Tax reform must do more for working families and to ensure funds to educate our children, build strong communities, and grow Maine’s economy
Recently a group of eleven legislators (five Republicans, five Democrats, and one Independent) has introduced sweeping legislation that according to the Bangor Daily News “slices the state’s individual income tax rate to a flat 4 percent — the highest rate now is 7.95 percent — and eliminates nearly all income tax deductions. The legislation also eliminates nearly all sales tax exemptions and raises the state’s 5 percent sales tax to 6 percent.”
MECEP commends these legislators for working together to come up with solutions to the Governor’s budget proposal and Maine’s outdated tax system. We continue to explore the details of this legislation to assess its impact on all Maine people. However, we cannot ignore the fact that the primary focus of the proposal is on increasing sales taxes in order to significantly reduce Maine’s income tax. With that in mind, we highlight eight concerns with this approach:
1. Maine’s income tax accounts for almost half of all General Fund revenue.
Dramatic cuts to the income tax will jeopardize our capacity to pay for education, health care, public safety, and other important services in the future. This is especially true since, as Maine recovers from the recession in the next few years, income tax revenues are expected to grow faster than any other revenue source. Cutting income taxes now is like selling an asset just as it is about to increase in value more than anything else in your investment portfolio.
2. Giving the wealthy and corporations large tax cuts paid for by massive sales tax increases is unfair to middle class and poor Mainers.
Maine’s tax system is already regressive, meaning low-income Mainers pay a significantly greater share of their income in state and local taxes than wealthier Mainers. The richest Mainers pay less than 10 cents on every dollar in state and local taxes, while the poorest 20 percent pay more than 17 cents on every dollar. The proposed flat 4 percent income tax, elimination of the estate tax, and reduction of the corporate tax will provide a huge windfall to wealthier Mainers and out-of-state corporations at the expense of low- and middle-income Mainers who will pay for it through a massive sales tax increase. For many Mainers, especially those who rent and small-business owners with multiple business locations, the bottom-line will likely be worse than it is now, despite efforts to make up for some of these costs through targeted tax rebates and improvements in the homestead exemption.
3. Cutting the income tax will not strengthen Maine’s economy.
States that enacted substantial personal income tax cuts in the 1990s had slower income and job growth and created jobs more slowly on average than more cautious states during the next economic cycle.[i] Investments in education and workforce development, transportation and high-tech infrastructure, and research and development – most of which require investments paid for with income taxes – are far more important to building a strong Maine economy.
4. Cutting the income tax will not keep wealthy residents from moving out-of-state.
Tax changes have little, if any, impact on people’s decisions to move from one state to another.[ii] For every story of someone who has left the state because of our taxes, there is a story of someone who has moved to Maine for our quality of life. The reasons people move have more to do with Maine’s natural environment, good schools, and vibrant communities offering a wide range of amenities, including many that are supported by investments that could be undermined by an income tax cut.
5. There are better ways to support small businesses and create jobs.
High-income households would benefit most from the proposed income tax cut, but most of them don’t own a small business so they aren’t in a position to create new jobs. Most small businesses earn such meager profits that cutting the income tax adds very little to their bottom-line and is not enough money to pay for a new employee’s salary. In fact, 87 percent of all U.S. small businesses either lose money or have under $50,000 in taxable income.[iii] The best way to support Maine small businesses and create jobs is to increase demand for the products and services they offer. Targeting tax relief to low- and middle-income Mainers and making sure Maine businesses are competing on a level playing field are better ways to encourage small business growth.
6. Not all property tax relief programs are created equal.
The tax reform plan acknowledges that different approaches to property tax relief result in different outcomes for Maine residents and businesses. However, their proposal does nothing to help the program that most effectively cuts property taxes for Maine residents who need it most – the Maine Property Tax and Rent Refund program. The legislature should invest more in this program and simplify the application process to ensure that hardworking Mainers who pay more than 6 percent of their income in property taxes get the break they need.
7. There are better, more targeted ways to tax nonresidents and out-of-state visitors.
Maine’s tax rates on meals, lodging, and rental car sales are below average in New England. Asking out-of-state visitors to pay more in these specific areas is much more targeted than a broad based sales tax increase that includes food and other basic necessities. Additional efforts to expand the sales tax to new areas should focus primarily on high-end services and recreational activities. This will generate much needed revenue that we can invest in Maine’s infrastructure and communities, making the state a more attractive place to visit and do business.
8. We still have a budget problem.
The tax reform plan is budget neutral meaning it does not provide additional funding for critical priorities like education, drugs for the elderly, public safety, general assistance, clean elections, and so much more. While the plan helps shine a light on ways to avoid some of the property tax increases in the Governor LePage’s budget proposal, Maine still faces a funding shortfall resulting from collapsing revenues in the wake of the recent recession and made worse by the 2011 tax cuts. There are better ways to address our immediate financial challenges, including repealing the 2011 income and estate tax cuts, making Maine’s state and local tax system more fair, raising revenues in more targeted ways, and reducing ineffective tax subsidies and exemptions.
[i] Michael Leachman, Michael Mazerov, Vincent Palacios, and Chris Mai. State Personal Income Tax Cuts: A Poor Strategy for Economic Growth. Center on Budget and Policy Priorities, Washington D.C., March 21, 2013.
[ii] See for example Jeffrey Thompson. The Impact of Taxes on Migration in Maine. Political Economy Research Institute. University of Massachusetts. Amherst, MA, April 2013.
[iii] Matthew Knittel, Susan Nelson, Jason DeBacker, John Kitchen, James Pearce, and Richard Prisinzano. Methodology to Identify Small Businesses and Their Owners, Table 6. Office of Tax Analysis, U.S. Department of Treasury, Washington D.C., August 2011. Available on-line at: http://www.treasury.gov/resource-center/tax-icy/tax-analysis/Documents/OTA-T2011-04-Small-Business-Methodology-Aug-8-2011.pdf.