Gov. Paul LePage’s proposal to exempt pensions from the state’s income tax would, if approved, make Maine even more attractive to retirees. Those retirees would likely spend money in Maine — building or improving houses, patronizing businesses and contributing to state revenue through sales and other use taxes.
As attractive as this gambit is — it would lure retirees considering places to settle for their final years and perhaps persuade Maine snowbirds to spend more time here — it will come at a cost, draining as little as $11 million and as much as $93 million annually from state revenues. Unless the governor has a plan to cut that much in spending or to raise that much in new revenue, the pension income-tax break is just another pipe dream.
During the campaign, Mr. LePage asserted confidently that he would lower the top state income tax rate to 5 percent by cutting spending. The budget passed in the spring succeeded in lowering the top rate from 8 percent to just 7.95 percent. Lowering rates is easier said than done.
The better way to lower tax rates is to approach it comprehensively. Every tax and fee must be on the table. And more importantly, a clear philosophy must guide decisions on changes, because every change to the tax code creates winners and losers.
On that question, there must be a robust debate. Which segment of the population should win? Those who are are more likely to invest in Maine and create jobs here? Those who are likely to stay in Maine — young, college-educated adults, perhaps — who then start businesses or swell the work force? Those who are having a hard time paying taxes?
A reformed tax system must flow from the answers to these questions. The LePage administration seems to approach this complex analysis with its own gut-level decisions — the top tier of earners should win, because of the ill-supported belief that their wealth will trickle down to others.
On purely an intuitive level, a convincing case can be made that small entrepreneurs, perhaps employing 5-10 workers, should be blessed by tax breaks. These are the businesses that can grow into the next Sea Dog restaurant chain, the next VIP auto repair group, the next Old Town Canoe.
And if the Republican-controlled Legislature and Gov. LePage are serious about comprehensive, revenue-neutral tax reform, the plan to beat is the one repealed by voters in June 2010. GOP leaders should pretend that plan fell onto their desks from some national conservative think tank, and forget that it actually was crafted by the former Democratic majority.
That plan made sense because it widened the base on which state revenue is based, thereby flattening out the roller-coaster ride of deficits and surpluses. It exported some of the tax burden to out-of-staters who visit our inns, hotels and campgrounds and patronize our restaurants. And it established a basic fairness by adding the sales tax to businesses which have skated away from it without good reason.
If the governor and Republican legislators can create a plan that better meets those standards, it should be embraced by both parties. That plan might even exempt pension income. But the Democratic plan is still the one to beat.