paying state income taxes

Cutting Income Tax Rate Could Increase Revenue in Maine


States with no income tax rate have experienced the most economic growth in the past few years.

Talk of tax reform is like blood in the water, all of the special interest groups start circling, looking for a piece for themselves. Some want to increase taxes on the rich, others to shrink government. Businesses lobby to get beneficial loopholes written into law. Right now, feeding the frenzy in Augusta, is the bi-partisan proposal LD 1496, An Act to Modernize and Simplify the Tax Code. The plan calls for a reduction in the income tax to a flat 4%, a sales tax increase from 5% to 6%, and a corporate tax rate reduction to 7.5%, while cutting exemptions, raising excise taxes, and eliminating the estate tax. The purpose of the plan is to lower the tax burden on Mainers by shifting it to seasonal visitors, and increase government revenue. The plan is already being chomped at from all sides.

LD 1496 is a step in the right direction. Lowering the tax burden on year round residents, and increasing the burden on seasonal visitors is a strategy that worked well for other states, like Florida. To raise revenue, Florida charges a 6% sales tax, a high property tax, and a 5.5% corporate tax. From 1997 to 2011, Florida’s economy grew 91%, while Maine’s grew only 70%. Even though this proposal is an improvement in some ways, there are also major problems. LD 1496 would end the gross receipts tax exemption, which includes business to business transaction. This would be disastrous, swiftly driving businesses out of Maine. Also, to keep the tax code progressive, LD 1496 proposes Maine issue $1000 rebate checks to low income families. Rebates are always problematic. A lump sum of money is generally spent all at once. The rebate would also open another opportunity for fraud, while many working poor may not have the time to fill out government forms.

Due to all of the competing interests, tax reform is never the clean cut process we tax payers would like. Exemptions and loopholes are political currency for favors and donations. Our legislators should have the integrity to write and pass a fair, pro-growth tax reform policy, because the economic benefits will be felt by many. We know what fair, pro-growth tax reform looks like. It includes lowering rates, eliminating exemptions and corporate welfare, and broadening the tax base, while encouraging people and business to make Maine home. Milton Friedman thought property taxes were the least worst tax, followed by the sales tax, and last the income tax. As Governor LePage rightly suggested, Maine should consider completely eliminating the income tax to help restore our competitiveness, and change the long-term outlook for our state.

Maine has one of the highest personal income tax rates in the nation. There are nine states that have no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. These nine states have significantly outperformed all other states in population, income, and economic growth. Between 2001-2010 the population grew 14%, compared to 9.0% for all states, and 5.5% for the nine states with the highest income tax rates. A low tax burden attracts employers, which leads to economic and wage growth. Over that same 10 year period wages grew 5.5% in the nine zero income tax states, compared to 0.0% for all states, and -1.6% for the highest nine. And shocking to many, state and local tax revenue also increased by 81.5% in those nine zero income tax states, compared to 51.0% in all states, and 44.9% in the highest nine. Maine can eliminate the income tax and actually increase revenue!

There are many other fair, pro-growth tax policy ideas. Maine could rely more on property taxes by reducing municipal revenue sharing, especially to wealthier coastal areas. A high homestead exemption, and eliminating the estate and inheritance tax would encourage people to become Maine residents and retire here, bringing in significant wealth. A sales tax, with exemptions for necessities, would stimulate long term economic growth because it encourages saving by discouraging spending. Most importantly, there seems to be little correlation between a state’s sales tax rate and economic growth.

When crafting a tax reform bill, the only question to ask is, “will this help grow our economy?” States can’t change the resources they have, but they can change the policy. I hope our legislators in Augusta take advantage of this momentum for real, fair, pro-growth tax reform.

Originally Published in the Portland Press Herald