Tax reform will put money back in Mainers’ pockets

Posted May 21, 2010, at 9:02 p.m.

As the state economist, I’m asked to evaluate the effects of public policies on Maine’s economy.

Recently this one came across my desk: a policy that would lower Maine’s tax burden, encourage business investment and expansion, reduce volatility in state revenues and put approximately $50 million directly into the hands of Maine people. All at no cost to the state’s General Fund.

Sound like a good idea? I think so.

That’s what LD 1495, otherwise known as “tax reform” does, and it will have a positive effect on the Maine economy. On June 8, Maine voters will decide whether to repeal this law. (A “yes” vote repeals tax reform; a “no” vote keeps it.) As you make your decision, here’s some information to consider.

Under tax reform, nine out of 10 households will pay less in taxes, with the average tax decrease about $150 per year. For families making less than $30,000 (half of Maine families), 97 percent will pay less in taxes.

Before tax reform was passed, Maine’s top tax bracket stood at 8.5 percent. This was the ninth highest rate in the country. Now, Maine’s top tax bracket is 6.85 percent. This improves Maine to 17th in the country. In fact, for those making under $250,000 (about 98 percent of residents), the top tax bracket will be even lower, at 6.5 percent.

The lower tax rates means that Maine households will have more money in their pockets, much of which will be spent in Maine. As this new income ripples through the Maine economy, economic models indicate it will support approximately 700 new jobs and more than $20 million in additional earnings.

What’s more, this is a conservative estimate because it does not take into account the additional positive impact that reducing the top income tax bracket from 8.5 percent to 6.85 percent will have on businesses and people investing in Maine. This lower rate will make Maine more competitive in attracting and retaining businesses and entrepreneurs to the state. Giving people and businesses an incentive to invest in Maine will spur economic development and help grow our economy.

This doesn’t mean we don’t need to do other things to grow our economy. Tax policy is only one part of the solution. But by reducing the volatility of state revenues, tax reform will help us to make consistent investments in education, work force development, renewable energies, roads and bridges and downtowns. This is good for the Maine economy.

Aside from stimulating the economy, tax reform is fiscally responsible, too. The reform is “revenue neutral” — it does not raise any additional money for the state. In order to reduce the income tax, it broadens the items subject to sales tax. And in order to provide tax relief to Maine households, it increases the sales tax on meals and lodging, a lot of which will be paid for by nonresidents.

Some small businesses are worried that changes to the sales tax code will hurt their bottom line. These changes will be tempered by two things.

First, many of the affected goods and services have prices that are relatively insensitive to small price changes (for example, lodging and car repairs). This means that a small tax increase will not result in a noticeable difference in demand for these items. For example, on a restaurant bill of $50, a customer would pay just 75 cents more in taxes. For a tourist staying at a hotel room that costs $100 per night, he or she would pay an extra $1.50. That won’t deter many sales.

Most important, a strong Maine economy is good for all Maine businesses, whether they collect sales tax or not. Nine out of 10 households will have more money to spend on Maine-made products and services.

Will tax reform solve all our economic problems? Of course not.

Will it eliminate the need to invest in our people, infrastructure and quality of place? Absolutely not.

But it’s a step in the right direction that will have a positive effect on the Maine economy.

Michael LeVert is the state economist.

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