Reading between the lines of the LePage budget

Posted Feb. 06, 2017, at 11:32 a.m.
Last modified Feb. 27, 2017, at 12:01 p.m.

Gov. Paul LePage’s budget proposal, which he summarized in a written statement to lawmakers and the public, will frame much of the next session of the Legislature. Below, we’ve annotated that statement. Our notes are interspersed with LePage’s text, which is in italics.

Those would be Question 2, which placed a 3 percent surtax on income over $200,000 to fund education, and Question 4, which will raise Maine's hourly minimum wage to $12 by 2020. LePage opposed them and the tax question ran counter to his long-stated goal of eliminating Maine's income tax.

LePage's budget proposes getting rid of Question 2's surtax by 2020, so it's up to the Legislature to account for the increase going forward. Question 4 has already taken effect, raising Maine's hourly minimum to $9 from $7.50 for this year. It'll go up by $1 each year until 2020, after which it'll be indexed.

Will they ruin Maine's economy? That's hard to answer. But the Brookings Institution has recommended that states and cities use half of the local-area median wage as a benchmark for the minimum wage, pegging Maine's target minimum at around $9.50 in 2014. So, it could eventually be too high to avoid some deleterious effects.

This budget also protects our state’s most vulnerable people, especially our elderly, who are already struggling to make ends meet.

LePage is certainly right that many Maine seniors are struggling, but we have a smaller share of seniors in poverty than the rest of the U.S. In Maine, 7 percent of seniors live in households with incomes below the federal poverty level, according to the Kaiser Family Foundation. That was below the national average of 9 percent.

That's actually the only age group where Maine beats the rest of the country: It's at the national averages of 20 percent and 12 percent for both children and adults ages 19-64 in poverty, respectively.

Now more than ever, after well-meaning citizens voted on these initiatives with little or no understanding of how destructive they would be to Maine’s fragile economy, we are teetering on the precipice of a financial catastrophe.

Since the election, a Republican line on questions 2 and 4 has been that voters didn't fully understand the questions. (For example, a voter may have backed Question 4 knowing that the minimum wage would rise, but not that the sub-minimum wage for tipped workers would eventually go away.)

That's somewhat reasonable. These questions were complicated. But we can't easily gauge what the average Maine voter knows about a given question. But the last poll of the 2016 election by the Portland Press Herald in October gave us a proxy: For each referendum question, it asked people the degree to which they were interested in that election.

On Question 2, 64 percent of the people who had either some or little interest in the election supported it, while 60 percent of those who were extremely interested also backed it. Opposition was most likely to come from those who were "very interested" — the middle category — where only 49 percent backed it. The numbers were nearly identical on Question 4. So, people who voted for it tended to have either higher or lower interest.

We can't prove LePage exactly right or wrong, but the poll shows that uninterested voters could well have swung those elections. But it's worth noting that LePage didn't question voters' understanding of him after they elected him twice.
To repeat, we're not sure how the two questions will affect Maine's economy. The state Revenue Forecasting Committee didn't work the 2016 election outcomes into their latest estimate in December.

That estimate noted that the Maine and U.S. economies improved in 2016, with personal income rising by 3.9 percent between 2015's first half and 2016's first half — more than the committee expected, while lagging the rest of the country on many indicators.

The committee also has familiar, long-term concerns driven by Maine's status as the nation's oldest state and "the resulting impacts on workforce availability."

So, LePage's outlook may be a little too gloomy, but concern is warranted.

I cannot in good conscience submit a budget that would exacerbate the damage to our economy and hurl the state over the edge.

I ask the 128th Legislature to join me in protecting our economy, our families, our small businesses and, most importantly, our elderly. I ask them to do no harm. Maine should not step back; we must continue moving forward.

Over the past six years, our administration has worked hard to move the state forward in a fiscally responsible manner, despite enormous challenges and fierce opposition from career politicians, special interest groups and the media. I was sworn into office on the heels of the Great Recession, the most damaging economic downturn in 80 years.

