State Income Tax Revenue Falls as Bill for 2011 Income Tax Cuts Comes Due

Four years after Maine Revenue Services (MRS) and the Legislature’s nonpartisan fiscal office put a $166 million price tag on Governor LePage’s income tax cut, an enormous decline in FY 2014 state income tax revenue appears to be validating their estimates. State income tax revenue through the first 10 months of fiscal year 2014 is $109 million—or 8.9%— lower than it was last year, according to the State Controller’s latest revenue report for the all-important month of April. This revenue drop-off is the result of two factors: the state income tax cut passed by Maine lawmakers in 2011, and an artificially large increase in personal income and tax revenue in 2012, driven by high-income taxpayers anticipating inevitable federal tax increases in 2013.


Anticipated Federal Tax Increases in 2013 Pushed Up 2012 Revenues

High-income taxpayers in Maine and across the nation shifted income from 2013 into 2012 in anticipation of the “fiscal cliff”—a series of automatic federal tax increases and spending cuts scheduled to automatically take effect at the end of the year. This shift drove large increases in state income tax revenues all across the nation in Fiscal Year 2013, which ended June 30th 2013. In Maine, total personal income tax revenue in Maine increased by nearly $90 million (6.2%) in FY 2013, but that only ranked 34th among the 43 states that collect personal income taxes, and 31st on a per capita basis, according to MECEP analysis of Census Bureau data on state tax collections.

Congress passed the American Taxpayer Relief Act (ATRA) on January 1st 2013 to deal with the fiscal cliff. Although ATRA increased taxes compared to 2012, it prevented much larger tax increases had Congress failed to act.

State Income Tax Cuts Are Driving This Year’s Decline in Revenue

Meanwhile, on the same day that Congress passed ATRA, Maine’s historically large income tax cut began to take effect. Passed by Maine lawmakers in 2011, the tax cut Governor LePage proclaimed the “largest tax cut in Maine history” reduced Maine’s top income tax rate from 8.5% to 7.95%, collapsed the 4.5% and 7% brackets into one 6.5% bracket, and replaced the 2% bracket with a 0% bracket. MRS estimated the cost to the state to be $79 million in fiscal year 2013. Without the tax cut, Maine income tax revenue in FY 2013 would have increased by 11.7% instead of 6.2%, and Maine would have ranked 17th in per capita personal income tax revenue growth that year instead of 31st.

With state personal income tax revenue artificially inflated in FY 2013, a downward correction in FY 2014 was inevitable. Through the first half of FY 2014, nearly all states that levy personal income taxes are experiencing slower annual growth than the year before, and 11 states are on track to see an overall decline.

Maine’s current drop in personal income tax revenue is especially large thanks to the 2011 state personal income tax cut, estimated to cost $166 million this year. FY 2014 marks the first full year to gauge the impact of the tax cut on the state’s budget, and so far the original estimated cost from MRS and the Legislature’s nonpartisan fiscal office appears to be close to the mark: income tax revenue is about $28 million over the forecasted amount so far this year, but $14 million of that is due to the fact that the Property Tax Fairness Credit—a new income tax credit for low-income Mainers with high property tax bills—is turning out to cost much less than expected. The cause of the remaining $14 million of the surplus income tax revenue so far this year is tough to determine; it could be due to any number of factors and is small enough to be within the typical margin of error in an overall forecast of $1.4 billion in annual income tax revenue.

Tax Cuts Have Consequences

There is no sign that the income tax cuts enacted in 2011 are costing any less or more than was originally forecast. Tax cut advocates like to claim that Maine’s current procedures for forecasting the impact of tax cuts fail to account for taxpayers working harder and the economy improving when policymakers cut taxes. But in most cases, including the 2011 tax cut, there is little evidence of these “dynamic” supply-side effects, and to the extent they occur they are adequately accounted for in Maine’s current procedures for estimating the cost of proposed tax changes.

With large tax cuts, only one thing is certain: they reduce tax revenue and make it harder for us to make the public investments in education, workforce training, research, infrastructure, and the rest of the foundation required for a thriving 21st century economy that works for everyone.