Let tax law work for state

Posted July 01, 2009, at 6:49 p.m.

A bad recession is like the June rains. Neither can last forever.

During this bad economic weather, Maine should prepare for the coming recovery by implementing tax reform under the law that takes effect this January.

Unfortunately, special interests are trying to veto the new bill through an ill-considered signature drive. My advice is not to sign such petitions — for one reason above all others: Maine must stop punishing capital for coming here.

Maine was once a wealthy state in the postwar heyday of the 1950s and ’60s. Money flowed in and grew here. Harold Alfond built shoe factories. The Cianchette brothers built bridges and paper mills. Great Northern dominated the North Woods. Hathaway stitched shirts. Bates wove bedspreads. Eastport canned sardines. South Paris made sleds. Bass made shoes. Forster made toothpicks. S.D. Warren put pulp and paper profits back into Westbrook and Winslow.

There was a vibrancy to our economy that is missing today. What happened?

Investors lost interest when we began to punish investment capital. Our income tax went to 8.5 percent, one of the highest rates in the nation for both income and capital gains. To make matters worse, state government got drunk on the revenue.

In the 1991 recession, we got warned. In 2001, we got slammed. In 2009, we got hammered. Each time our economy fell, we dropped from a lower point in our downward slide.

Money managers in Manhattan won’t invest here. When they use a spreadsheet to calculate risks, they apply an 8.5 percent penalty to doing business in Maine. Excel says “no” even before the analyst can examine the results. Investors move on and capital flows elsewhere.

The new tax reform bill drops the top rate to 6.85 percent. It lowers income taxes for most Maine residents while shifting the burden to the sales tax and to out-of-staters.

So why does anyone oppose this law? We have heard three bizarre arguments:

Argument No. 1: “Don’t reduce Maine income taxes now. It will just make it easier to raise taxes later if money is needed.” By this rationale, we should never reduce taxes but keep them high all the time.

Argument No. 2: “Don’t spread the base of the sales tax. Tax income rather than candy or fast food or rental cars for tourists.” Does anyone seriously want to punish Maine workers by taxing wages over candy?

Argument No. 3: “Save the rich from the loss of their tax deductions; just keep taxing them at high rates.” Most rich people would gladly trade their home mortgage deduction for a significant cut in the capital gains tax and a lower top rate on income. Several of Maine’s most prominent Chambers of Commerce have weighed in to say so — as has the Wall Street Journal and the Tax Foundation.

This year’s reform bill results from years of hard work by many people. It is endorsed and supported by nearly every prominent economist and editorial writer who has weighed in on it.

It deserves to be. While far from perfect, the new law cuts taxes while preserving fairness to poor people, the middle class and the rich alike. It exports $57 million in tax burden to people who don’t live here and it reduces overall taxes for 90 percent of Maine residents.

For years now, Maine has been dallying with economic attraction schemes supported by no hard evidence as to whether they work. TIFs, BETR, ETIFs, Pine Tree Zones and dozens of other little tax gimmicks compile an acronymic soup of ineffective inducements.

Yet, nothing is quite so powerful — or so simple — as reducing the tax on investment capital.

It’s time to tear up the petitions and permit the new tax bill to go to work for the Maine economy.

Peter Mills is a Republican state senator from Somerset County who served on the Legislature’s Tax Committee from 1997 to 2000.

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