LePage was swept into office narrowly in 2010 on the heels of the recession that was the worst downturn by many measures since the Great Depression.

He may never have won outside of that context, running a campaign in which he highlighted his business background and tax-cutting record as mayor of Waterville and superior to other "career politicians" who had been running Maine for decades.

Financial markets had collapsed, Mainers from all walks of life were out of work and discretionary consumer spending – a key part of the sales taxes that fund state operations – was virtually frozen.

In the face of these challenges, our administration set out and executed a multi-year strategy of major structural reforms for state budgeting. We have confronted the toughest, most stubborn problems and fixed them for the long term—without using the financially irresponsible budget gimmicks employed by previous administrations. Instead of hiding from our state’s challenges, we took them head-on and got to work to begin Maine’s turnaround.

This required the ability and the fortitude to fix Maine’s political third rail: the deeply entrenched fiscal, budget and balance-sheet problems that threatened our state’s future. We tackled Maine’s staggering unfunded public pension liability, paid off the long overdue welfare debt to Maine’s hospitals and provided Maine families with their first income tax cut in 20 years.

These were the three biggest financial victories for LePage in his first term.

He got the pension and tax changes in the two-year budget passed by the Republican-controlled Legislature in 2011, which reduced Maine's unfunded public pension liability from $4.3 billion to $2.5 billion and cut taxes by approximately $400 million.

Two years later, LePage made paying back $484 million in hospital debt his main goal in a Democratic-controlled Legislature and got them to pass it. The state borrowed against liquor revenue to pay back $183.5 million in Medicaid debt to Maine’s hospitals, unlocking $305 million more in federal payments.

We moved our state back from the edge of financial ruin and started it on the path to prosperity. It took brutal pragmatism and came at the expense of political capital, but it was the right thing to do and our approach worked.

More importantly, when I first took office, Maine’s top income tax rate was one of the highest in the nation.

When LePage took office, only seven states had higher top income tax rates than Maine's 8.5 percent, according to the Tax Foundation. In 2016, Maine's top rate was 7.15 percent, and nine states were higher.

Our efforts resulted in two significant tax cuts that lowered Maine’s top rate to 7.15 percent and allowed Mainers to keep more of their hard-earned money. Because of our solid financial management, I was named the nation’s most fiscally conservative Governor.

LePage got the highest mark in the conservative Cato Institute's report card grading governors on fiscal issues from 2014 through part of 2016. But since it's a conservative group, those marks went to Republican governors who cut both taxes and spending.

I inherited a Budget Stabilization Fund (BSF) that was zeroed out by the Great Recession. Over the last six years, we have built the balance to $122.7 million. While progress, this balance still represents an insufficient reserve for state government to rely on during the next economic downturn. It is in the best interest of the state’s fiscal health to make deliberate deposits. That is why my budget dedicates $40 million to bolster this important fund.

Our administration has significantly reduced the structural imbalance between spending and revenues that begins every budget planning cycle from $1.2 billion, when I first took office, to $165 million six years later. This marks the single lowest structural gap in the last 16 years, proving that significant, ongoing reforms – not one-time gimmicks – get real results for the Maine people.

The state’s financial position has improved, unemployment continues to be low, personal income growth is up, and the state is meeting its financial obligations.

Unfortunately, liberal special-interest groups are trying to reverse all of our fiscally responsible reforms. They poured millions of out-of-state money into Maine and hijacked our citizens’ initiative process to usher in a massive tax hike on our state’s small businesses and job creators. Thanks to efforts funded by wealthy, out-of-state unions and progressive groups, Maine has gone from moving in the right direction to having the second-highest top marginal tax rate in the country at 10.15 percent.

LePage refers here to funding from the National Education Association -- the national teachers' union -- which gave about $2.4 million of the $3.8 million spent to support Question 2 (see chart below). To be fair, it's unclear how much of those contributions NEA raised from Mainers to give back to the in-state campaigns.

