As contentious negotiations over a state budget for the next two years press on in Augusta, it is important for lawmakers and the public to keep two things in mind. First, maintaining a surtax on high earners is not a tax increase. Second, unlike in past years, Maine does not have a revenue shortfall, so it is not necessary to cut programs and reduce state spending to balance the budget.
The 3 percent surtax, on annual income above $200,000, was approved by voters in November as a means of increasing state funding of K-12 education. It is state law. High earners are already paying the surtax. It is being withheld from their paychecks.
Or, many of those who earn much of their income from interest and dividends — i.e. wealthy people — pay their taxes quarterly. The first two 2017 estimated income tax payments have already been paid and include the surtax, if applicable.
So, any proposal to shrink or eliminate the surtax is a tax cut for Maine’s wealthiest residents. It will also reduce the amount of revenue the state collects.
The surtax does create a perception problem for Maine. With the surtax, Maine’s top income tax rate is among the highest in the country. After years of work to reduce Maine’s income tax rates, returning Maine to the top of the “highest taxed states” list is concerning. That is one reason the Bangor Daily News opposed Question 2, which assessed the tax on high earners to raise revenue that was to be dedicated to schools. “Even though research has shown taxes ultimately play a small role in determining where businesses set up shop, we fear negative fallout from Maine again being labeled as among the most taxed states in the nation,” the BDN said before the November vote.
Senate Republicans and Democrats in the Legislature are focusing their attention on meeting the school funding goal in Question 2 without the surtax or with a smaller surtax, while making up the revenue loss elsewhere in the budget. This is where a compromise will be found.
At the end of the last week, these two caucuses were only about $25 million apart in terms of school funding, although it was unclear where the Senate Republicans would come up with all the money they sought to earmark for schools. The latest proposal from Democrats is to reduce the surtax to 1.75 percent on annual income over $300,000. They would also increase the state’s sales and lodging taxes to raise more money for education.
House Republicans, on the other hand, want to eliminate the surtax with no replacement means of collecting revenue to direct to schools.
When Paul LePage was elected governor, the state often had a revenue shortfall at the end of the year. He and lawmakers cut programs and replenished the state’s rainy day fund. They also cut taxes, which further reducing state revenues, requiring more cuts.
As the economy has improved, the days of cutting to balance the budget have receded.
Now, there is no revenue shortfall. In past years, budget negotiations have been contentious because lawmakers disagreed over which cuts to make to meet revenue collections that were lower than expected. That is not the case this year, although lawmakers will have to find $51 million that the federal government has demanded the state return because of its mismanagement of the Riverview Psychiatric Center.
This year, the largest stumbling block to a budget agreement fight boils down to a simple point — what is the best way to raise revenue to meet the public’s expectation that the state will finally fund 55 percent of K-12 education costs.