Maine’s legislative leaders want to tackle tax reform in anticipation of gathering again in Augusta in the fall. It’s a worthy endeavor, and gives the Republican majority a chance to apply its version of a fix to this perennial problem.
There are two approaches to cracking this nut, and each has its adherents. One would have reapportioning the tax burden coupled with cutting state spending. The second holds that reworking the tax scheme must be done in a revenue-neutral framework. This second approach makes more sense, if only because it removes the political sniping over what gets cut and what is saved.
And if lawmakers focus on how the tax burden is apportioned, they will have enough work to keep them busy; looking for efficiencies should be an ongoing effort.
Two themes should guide their work. The state tax burden should be assessed more broadly, thereby ensuring more predictability. And as much of that burden as possible should be exported to nonresidents, an opportunity the state has given its status as Vacationland and Second-Home Land.
A look at New Hampshire’s tax policies, where there is no income or sales tax, should point the way for Maine. New Hampshire has more than 15 revenue sources, with the largest three — the statewide property tax, a business profits tax and a business expenditure tax — amounting to 42 percent.
Maine relies heavily on income and sales tax, with 48 percent of revenue coming from income tax and almost 33 percent coming from sales and use tax. And a big part of sales tax comes from the sale of automobiles and building materials; the sale of both drop precipitously during recessions, leaving the state budget with gaps.
In all, Maine has just six sources of tax revenue in addition to income and sales: corporate income tax (5.6 percent of revenue), tobacco tax (5 percent), insurance companies tax (2.6 percent), lottery (1.8 percent) and various other transfers and fees.
The easiest and arguably the most equitable way to broaden the tax base is to eliminate the many exemptions to the sales tax. Democrats tried that approach in their 2009 tax reform plan, a plan that Republicans successfully demonized by labeling as 100-plus new taxes, and voters repealed the law.
Former state Sen. Peter Mills notes that in 1951 when the sales tax was introduced (at 2 percent), there were 13 paragraphs of exemptions. “Now there are 90 such paragraphs with numerous sub-parts,” he writes.
Another tax reform strategy is to eliminate many of the unproven business tax breaks.
Still another strategy is to institute more fees. They are irksome and give the state the reputation that at every turn, someone has their hand out, but other states use this approach successfully.
Gov. Paul LePage and the Legislature were correct in aiming to lower income tax rates in the recently approved budget. Sen. Mills writes that after Maine’s income tax was enacted in 1969 and validated by referendum in 1971, it has grown at 7.6 times the rate of inflation.
There are no painless fixes, but a broader, more predictable tax base is possible and needed.