EDITORIALS

Tax reform for Maine: Piecemeal edition

Economists including (from left) Chuck Lawton and Gordon Weil and University of Maine School of Law professor Orlando Delogu present to the Joint Standing Committee on Taxation during a public hearing on LD 1088 on Thursday, April 2, 2009 at the State House in Augusta. The bill was sponsored by John Piotti (D-Unity) and was titled &quotAn Act To Modernize the Tax Laws and Provide over $75 Million to Residents of the State in Tax Relief".
Bridget Brown | BDN
Economists including (from left) Chuck Lawton and Gordon Weil and University of Maine School of Law professor Orlando Delogu present to the Joint Standing Committee on Taxation during a public hearing on LD 1088 on Thursday, April 2, 2009 at the State House in Augusta. The bill was sponsored by John Piotti (D-Unity) and was titled "An Act To Modernize the Tax Laws and Provide over $75 Million to Residents of the State in Tax Relief".
Posted Sept. 08, 2013, at 12:50 p.m.
Last modified Sept. 09, 2013, at 11:38 a.m.

A newly appointed task force will get to work later this month combing through Maine’s tax laws and coming up with $40 million in tax breaks to eliminate or scale back.

As the 13 members of this group get to work, they might consider their job the first step of many needed to reform Maine’s outdated tax code, which received its last major shakeup in 1969 when the Legislature passed a state income tax.

Maine’s tax structure hasn’t remained largely unchanged for lack of trying. The state has seen at least six major attempts to overhaul its tax code in recent memory, including four in the past decade. The reform attempts have relied on the same broad principle: Extend the sales tax to more goods and services to fund income and, often, property tax relief.

Something else the plans have all shared? Failure.

It’s widely acknowledged Maine’s tax code is in need of an overhaul.

For years, the Maine Legislature has added dozens of credits, exemptions and refunds to the tax code. Lawmakers have rarely revisited those carve-outs to assess whether they’re accomplishing their original goals, much less repealed them.

One of the results has been a confusing patchwork of tax laws that exempt certain goods and services from taxation and not others.

But confusion isn’t the only reason Maine’s tax code needs an overhaul.

From a state budgeting standpoint, Maine’s tax structure is volatile. When times are good, state coffers are flush. But they drain out when the economy is weak, forcing lawmakers to resort to desperate measures to balance the books.

The sales tax is partly responsible for that volatility. Maine’s sales tax base has long been among the narrowest in the United States, and it isn’t designed to capture revenue from an economy that is increasingly based on services and less on the production and sale of raw goods.

A 2007 survey by the Federation of Tax Administrators found Maine taxed 25 categories of goods and services compared with a median of 55 in the rest of the country. The reliance on a narrow base means Maine’s tax collection stream is sensitive to economic swings. Auto and construction goods sales alone — two of the most recession-sensitive sectors — account for about 30 percent of Maine’s sales tax base, according to Maine Revenue Services.

The state’s last few budget cycles are a perfect illustration of the danger of a volatile state tax structure. Lawmakers have continually dipped into accounts set aside for municipal aid to balance the budget.

Gov. Paul LePage proposed eliminating municipal revenue sharing entirely when he made his two-year state budget proposal in January. While lawmakers reversed about 65 percent of that revenue sharing wipeout, that means towns and cities over the next two years will still absorb a 35 percent revenue sharing cut.

And if the 13-member task force charged with eliminating $40 million in tax breaks falls short of its goal, the $40 million will come from municipal revenue sharing instead.

As aid to towns and cities drops, property tax hikes are largely inevitable. And that will exacerbate another of Maine’s major tax problems: an over-reliance on the property tax.

In 2011, nearly 40 percent of Maine tax revenues came from the property tax, according to the Federation of Tax Administrators, compared with 33 percent nationwide. The relationship with a low and narrowly applied sales tax is clear. Maine’s sales tax rate is the third-lowest rate nationwide, according to a recent survey by the Tax Foundation. The state’s sales tax will jump to fifth-lowest on Oct. 1, when Maine’s 5 percent rate becomes 5.5 percent for two years.

In neighboring New Hampshire, which has no state sales or individual income tax, the property tax made up 62.5 percent of all tax revenues in 2011.

Unfortunately, high property taxes hit hardest those who are least able to pay — which makes it that much harder for low-income residents to get ahead.

While the need for far-reaching tax reform is clear, it’s proven to be a near political impossibility, just like the income tax was a century ago. The Legislature considered its first state income tax proposal in 1911, rejected it and rejected 46 others over the next five decades until the tax became law in 1969.

Given the difficulty in making far-reaching changes to Maine’s tax code, we should welcome the changes we’re able to get through our political system — like the task force charged with scaling back tax breaks and devising a way to evaluate those that remain — without losing sight of the broader need for a permanent solution that keeps property taxes in check.

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