November 17, 2018
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Question 1’s new surtax would be detrimental to Maine’s economy

George Danby | BDN
George Danby | BDN

The state economist recently issued a report on the likely impact that a proposed 3.8 percent surtax to fund universal home care would have on Maine’s economy.

The report demonstrates that the surtax, which will appear as Question 1 on the November ballot, would have a detrimental impact on Maine’s economic growth. Specifically, if implemented, the surtax would result in the following outcomes relative to a projected five-year baseline:

— Cumulative net loss in total personal income up to $2 billion from 2019-2023.

— Population decline, relative to current projections, of 1,200 to 2,300 in each of the next five years.

— Consistent declines in Maine’s labor force compared to baseline levels over the next five years.

At a time when Maine’s economy is strengthening and Mainers have increasing levels of disposable income, imposing the surtax would reverse or slow considerably these advances. It would add new, unnecessary headwinds to economic growth in our state. Those headwinds have two primary drivers.

First, imposing the surtax would yield increased out-migration and decreased in-migration. Skilled, high-earning professionals and entrepreneurs are highly mobile. Simply put, if Maine imposes even higher taxes on these individuals and families, they are more likely to leave our state or not to come here in the first place. Second, the surtax would increase production costs for businesses in our state. This, in turn, would result in less job creation, fewer wage increases and reduced capital investment.

The proposed tax regime itself is a complex one. For individuals earning more than $128,400, it would impose a payroll tax of 3.8 percent on earnings in excess of that amount, of which those individuals would pay 1.9 percent, and their employers would pay 1.9 percent. Also, for individuals with more than $128,400 in earnings, any non-wage income — such as from dividends, capital gains or rental payments — would be taxed at the full 3.8 percent. Further, self-employed individuals would pay both sides of the 3.8 percent payroll tax for income in excess of $128,400.

Based on the language of the referendum, the surtax would apply not only to individual income in excess of $128,400, but also to combined household income exceeding that level. For a married couple filing jointly, with each partner earning $75,000 per year for a total of $150,000, that means $21,600 of their income would be subject to the surtax. Because neither partner earns more than $128,400, an employer would not be responsible for paying half of the 3.8 percent; therefore, the joint-filing couple would pay the full 10.95 percent tax rate on income in excess of $128,400.

Proponents of Question 1 claim that the 3.8 percent surtax would not apply to combined household income. Maine Revenue Services, which will administer the tax, disagrees, and the language that will appear on the November ballot refers to “a new 3.8% tax on individuals and families with Maine wage and adjusted gross income above the amount subject to Social Security taxes.”

That language resulted from a formal process, in which the secretary of state issued a draft of Question 1 and solicited input from commenters. I and numerous others submitted comments. My comment was informed by — and included as an attachment — a memorandum prepared by Maine Revenue Services’ civil servant tax policy experts, arguing that the surtax would apply to combined household income. Based on the comments he received, the secretary of state revised the preliminary Question 1 language — which included only individual income — to include individual and family income in the final version that will appear on the November ballot.

In its fiscal note on Question 1, the Legislature’s Office of Fiscal and Program Review also included individual and family income in projecting the $310 million that the surtax would yield annually. This means that three independent state offices, Maine Revenue Service, the secretary of state and Legislature’s fiscal office have interpreted the referendum’s language to include combined household income.

To be clear, the LePage administration would oppose a new surtax regardless of whether it applied to individual or combined household income. Maine’s taxes are already too burdensome, and the state economist’s report makes clear the detrimental impact that adding the proposed surtax would have on economic growth in our state.

With unemployment below 4 percent for a record 32 consecutive months, 12 of 16 Maine counties experiencing population growth last year, personal income growth nearing 4 percent and a record number of private sector jobs, our state is seeing gains that we have strived for years to make. We should do everything we can to keep a good thing going.

Alec Porteous serves as commissioner of Maine’s Department of Administrative and Financial Services.

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