Rather than undertake a thoughtful, deliberative analysis on how to reduce Maine’s income tax rate, Gov. LePage and Republicans in the Legislature are pushing through a proposal that would instead cut it in half, the consequences be damned.
While a lower income tax rate certainly could help spur business and job growth, choking off the revenue the current rate produces — as much as $600 million per year — could put state government into perpetual crisis management mode. The $600 million estimate does not include federal funds that come to Maine through state matches, which will be dropped if the money is not available, making for a more dramatic reduction.
LD 849 would divert a portion of excess revenues toward a stepped process that cuts the income tax rate, eventually reaching a flat 4 percent for all filers. The top rate is currently 8.5 percent, but the governor’s budget brings the top rate down to 7.95 percent beginning next year. Currently, any unanticipated revenue would be diverted to a rainy day fund and other budget lines through a mechanism known as the cascade. It also is used to pay off unanticipated obligations, like debts to hospitals or filling holes in the Department of Health and Human Services budget.
Republican proponents say the income tax cut is paid for; Democrats counter that it is covered only in the first year of each downward step. Rep. Seth Berry, D-Bowdoinham, likens such an approach to buying a new car after winning $100 on a scratch lottery ticket: the first month’s bill might be covered, but the remaining payments loom large.
By ratcheting a reduction in the income tax rate, the plan forces cuts in other state activities that have been underfunded in recent years due to the recession. For example, school districts have repeatedly noted that the state has not met its goal of funding K-12 education at 55 percent of total costs. If there is more revenue, it could be applied toward that goal.
Opponents of LD 849 correctly note that when a deep tax cut forces the state to back off on funding various activities, the local property tax generally picks up the slack. Education, road work, poverty assistance programs and dozens of other activities will see less funding by the state. Even if locals agree that some government-funded programs should be scaled back, at least some of the burden will fall to the property tax bill.
The 4 percent income tax rate will benefit everyone who files in Maine, but it will benefit some more than others. Democrats opposing the bill say 75 percent of the tax cuts will be enjoyed by just 20 percent of the population. This raises questions of equity, always germaine in tax reform discussions.
As the economy recovers, tax revenue will indeed rebound. With state government expenditures at what are presumably low points, given the ravages of the recession, it makes sense to try to institute some fiscal discipline now, rather than risk expansion of programs through weak-willed legislators.
But this forced diet is not the way to shrink government. In fact, it is suspiciously like the various taxpayer bill of rights proposals that Mainers repeatedly have shot down at the polls. Such mindless, rigid autopilots are not worthy of our representative government. Nor is the party-line vote that has propelled LD 849 forward.
Cutting the income tax rate in half is a bold move that may prove to be a brilliant solution to many of our economic problems. Bold moves, though, can go terribly wrong if not carefully vetted and discussed.