Although he never touted it on the campaign trail, Gov. Paul LePage reiterated his desire last week to eliminate the state’s income tax so Maine can “compete with big states.” To make up for lost revenue, he’d expand the sales tax to more items.
This is an idea worthy of rigorous consideration, but it is far from new and it is not an easy political sell. Just five years ago, a Democratic Legislature passed a plan that was similar in broad strokes — lower the income tax and broaden the sales tax — but it was repealed through a people’s veto led largely by Republicans. That plan would have reduced the state’s top income tax rate from 8.5 to 6.5 percent while broadening the state’s sales tax and raising the meals and lodging tax from 7 percent to 8.5 percent. This would have helped stabilize the state’s tax collections, which are heavily reliant on car and construction sales, and exported much of the additional sales tax burden.
Shortly after the reform package, LD 1495, was passed in 2009, the conservative Wall Street Journal ran an editorial titled “Maine Miracle” that praised Maine’s tax reform effort for dropping Maine’s income tax rate from seventh to 20th highest in the country. The Tax Foundation, a longtime critic of Maine’s high tax rate, also called LD 1495 a positive step forward. In Maine “tax cutting to promote growth and attract jobs is back in fashion,” the Wall Street Journal wrote.
Still, the Republican-backed repeal was successful and this reform didn’t go into effect.
Two years later, Republican passed their own income tax reduction package. It lowered the top rate from 8.5 percent to 7.95 percent and eliminated income tax obligations for an estimated 70,000 lower-income residents. It doubled from $1 million to $2 million the estate tax exemption. It also increased personal and standard deductions by conforming Maine’s tax code with the federal government’s.
But these tax cuts weren’t paid for with budget cuts, so lawmakers faced a major budget shortfall when it came time to work on the next two-year state budget. Rather than eliminate revenue sharing and cut back on property tax relief as LePage had proposed, lawmakers passed a budget in 2013 that raised the state sales tax from 5 percent to 5.5 percent and the meals and lodging tax from 7 percent to 8 percent for two years. The governor vetoed the budget, but his veto was overridden.
Now, Gov. LePage wants to go further.
Nine states have no tax on earned income — and those states tend to make up for the lost revenue elsewhere. In New Hampshire, residents see it in their higher property tax bills. Alaska relies heavily on revenue from oil and gas extraction instead. Nevada relies on nearly $900 million in annual gaming taxes and fees. Others, including Florida and Texas, levy numerous county or local sales taxes. In Florida, counties can levy sales taxes to pay for infrastructure, emergency services, hospitals and indigent care. These taxes can be up to 3.5 percent. South Dakota has additional state taxes and fees on alcohol, coin-operated laundromats and other entities. In addition, its sales tax applies to golf courses, gyms, ski lift tickets and other items that are not taxed in Maine. The state also allows municipalities to assess their own sales, use and gross receipt taxes.
Maine towns, especially service centers like Bangor, have tried for years to get the authority to assess local sales taxes. The most recent effort failed last year. It was passed with a strong favorable vote in the House but defeated in the Senate. Still, a local option sales tax should be part of any tax reform discussion.
Maine’s tax structure is still too narrow and too volatile, and doesn’t capture enough from out-of-state visitors. Structural changes are needed to address these problems, not just tax rate increases or decreases. And those changes can’t result in lower state taxes that subsequently force towns to raise property taxes. That’s not a solution, it’s just a shift.