LePage makes mention also of the out-of-state funding that came to Question 4, to raise the state's minimum wage, as a duping of Maine voters. But Question 3's proposed expansion of background checks provides a counter-argument there.



The campaign was the most highly funded and the most handily defeated of the questions on November's ballot. But it raises an interesting question of how money influences specific political outcomes -- one that we as reporters frequently as ourselves.

LePage's own re-election over Democrat Mike Michaud also showed that money doesn't buy a win on election day.
It sounds strange, but we'll show you how this works with some back-of-the-envelope math that totally oversimplifies Maine's tax code.

Maine's top tax rate before the law was 7.15 percent. Let's say that you made $1 million in a year and it's all taxed at that rate (though it wouldn't be in real life) for $71,500. The surtax in Question 2 hits all income above $200,000, so that's 3 percent on what we'll call $799,999. It all adds up to $95,470 — a total of 9.5 percent in taxes that would be less in real life.

Let's go up the ladder: Someone making $20 million in a year would pay $2.42 million in taxes, or 10.12 percent. Make $200 million? It's 10.147 percent.

Basic math tells you that it isn't possible to get all the way to 10.15 percent, since the first $200,000 is exempt. But it is possible to hypothetically get close enough for it not to be a quibble, though it's highly unlikely anyone ever will pay that much.

Correction: An earlier version of this note oversimplified the way income taxes work in Maine. The updated version couches this.

To counteract the damage that will be caused by this high tax rate, policymakers in Augusta must have a serious conversation about how we can work together to respect the will of the voters, while at the same time protecting our economy. Maine already ranks 44th in the Family Prosperity Index, which measures the strength and prosperity of families by combining the most important social and economic data into a single number.

The Family Prosperity Index comes from a project of the American Conservative Union Foundation for which J. Scott Moody, the former executive director of the conservative Maine Heritage Policy Center think tank, is a director.

Moody, an economist, has other influence over key metrics LePage uses to gauge the state's progress, as a co-creator of the Tax Foundation's State Business Tax Climate Index, too.

We must work to improve opportunities for Mainers and their families to achieve their American dreams, not shatter them with high taxation and job losses.

California, which is a wealthy state, has the highest tax rate in the nation, but it kicks in at $1 million of income. Maine is not California. We are not a wealthy state. We do not have the jobs, employers, industry and investment California has. We cannot afford to chase professionals out of our state and watch our small businesses close because of this draconian new tax rate.

Maine Revenue Services and an analysis of federal tax data by the Bangor Daily News estimated the increase would impact about 16,000 filers, but we also found most small businesses earn too little to get hit by the new tax.

We found that 92 percent of filers with pass-through income from business or corporate profits reported less than $200,000 in annual income in 2014. However, that vast majority of pass-through earners only accounted for 50 percent of all income reported on returns with any pass-through income. Said another way, the new surtax as approved by voters would affect about half of the business income over $200,000, and about 8 percent of filers with business income of some sort. That group doesn't necessarily include only income from small businesses or Maine-based businesses.

That is why my budget begins by delaying the Question 2 tax hike for one year.

LePage's budget changes how the law approved in Question 2 is applied.

As approved in Question 2, the new surtax was to apply to income over $200,000 for both single and joint tax filers. LePage's proposal changes that, applying it across all filers (see proposed tax brackets here).

The text of his budget bill reads: "For tax years beginning on or after January 1, 2018, in addition to any other tax imposed by this chapter, a tax surcharge at the rate of 3% is imposed on the taxpayer's Maine taxable income."

In 2018, Maine will simplify its tax code by reducing the number of rates from three to two: a 2.75 percent bottom rate and a 3.15 percent top income tax. The new 3 percent surtax imposed by Question 2 will be applied to both rates, resulting in effective rates of 5.75 percent and 6.15 percent. By 2020, Maine will join the ranks of forward-thinking states, such as Massachusetts and North Carolina, in adopting a flat 2.75 percent tax rate on income. With the Question 2 tax hike, Maine’s effective statutory rate will be set at 5.75 percent for all Maine families.

