Gov. Paul LePage’s new budget is based on the belief that reducing income taxes, especially for wealthy “job creators” and corporations, will improve Maine’s business climate and stimulate the economy. To make up for the loss of income tax revenues, the governor proposes broadening and increasing the sales tax and eliminating municipal revenue sharing. What the governor is proposing, therefore, is more of a tax and revenue shift than a tax break.
On the municipal level, elimination of revenue sharing will cause immediate and continued injury. The governor ignores basic facts to justify this harmful policy change, adding insult to the injury. And the happy result of benefits to the whole economy by destabilizing towns is far from guaranteed.
The Legislature initiated revenue sharing decades ago to help reduce municipal reliance on property taxes and to compensate towns for some expenses that benefit the state. It is not, as the governor has called it, “welfare for towns.” If revenue sharing is eliminated, municipalities either will cut services, increase property taxes or both.
Property taxes are regressive, in that they can go up even as incomes are fixed or declining. The state has had two remedies to lessen the impacts: the homestead exemption and the circuit breaker, now called the Property Tax Fairness Credit. The LePage proposal would double the homestead exemption for those over 65 but eliminate it for everyone else. Property owners losing the exemption immediately would have higher property taxes, regardless of their ability to pay.
The governor argues these remedies target help to those most in need whereas revenue sharing, which goes through towns, does not. This misses the point that we traditionally have had both, not one or the other.
The governor has argued that towns are spending recklessly and can tighten their belts. When one excludes education and county expenses, however, the average Maine town budget has not increased substantially over the last five years. Even when town budgets are cut to the bone, if revenue sharing is eliminated and education costs rise, taxes will rise. After all, the state share of K-12 education has been in decline for years.
The governor argues towns can save through collaboration and don’t need revenue sharing. Many towns already are collaborating with others, however. In my town, we cooperate on fire control, ambulance services and trash collection. We share our plumbing inspector, health officer and animal control officer. There might be more opportunities, but these will not compensate for loss of revenue sharing.
The governor proposes that towns should be able to tax large nonprofits to make up for lost revenues. Even if this gets through the Legislature, there is a problem. Only a few dozen towns have enough such organizations to make up for lost revenue sharing. Most towns — about 350 — have none.
On the state level, sales taxes are regressive. Lower income groups already pay a much higher percentage of their income on sales than on income tax, and this will get worse.
For some, sales and property tax increases will more than make up for income tax reductions. The highest income groups, in contrast, pay a very small proportion of income on sales taxes and clearly will benefit from the tradeoff.
In return for the proposed tax shifts, we are supposed to get increased corporate investment in Maine and an improved economy. Corporate taxes may be a consideration for company locations. But in most cases, access to resources and markets, a trained workforce, affordable energy, quality infrastructure, high education standards and livable communities are far more important. Many of these qualities are improved by local and state government spending, which relies on taxes.
“Business-friendly” policy changes — such as lower corporate and income taxes, no inheritance tax, less labor protection and less environmental regulation — do not magically compensate for shortcomings in the previously mentioned factors. And they can have long-term negative consequences for state budgets, workers and the environment.
Several states, including Kansas and Wisconsin, that have tried major tax cuts during the last five years have experienced budget shortfalls, program cuts and sluggish growth and job creation. Economies are too complex to easily be controlled by a single factor, such as state tax rates.
Here are a few takeaways:
— There is a problem when cutting taxes for the wealthy and corporations leads to taxing homeless shelters.
— Getting angry at those who point out this irony is not the solution to the problem.
— Municipalities should be the state’s allies, not adversaries. It does not help to vilify the motives of those who run municipalities and to dismiss their concerns.
— Tax reform should broaden the tax base, not eliminate the major revenue source. It should lead to less regressive taxes. Increasing income inequality is not a good outcome.
— In towns, we reduce costs first or find alternative revenues before we cut taxes. Cutting taxes first in the hopes that the economy will grow enough to make up the difference is a risky strategy.
— State taxes usually are a minor cost to businesses compared with other factors. Loss of state income and corporate taxes, however, is a major cost for government. Loss of these revenues make it difficult for the state to fulfill its roles in education, infrastructure maintenance and services that can, ironically, help businesses in the long run.
Mitch Lansky is retired town manager of Reed Plantation.