If Gov. Paul LePage’s proposal to overhaul Maine’s tax system goes through, the governor says the changes will result in a modern tax system.
“We will achieve this significant reduction by transitioning our tax code from one dependent on taxing earnings to a more modern tax model based on consumption,” the LePage administration’s budget briefing materials read.
To that end, LePage’s budget proposes the swift adoption of a higher and more broadly applied sales tax and an incremental shift away from reliance on income taxes.
The income tax, currently Maine’s largest source of revenue for the state budget, brought in $1.4 billion during the state budget year that ended June 30, 2014, compared with $1.1 billion from sales and use taxes. For the first year of LePage’s proposed two-year budget, the governor’s proposal would boost sales tax collections by $218.7 million over current projections; individual income tax collections would drop $176.4 million, according to the LePage administration’s estimates.
By the second year of the budget cycle, Maine would collect more from the sales tax than the income tax: $1.6 billion vs. $1.1 billion.
Does that make Maine’s tax system more modern?
“I think it’s in the eye of the beholder,” said Norton Francis, a senior research associate at the Urban Institute who specializes in state and local finances.
“Some people have used ‘modernization’ in that way because they’re describing a world where a lot of economic activity is consumption-based, so a more modern tax system should be more consumption-oriented,” he said. “It’s more an argument to make these shifts from income to sales [taxes].”
Talk of modernization in politics stretches well beyond the tax system. It’s been used at the federal level to justify changes to the immigration system, in North Carolina to justify changes to personnel laws governing state employees, and in Ohio to promote legislation allowing the state to invest in highly rated bonds issued by government bodies.
On the tax front, efforts to “modernize” often do apply to initiatives that resemble LePage’s.
In 2013, Florida state Rep. George Moraitis, a Republican, called on Congress to pass legislation allowing states to collect sales tax from online retailers. The additional sales tax revenue would allow the state to cut “other types of taxes [that] can stifle growth and discourage commerce,” he wrote in a SunSentinel OpEd headlined “Time to modernize Florida’s tax code.”
In Maine, the 2013 tax reform plan from the Gang of 11, a group of legislative Democrats and Republicans, was called “ An Act to Modernize and Simplify the Tax Code.” LePage’s budget includes many elements of that plan: A lower income tax in which most itemized deductions are eliminated, a lower corporate income tax, a phased-out estate tax and a sales tax with a higher rate that applies to a broad scope of services.
But a “modern” tax code isn’t always one that moves away from the income tax in favor of taxing sales.
In Connecticut, a review panel charged with determining how to “modernize” the tax code is approaching its work with efficiency, cost of administration, equity, stability and economic development in mind.
In Nebraska, a specially appointed Tax Modernization Committee concluded its work in 2013 recommending that the state largely keep its sales and income taxes intact. Its most significant recommendations were aimed at reducing property taxes.
It might be more “modern” to rely on consumption taxes, but there’s little that’s modern about taxing consumption. Many in colonial America, after all, objected to Great Britain’s imposition of the Stamp Tax, which imposed a duty on every piece of printed paper.
In Maine, the sales tax predates the income tax by nearly two decades. Maine’s sales tax started in 1951, at a rate of 2 percent; Gov. Kenneth Curtis, a Democrat, signed the income tax into law in 1969.
What is modern about shifting taxation to consumption is that it matches economic trends that have been playing out for decades in Maine and the U.S. In 1959, personal consumption expenditures accounted for about 60 percent of the U.S. economy, according to the Federal Reserve Bank of St. Louis. Today, the figure is 70 percent.
And as industrial economies have developed into post-industrial economies, their service sectors as a share of the economy have grown while manufacturing has shrunk. “As incomes continue to rise, people’s needs become less ‘material’ and they begin to demand more services,” the World Bank writes of post-industrial economies.
The jobs picture has changed accordingly. In Maine, the number of jobs classified as goods-producing declined more than 25 percent between 2001 and 2013, according to the state Department of Labor. The number of service-providing jobs, meanwhile, rose by about 6 percent.
Since most state sales taxes are imposed on the sale of goods, they miss sales conducted in a significant portion of the economy. That’s the logic behind LePage’s plan to impose the sales tax on entire new categories of services — from personal care (think haircuts and manicures) to personal property (think snow-plowing and landscaping) to professional (think accountants, lawyers and graphic designers).
While LePage claims many of his tax reforms will bring Maine in line with other states, it’s still uncommon for states to tax many of the services LePage plans to tax. For example, Maine would join just seven other states in taxing haircuts, six other states that tax investment counseling and tax return preparation, and five other states that tax services from an attorney, according to a Federation of Tax Administrators database.
“To say ‘modernize,’ it sounds like you’re improving, but it’s hard to know if you are,” Francis, of the Urban Institute, said. “People say they want to simplify the tax code, but then they realize there’s a large constituency for the complicated portions.”
Matthew Stone is the BDN’s opinion page editor.