My budget sends a message that we are cutting taxes, we welcome professionals and small businesses and we want working people to keep more of what they have earned.

We have fought to completely eliminate the income tax, which would be the biggest pay raise Mainers could get, but the Legislature does not have the political will to enact such bold tax reform.

Eyes are on Kansas to see just how such a plan will play out. It started there with totally nixing pass-through income taxes and dramatically lowering personal income taxes. Republican Gov. Sam Brownback narrowly won re-election despite losing support of many in his own party and says he plans to continue pursuing a decline in income taxes to zero.

The immediate impact has been that Kansas is staring down a $1 billion budget deficit, but the economist behind the idea urges that broader economic benefits won't come overnight.

NPR's Planet Money podcast took a trip to Kansas in 2014 to see how business owners and Arthur Laffer, economist who first sparked the theory as an adviser to the Reagan Administration, view the "Kansas Experiment."

So this budget simplifies the tax code and gradually reduces the top tax rate over the next three years. This will dramatically improve Maine’s competitive position in the global economy and prevent our job creators and high-wage professionals from fleeing our state.

By 2020, Maine families and small businesses will have seen a reduction in their income tax burden of more than $600 million a year because of tax cuts ushered in during my administration.

This is key: An analysis from LePage’s budget department looking at just the income tax changes between 2010 law and what’s proposed for 2020 show a $600 million reduction, with average cuts of just over 29 percent for all income groups.

However, a broader analysis from the liberal Maine Center for Economic Policy looking at tax changes around income, sales, property, child care and pensions found it would raise taxes over current law for the bottom 80 percent of Maine households — those with less than $92,000 in annual income.

That analysis says the top 1 percent — those making more than $384,000 — would see an average cut of $23,000 with people making between $22,000 and $37,000 seeing an average increase of $109.

We will achieve this significant reduction, in a fiscally responsible manner, by cutting the size of state government and modestly expanding our sales tax base to reflect the current spending habits of consumers.

The proposal would begin levying taxes on recreational services such as movie tickets and concerts, household services such as snow removal and pet care, and personal services such as hair and tanning salons, outlined in detail in the text of the proposed budget bill.

Another citizens’ initiative that will wreak havoc on the economy is the law to raise the minimum wage. Mainers agreed at the ballot box to raise the minimum wage, but they did not understand the consequences of the law they voted for. It will devastate the restaurant industry, prevent teens and low-skilled workers from getting jobs and push the elderly on fixed incomes deeper into poverty by raising prices on everything they buy.

The minimum wage hike will hurt the 325,000 elderly Mainers and others living on fixed incomes.

The latest census pegs the total population over 60 in Maine at about 331,119. It's not entirely clear here, however, whether the number is a sum of some count of both elderly and other Mainers "on fixed incomes."

As the minimum wage increases so high and so fast, businesses will have to raise prices on goods and services to absorb the new labor costs.

Opponents of increasing Maine's minimum wage commonly issued reminders that "Maine is not [insert city, town]." That could be Los Angeles or Seattle, places pioneering local $15 minimum wages. As a result, those places are frequent sources of study on the impacts of increases that go anywhere near doubling the federal minimum of $7.25.

It's hard to tell from that what will happen in Maine. And, of course, while we can say "Maine is not Seattle," we can in the same spirit point out that "Cape Elizabeth is not Dover-Foxcroft," or even that sit-down restaurants are not the same as heavy manufacturers. At the county level, our review of federal data showed Penobscot County in 2015 had the highest share of jobs starting below the new minimum of $9.

Analysis from the University of Washington found no early evidence of price increases in Seattle. A Purdue study projected a wage hike to $15 would eventually raise fast-food prices.

But those forecasts and projections depend on a lot of things -- for instance, the nearly repealed Affordable Care Act. The Purdue study estimated that health care credits would limit the impact of a minimum wage hike for restaurants with fewer than 25 employees. And there are other economic factors at play, too, such as a tightening labor market in Maine that's started to push up wages.

