Mainers would be best served if tax changes are based on factual, sound tax policy, not myths. But politics and the lack of detailed understanding of tax laws by many legislators, business leaders, economists and Maine voters have resulted in numerous poor “tax reform” proposals over the last several years.
Before one can analyze any tax reform proposal, one first needs to understand Maine’s current state and local tax structure. In August 2011, Maine Revenue Services prepared a very detailed analysis of the state and local taxes paid by Mainers in 2009. The report illustrated the following:
1) Maine’s total state and local tax burden is regressive, as the top 1 percent of Mainers (incomes more than $323,000) paid taxes equal to 6.64 percent of their income, while the bottom 99 percent paid 8.96 percent of their income in taxes. That’s a rate 35 percent higher.
2) Maine’s sales tax is the most regressive tax, slightly more regressive than the local property tax.
3) The bottom 95 percent of Mainers (incomes less than $145,201) paid more in property taxes than income taxes.
4) Although Maine’s top income tax rate was 8.5 percent, the top 1 percent of Mainers paid total Maine taxes (after federal tax benefit) of only 4.1 percent of their income.
Since 2009, Maine’s tax structure has become even more regressive as a result of the reduction of the top income tax rate from 8.5 percent to 7.95 percent and the increase in the sales tax rate and the reduction in the property tax circuit breaker refund program.
Gov. Paul LePage has stated he would like to eliminate the income tax and either partially or fully replace it with sales tax increases. While it is very unlikely that all of the $1.46 billion in revenue the state receives from the income tax would be replaced with a sales tax increase, it is informative to see what the impact would be on Mainers. Based on the Maine Revenue Services distribution analysis in their 2011 study, the bottom 80 percent of Mainers (incomes less than $86,789) would have an aggregate $223 million tax increase, while the top 1 percent would have a $183 million tax cut.
The 2011 Maine Revenue Services study clearly illustrates that income tax cuts paid for with direct sales tax increases or indirect property tax increases (from a reduction of revenue sharing) benefit only the top 20 percent of Mainers, with the vast majority of net tax cuts going to the top 1 percent.
Another suggested tax reform idea would reduce Maine’s 7.95 percent top income tax rate, based on the myth that the majority of Mainers paid taxes at that rate and that many retirees are leaving the state because of high tax rates. The fact is that Maine Revenue Services calculated that only about 37 percent of Mainers had any income taxed at the old top rate of 8.5 percent.
A family of four with Maine itemized deductions of $15,000 would need to have income in excess of $72,650 before they reached the top 7.95 percent tax rate in 2014, and their total income tax on $72,650 would be $2,041, or 2.8 percent of their income.
Maine taxes on retired couples are even less, because Social Security benefits are not taxable in Maine. A married couple over age 65 both with Social Security benefits can have incomes over $100,000 and not reach the top tax rate, and they would pay about $2,000 in Maine income taxes on their $100,000 income. Most retirees in Maine pay significantly more in property taxes than income taxes, so cutting the top income tax rate to keep retirees in Maine is a very ineffective tax policy, especially when higher property taxes are likely.
The biggest myth supporting an income tax cut is that lower income taxes will draw companies to Maine and create thousands of good paying jobs. The facts are low income taxes are not a major factor in a company’s decision to locate in a state. Much more important factors include location, a skilled workforce, overall labor costs, energy costs, information and communication technology services, and property and sales and use taxes.
In addition to overstating the favorable impact of income tax cuts, many ignore the unfavorable impact of increasing sales taxes. Maine Revenue Services estimates that more than $400 million in sales-taxable purchases are made by Mainers each year online or in New Hampshire rather than in Maine retail stores in part in an attempt to avoid sales tax. Sales tax increases will have additional adverse impacts on Maine retail businesses.
Rather than reducing income taxes, tax reform should include reversing the 2013 sales tax increases and reinstating the full property tax circuit breaker program from 2009.
Albert A. DiMillo Jr. of South Portland is a retired corporate tax director and CPA with more than 30 years of tax experience.