Tax Analysts Blog

Go Big or Go Home -- Tax Reform in Maine

Posted on May 8, 2013

The big idea of the last week was a dramatic tax reform proposal in Maine. The idea is big and bold. Big and bold usually means a measure has no chance of passage. State legislators from both parties are not exactly profiles in courage.

The proposal would change all of the state’s primary taxes. For sales taxes, the bill raises the rate from five percent to six percent. It would eliminate an estimated 200 exemptions to the sales tax. And it would expand the base to many non professional services. A broader base of course is good. But you don’t usually couple that argument with a call for higher rates. This part of the measure would make the Maine tax system decidedly more regressive. The plan will provide unspecified credits to the poor to address this issue. The sales tax increases would generate more than $700 million a year in new revenue.

And that money will be used for reductions in income taxes. The proposal would impose a flat four percent individual income tax. Maine currently has the highest personal income taxes in New England. Cutting personal income taxes is a good idea. I do not believe we should penalize people when they actually work harder and produce more. My liberal friends will disagree with reducing the personal income tax, particularly when the proposal calls for more sales taxes. The proposal also calls for a reduction in the corporate income tax rate from 8.93 percent to 7.5 percent. That is good, I guess. But reducing the rate on what is essentially a voluntary tax is window dressing for economic development.

The plan also proposes property tax relief. The state’s homestead exemption would be increased to $50,000. Cutting the property tax may be politically popular, but it is bad policy. The property tax is the one source of revenue that actually works well. It is efficient. It is effective. And it insures local autonomy. The proposal will also create a revenue sharing program that will send 1.5 percent of state tax collections to towns and cities with higher-than-average property tax rates. The recipients would then be able to lower their property tax burdens.

Expanding the sales tax base and reducing personal and corporate income taxes are sound ideas. Expanding the sales tax rate and curbing the property tax are not. Liberals will hate it (and many have already come out against the proposal). Conservatives will not like it because it is designed in part to raise more revenue. Local governments will fight it with vigor. And everyone who sells a non professional service will complain. It is not a perfect plan. Passage will take the kind of fortitude that is rarely seen in the state house.

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