The great tax shift: Income tax cut burdens many Mainers

Think Maine’s 2011 income tax cut was a good thing for you? Think again.

To pay for income tax cuts that transfer tens of millions of dollars to the richest Mainers, Gov. Paul LePage and the Legislature shifted costs to local communities, forcing them to raise property taxes to avoid damaging cuts to education, road maintenance, fire and police protection and other basic services. This will actually increase the combined state and local tax bill for 270,000 low- and middle-income families — the 40 percent of Maine’s taxpayers who can least afford it.

That estimate, based on our analysis of data from Maine Revenue Services and the Legislature’s fiscal office, is a cautious one and may actually understate the true impact of what should be called the Great Tax Shift.

It couldn’t come at a worse time. Communities throughout Maine have tried to weather the worst economic downturn since the Great Depression and make up for state funding lost after earlier rounds of cuts by depleting their emergency reserves and deeply cutting or eliminating funding for libraries, recreation programs and other services. Local officials now must choose between laying off teachers and first responders; limiting critical services like snowplowing and road repair; and raising property taxes, the primary source of local revenue, for many low- and middle-income Mainers.

The squeeze is a result of lawmakers’ decision to fund income-tax cuts by cutting state funding for towns and cities. At the same time, the state scaled back property tax relief for low- and middle-income families. The governor and legislators even defied the will of voters by reducing the state share of K-12 education funding to 45 percent in 2013 and changing the calculation to make the state share seem higher. That’s lower than it was in 2006, the year after Mainers approved a ballot initiative to set the state share at 55 percent in hopes of getting some property tax relief.

Low- and middle-income families already pay more than their fair share in state and local taxes. For every dollar earned in 2009, the richest 1 percent of Mainers paid 10 cents in state and local taxes. The 20 percent of Maine families with the lowest annual incomes paid 17 cents on each dollar they earned, according to a 2009 Maine Revenue Services study.

The 2011 income tax cuts make this situation even worse. Maine families with annual incomes of $355,000 or more will get a $2,800 windfall from the tax cut. Maine families earning $14,246 or less will receive $7 per year — about enough to buy two gallons of milk or heating oil. But even that meager benefit will be erased by an average $28 property-tax increase to pay for education and other vital services, since state funding has dried up, according to the Maine Center for Economic Policy analysis of data from Maine Revenue Services and the Maine Office of Fiscal and Program Review.

High-income earners benefit most from the income-tax cuts because these levies are the biggest slice of their total state and local tax bill. Sales and property taxes, on the other hand, are by far the biggest share of the bill for low- and middle-income earners. Four out of every five Mainers would be better off with an across-the-board property tax cut than with the 2011 income tax cut. This is true for businesses, too. Because they must be paid regardless of profit, property taxes “have the strongest negative effect on business,” according to the conservative Tax Foundation.

This is the wrong direction for Maine. Instead of income-tax cuts that mostly benefit the wealthy while jeopardizing vital public services, we need to move toward a fair tax system and invest more in schools, roads, health care and other basic services that strengthen communities and make our economy more competitive.

Garrett Martin is executive director and Joel Johnson is a policy analyst with the Maine Center for Economic Policy. Their report, “The Consequences of Maine’s Income Tax Cuts: Recent Tax Cuts Increase Costs for Municipalities, the Poor, and the Middle Class,” is available at mecep.org.