It’s about tax fairness

Maine’s tax system has undergone seismic shifts during the 125th Maine Legislature and more changes are in the offing. The resulting tremors will deepen the chasm between Maine’s wealthiest and everybody else.

Take for example last year’s income tax cut. For every $1 in income tax relief for a family in the bottom 20 percent of income, a family in the top 1 percent of income earners receives $401. Factoring in cuts the Legislature made to property tax relief to help pay for the income tax cut, the bottom 20 percent will actually see an increased tax bill on average.

This is a clear case of a reverse “Robin Hood” effect.

While we expect the top 1 percent to receive a larger dollar-for-dollar tax cut because they make more, they benefit more than projected based on relative earnings. In 2009, the bottom 20 percent of Mainers earned an average of $1 for every $115 in earnings for the top 1 percent.

The 2011 income tax cut was only the opening salvo in a massive frontal assault on the progressivity of Maine’s tax system. Legislators are currently considering a proposal to eliminate taxes on pension income. The bottom 20 percent will receive an average benefit of two cents per year compared with an average of $438 per year for the top 1 percent. That’s a ratio of 1 to 21,900 — a far cry from the 1 to 115 ratio of average income for these two groups of taxpayers.

Legislators have also taken up a proposal aimed at reducing the income tax rate to 4 percent over time. Here again, the disparate impact is huge. The bottom 20 percent will see an average benefit of $1 per year compared with $21,638 for the top 1 percent.

Taken together, the enormity of these three tax proposals is astounding. Inequality hurts all of us and our tax system shouldn’t make it worse. But that’s exactly what will happen if these proposals take effect.

There is a better way. One that delivers targeted relief to those who need it most, maintains funding for critical programs and services and stimulates economic activity.

Consider the pension tax proposal. Older Mainers most in need of tax relief are the ones who lack the retirement security to stop working.

Maine already exempts Social Security income. Expanding eligibility for the State Earned Income Tax Credit to working Mainers ages 65 and older and making the credit refundable for all who are eligible would do more to lessen inequality and aid working families than any of the current proposals. Restoring the property tax relief program to its full level and streamlining the enrollment process to encourage greater participation would also offer significant benefit where it is needed most.

There are more responsible and effective ways to go about changing Maine’s tax system. The current approach worsens inequality and creates long-term structural funding gaps that will have to be closed through program cuts or tax increases by future governors and legislatures.

And despite the repeated claims by proponents that such tax cuts will create jobs, the evidence is more convincing that targeted tax relief to people more likely to spend their savings does much more to spur short-term economic activity.

Maine’s wealthiest 1 percent already pay an effective state and local tax rate significantly lower than everybody else. We already ask struggling families to pay more than 17 cents out of every dollar they earn in state and local taxes, while the wealthiest households pay less than 10 cents. Pursuing policies that widen this gap and leave more and more Mainers on the wrong side of the chasm is bad economic policy and a giant step backward for tax fairness.

Garrett Martin is executive director of the Maine Center on Economic Policy.