For now, much of what we'll see coming out about the impact of the minimum wage increase will be anecdotal, like this story about a restaurant near the New Hampshire border and as we saw with this national look at Portland's minimum wage hike five months after it took effect.

The elderly will be forced to pay more for everything they buy—but they will not get a pay raise. While the minimum wage will go up $4 an hour, the average increase in Social Security will be just $4 a month.

This budget was crafted to assist the elderly and shield them from the sharply rising costs they will be facing because of the minimum wage law. As we continue to reduce the tax burden on working families and retirees, we will ensure our most vulnerable continue to receive the care they need and deserve. My administration has realigned the Medicaid program in a way that allows us to chart a new course and prioritizes the elderly, the disabled and those with intellectual disabilities while advancing common-sense welfare reforms.

In this budget, elderly and disabled Mainers account for more than 40 percent of those served by MaineCare. That is an increase of 35 percent since the beginning of our administration. In fiscal year 2019, it is predicted that the elderly and disabled will make up 45 percent of those served by MaineCare.

The budget includes more than $30 million to support increased costs for Medicare Part B and Part D. It also provides direct property tax relief to low-income and elderly Maine homeowners through the Property Tax Fairness Credit.

To ensure we have the infrastructure that allows a safe and efficient flow of commerce and citizens, this budget makes significant investments in our public infrastructure. The Highway Fund budget is 11.1 percent higher, which will allow for 1,200 miles of paving during the biennium. Funding for the Maine State Police has been transferred to the General Fund from the Highway Fund, directing more money to road repairs. In addition, this budget will support $2.3 billion of infrastructure investments identified in the MaineDOT Work Plan, with state funding supplemented by millions in matching federal and local funds.

This budget also makes important reforms in education funding. Rather than spend money on a bloated administrative structure, we will direct funding to where it is needed most: our students and our underpaid teachers in the classrooms.

With this budget, we are in a position to address the serious demographic challenges that face our state. We need to attract small businesses and successful professionals. We need to keep our families here and attract new families from other states and countries.

Deaths are outpacing births in Maine, but the latest population statistics show new migrants from other countries are helping to turn that trend around.

We need to give our young people the opportunity to stay and work in Maine and raise their own families here.

In addition to resources in the budget for direct property tax relief to help Maine families stay in their homes, I will introduce other stand-alone initiatives to reduce the property tax burden on Mainers. Municipalities will have the authority to collect service charges from large non-profit entities and to require land trusts to contribute to municipal coffers.

LePage's previous budget proposed taking away state aid to municipalities, making up for it by allowing them to tax nonprofits. That didn't fly. But before it didn't fly, I took a stab at seeing what that would mean, finding that the arrangement would have been a net loss for an estimated 439 towns.

The analysis exaggerated how bad the picture for municipalities, but it did reveal the towns that have the most to gain -- that is, the towns with the highest value in nonprofit property exempted from taxation.

It is important to note that while executive branch agencies are essentially flat funded, the legislative branch and judicial branch have increased their spending. We have worked hard to reduce spending and reduce the growth of government. It has not been easy. The decisions we have made will have impacts across state government. But we were elected to make tough decisions on behalf of the hard-working Maine taxpayers—not legislators seeking the limelight or career bureaucrats actively resisting change—and we have done that.

This budget reflects my vision for an economically viable Maine in which families, businesses and future generations can thrive and succeed. Our state needs bold initiatives to make it a place where people want to live and work and an attractive destination for young families from across the country. This budget should serve as a roadmap not only for this legislature, but for future legislatures and future governors.

Our administration has proven that by responsibly introducing tax cuts and prioritizing state spending, we can allow Maine families to keep more of their money and still deliver the services demanded by the public.

Over the next two years, I hope we can work together to set Maine on the path to future prosperity. More importantly, I hope you pledge to do no harm to Maine’s elderly population and to our state economy.

Sincerely,

Paul R. LePage

Governor

Read the full supplemental budget briefing below.

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