Gov. Paul LePage’s road show on his tax proposals — which came to Bangor this week and continues Wednesday in Lewiston — makes this a fine time to get a few points and principles straight about Maine’s taxes.
First, Maine’s taxes are not driving people or businesses away. Maine ranks smack in the middle of the states, No. 25, in terms of tax burden, according to the Federation of Tax Administrators. State and local governments here collect $6,127 per person in revenues, equal to 15 percent of average personal income. Nationally, the figure is $6,415, also about 15 percent of personal income. Maine has the second lowest tax burden in New England after New Hampshire.
The property tax is the largest single revenue source. Property taxes provide 39 percent of total tax revenues in Maine (the U.S. average is 32 percent); the sales tax provides 29 percent; and the state income tax, 23.5 percent.
For every dollar a Mainer pays in income tax, then, he or she pays $1.65 in property taxes and $1.22 in sales taxes. This tax is especially onerous for families hit by unemployment or a major illness and for businesses that are just starting up or suffering through a downturn. High property taxes in urban areas contribute to flight to the suburbs. For these and other reasons, the need for property tax relief is more urgent than it is for income tax cuts.
Second, relying more on regressive taxes is not good for the economy, despite the governor’s assurances to the contrary. Regressive taxes are ones that swallow a smaller portion of your income the greater your income becomes — sales and property taxes, for example. Regressive taxes usually provide no exemptions for economic hardship and, as a result, exacerbate whatever monetary stress a business or family is facing. And greater economic stress among working families and small businesses makes it more difficult to achieve excellence in production — which is the key to economic leadership.
LePage’s stated goal of transitioning to a system based on consumption-based taxes fits into a national push by the Heritage Foundation and other conservative think tanks to introduce a singular “consumption tax.” As these conservative thinkers discuss it, the consumption tax is really just a flat-rate income tax that does not tax income that is saved or invested. This tax has been heavily promoted on the grounds that exempting savings and investment from taxation will bring a surge in investment. And eliminating other taxes in favor of a single consumption tax would mean fewer loopholes and exemptions, making possible a lower rate.
The consumption tax would be easiest to collect on an annual basis, but it also can be collected by taxing all forms of spending except savings and investment. This would mean taxing not only purchases of goods and services online and off, but all expenditures, from monetary gifts and parking tickets to health care and education. This would be administratively difficult, not to mention unpopular. So for now, the emphasis at the state level is on gradually expanding the sales tax.
“But,” you exclaim, “I don’t like where this consumption tax rhetoric is headed! A flat-rate income tax with no exemptions except for investments! I don’t invest that much! That would let the high-income folks buying stocks and bonds off the hook!”
Hmmm, so you’ve noticed. Note also that your largest investment is in your home — and it is the property tax, not the income tax, that costs you the most there.
That leads me to my third point: There are several sectors of the Maine economy whose share of the total tax burden is less than their share of output and income. Both fairness and revenue stability would be improved by increasing their share of taxes paid.
This under-taxed group includes several large corporations, some tax-exempt nonprofits and more. The Institute on Taxation and Economic Policy lists Wal-Mart and other giants among companies that avoid state income taxes, typically by allocating the sources of their income among the states by inscrutable, if legal, accounting practices. The Institute on Taxation and Economic Policy examined 269 profitable Fortune 500 firms over the 2008-12 period. The total amount they paid in state income taxes amounted to less than 3.1 percent of their profits. But the (weighted) average state tax rate was 6.3 percent, meaning that half of their profits escaped taxation. Verizon and Best Buy were among 90 firms that paid zero taxes in at least one of those profitable years. Wal-Mart paid 3.5 percent on average.
As for taxing nonprofits, those with nice income streams — such as nonprofit hospitals or yacht clubs — might be persuaded to voluntarily contribute toward the cost of municipal services they use. This has already happened in other cities across the country after negotiations with such organizations on an individual basis.
LePage is right that the key to successful tax reform lies in popular support. Such support, however, can only be built through consideration of the best information available and, above all else, through honoring shared principles. And when it comes to taxes, fairness is principle No. 1.
Marianne Hill, Ph.D., of South Portland moved to Maine in 2014 from Mississippi, where she did the state economic forecast and edited the Mississippi Economic Review and Outlook for 23 years.