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Congratulations, you’ve just won the lottery, and come into a substantial pile of money. Because you are human, your mind immediately starts swimming with ideas about what to do with the new, unexpected cash. Do you save it all? Invest it in the stock market? Pay down some debt?
Or do you blow most of it?
While everyone’s answer will vary a little bit, those who secure their financial future and guarantee lifelong prosperity manage their winnings wisely. Frittering away money quickly is a terrible idea, yet is all too common among lottery winners. In fact, it is the very reason why so many of them end up declaring bankruptcy after winning it big.
In research published 20 years ago, economists Guido Imbens and Bruce Sacerdote together with statistician Donald Rubin, observed that lottery winners had saved just 16 cents of every dollar they had won 10 years after the fact. The main reason for such a dramatic loss? Excessive spending and poor investments.
So the lesson would seem to be that if you find yourself suddenly having a lot of money you didn’t expect, resist the temptation to blow through it quickly, particularly by spending on immediate extravagances that won’t help you much down the road. It is just common sense.
But if that is common sense for individuals, why isn’t it common sense for government?
The state of Maine hit the jackpot this year, coming into hundreds of millions of dollars of surplus revenue, driven by an awful lot of federal bailout money and rising prices from inflation. In fact, the revenue picture is so rosy that the Revenue Forecasting Committee just revised the projected surplus upwards by $411 million.
It is worth noting, though, just for the record, that the revenue forecasts have also been revised downward for future years, with the committee warning that current economic uncertainty makes those projections somewhat less reliable. Therefore, they urged caution in the use of the surplus revenues.
In Gov. Janet Mills original supplemental budget proposal, roughly half of the projected surplus was to be spent on a variety of items, some of which are good, smart investments, like the roughly $100 million being spent on Maine’s roads. Much of it, though, is the same old bloated spending proposals we have come to expect from this administration.
The other half of the surplus is more interesting. Mills proposed to take the remainder of dollars and return them to the people of Maine via direct payment checks. And now that there is additional revenue, she is more or less proposing to do the same thing, using half for direct payments and the other half for undetermined spending.
I actually appreciate the governor’s gesture here, though I oppose her proposal. Sending the money back to the taxpayers is a far, far better use of the money than an additional $600 million in pork projects and programs.
But “better than a bad idea” doesn’t make something a good idea, and despite its partial virtue, at the end of the day the direct payments to Mainers are not going to help anyone beyond the very short term, and will do nothing to improve the structural financial picture of the state in the long term. In essence, $600 million will evaporate overnight, and the good it will do will be very small for the average Maine family, and will be very fleeting.
The right answer is to take those funds, and apply them to long-term, structural tax relief. Tax relief that Maine people can depend on beyond just this year. Tax relief that will make Maine more competitive against its neighbors and economic competitors. Tax relief that will help incentivize economic activity and improve the Maine economy for years to come.
This is something that other states have been moving aggressively to do, given the one-time opportunity given to them by pandemic relief. Last year, both New Hampshire and North Carolina passed state budgets that significantly lowered income taxes and phased out corporate taxes over time.
Maine could do something remarkably bold. We could completely eliminate all income taxes on earners making $50,000 or less, set a simple 5 percent rate for incomes between $50,000 and $100,000, and have one last bracket that subjected earnings over $100,000 to a 6.5 percent rate. The total bill for a proposal that looks like that would be $750 million, which is only slightly higher than what Mills is proposing we commit to one-time checks. While this would be an ongoing, rather than one-time “expenditure,” Maine’s future economic growth and economic forecasts are such that such a reform would not set Maine up for any kind of long-term budget problems as a result.
Sending checks, by contrast, would leave Maine’s tax rates where they are and miss a once-in-a-generation opportunity to make major, structural reform. We can do better.