greater share of their income in taxes than those with high incomes. But in Maine, ITEP finds recent policy reforms have led to the bottom 40 percent of earners — those with income up to about $47,000 — paying a lower share of their income in taxes than those with high and middle income.

Choices to expand refundable tax credits in recent years — including the state’s Earned Income Tax Credit and Child Tax Credit — have boosted incomes and lifted children and families out of poverty, giving Maine a high rating compared to other states for the progressivity of its tax system. There is still more work to do, however, to create a tax code that reduces inequality further and increases financial security for all Mainers. The middle 40 percent of Maine earners pay well over 10 percent of their income in taxes, versus the top 1 percent of earners in Maine who pay 9.5 percent.

Expansion of refundable tax credits — policy changes to Maine’s tax code benefit Mainers who need it most

Maine lawmakers expanded the state’s Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) in recent years so they reach more families and provide a bigger benefit. Lawmakers also created the Property Tax Fairness Credit and Sales Tax Fairness Credit to lessen the impact of property and sales taxes for Mainers with low and moderate income. Like the EITC and CTC, lawmakers have made several improvements to expand eligibility and increase the value of the Property Tax Fairness Credit since its inception in 2014. This includes changes approved last year that provide a bigger benefit to households with moderate income that are not reflected in the 2023 calculations.

Together, these credits are helping boost income particularly for Mainers with low income. For example, 1 in 5 households have an income of less than $27,000 and because of refundable credits are now receiving an average of $960 in additional income at tax time.

These gains show the opportunity for lawmakers to make choices that positively impact Mainer’s lives through good tax policy. We cannot take these outcomes for granted — 2020 was the first time in decades Mainers in the bottom 40 percent finally paid less than those at the top.1 Further, Maine’s tax structure continues to favor those with wealth at the expense of those in the middle, who pay a comparatively greater proportion of their income in taxes.

ITEP finds that while Maine’s income tax is progressive, meaning as income increases the share of their income Mainers pay also increases, both the property tax and sales tax are regressive. Mainers with the lowest incomes pay 6 times more of their income in sales taxes than Mainers earning in the top 1 percent, and almost twice as much of their income in property taxes.

Maine could address this inequity by pursuing reforms that will make our tax system fairer and secure the resources needed to sustain investments in our schools and communities, including:

  • increasing the estate tax2 and income tax for high earners
  • increasing the real estate transfer tax for high value sales
  • decreasing the pension benefit deduction3

Maine’s tax code should help narrow income inequality, not widen it. Maine’s relatively progressive tax ranking is an important reminder of the impact tax policy decisions have on income inequality. By supporting income boosting policies for Mainers with low and middle income, we can help create a state where all Mainers have the means and opportunity to thrive.