Democrats in the Legislature, with the support of Gov. John Baldacci, will take another pass at reforming Maine’s tax system in the coming months. Key to the effort is a clear understanding of “reform,” a word elected officials use more freely than they should. With taxes, “reform” suggests a fix, a move toward equity, a closer adherence to a standard on which most can agree. In reality, though, reform is in the eyes of the beneficiary.
Democrats are maintaining that any revamping of the tax structure must not change the amount of revenue raised. Rather, the goal is to redistribute the burden so it is more closely linked to ability to pay, or at least to tie taxes more closely to discretionary spending. Another goal is to make state government less vulnerable to the revenue roller coaster that has plagued it in recent years.
A likely starting place is the sales tax. The 5 percent sales tax on general goods and the 7 percent tax on prepared food and lodging generated $981 million in fiscal year 2008. Compare that with individual income tax at $1.3 billion, corporate income tax at about $210 million, and cigarette and tobacco taxes of about $230 million.
Long discussed, but not yet acted on, are proposals to expand the goods and services on which the sales tax is paid. Among those services are haircuts, consultations with an attorney and auto repairs. Currently, about 45 percent of sales in Maine are not taxed, the biggest portion of which is food.
The Center on Budget and Policy Priorities reports that if Maine began taxing the services that are currently taxed in Connecticut, an additional $120 million would be generated. Among the services taxed in Connecticut yet untaxed in Maine are: leases and rentals, computer and data processing services, private investigation and protection, painting and lettering, advertising and graphic design, landscaping, janitorial services and health clubs.
Further sweetening the pot is the fact that 15 percent to 18 percent of the sales tax is paid by nonresidents.
Another course Democrats are not likely to take is to increase the sales tax rate. There are 24 states that have sales tax rates higher than Maine. Eleven states have a 6 percent sales tax, while nine states have rates ranging from 6.25 percent to 7 percent.
With a broader sales tax, the Legislature could consider revamping its income tax rates. Only three states and the District of Columbia have higher marginal income tax rates than Maine. Presently, single taxpayers begin paying the top rate in Maine — 8.5 percent — on taxable income of $18,951; married taxpayers filing jointly pay the top 8.5 percent rate on taxable income of $37,951 and more. These thresholds could be raised, if more revenue is generated through the sales tax.
A far less sweeping, but perhaps equally effective way to fix the tax system in Maine is through targeted tax credits.
If legislators are serious about tax reform, the first step is to decide whom they want to “win” under a new system, and what the implications are for the economy if that group is paying less. It’s a difficult and politically vulnerable discussion to have, but an essential one.