Editorial: Time to End Maine’s Income Tax

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Imagine if the State of Maine wrote you a check for $4,000.

Every year.

That’s essentially what would happen if we eliminated Maine’s personal income tax. The average family of four would save nearly $4,000 each year.

Think it’s impossible? Think again.

The personal income tax is a leash that pro-government forces have tied around the necks of Mainers for more than 30 years. Maine used to have a thriving economy and booming industries, but we all know that’s history. The startling truth is, the decline of Maine’s economy started at nearly the exact time the state decided to implement the income tax. And it’s wreaked havoc on families and businesses ever since.

Maine consistently ranks among the worst states in the nation for business climate, and we have one of the highest tax burdens in the country.  The income tax plays a huge role in this dynamic. The fact is, Maine is known as a big-government state that will squeeze every nickel out of its citizens, even to the detriment of the overall economy.

We can take a huge step toward ending this dynamic by eliminating the income tax.

There are basically two factors involved in eliminating the income tax, and giving families their $4,000 a year back. One is the reduction in the size of government, and the other is the increased economic activity spurred by Maine becoming a more business- and family-friendly state.

Maine’s government has grown at an unbelievable rate, far surpassing need, and far surpassing the rate of growth of other, more prosperous states. A startling statistic is that Maine’s welfare system alone grew 78% over the eight years of the Baldacci administration – while Maine’s poverty rate remained relatively flat.

Here’s an even more amazing fact: If we reduced spending to the level it was the day Angus King became governor, we could completely eliminate the personal income tax.

That’s right. Maine’s income tax brings in roughly $1.3 billion a year, 37% of $3.4 billion in total revenues. When Angus King took office in 1994, total state revenues were about $1.7 billion a year. By the time he left in 2002, annual revenues increased more than 65%, almost a billion dollars, to $2.6 billion a year.

If we reduced our government’s size to 1994 levels, we’d save $1.7 billion a year – $400 million more than we would need to eliminate the income tax.

Reducing the size of Maine’s government by 37% can’t be done overnight. We need to take steps to get spending under control, and that means bringing Maine more in line with national averages in areas like Medicaid eligibility and education spending. Maine’s income tax would need to be phased out over a period of years, as state spending is ratcheted back down to reasonable levels.

Once Maine charts a course for eliminating the income tax, economic activity will be stimulated. As our reputation as one of the worst states in America for doing business recedes, and as the nation sees that we are serious about reducing our tax burden, it will become less difficult to convince companies to invest in our state. The increased economic activity that would result has the potential to increase state revenues overall through sales tax, property tax, and other revenue sources that result from increased commercial activity. The uptick in other revenue sources would make the phase-out of the income tax easier, and possibly more rapid. As we get closer and closer to zero percent, this dynamic compounds.

Right now, Maine is caught in a figurative ‘death spiral’ of economic trends. As the people of Maine get pulled into the social services network, this increases spending and decreases private-sector output. The increased dependence on government increases the need for revenue, which increases the tax burden on a shrinking number of private-sector sources. This drives businesses out of Maine, which reduces the number of jobs, which increases the public dependence on government programs. This ‘death spiral’ is an unsustainable dynamic.

Imagine reversing this trend. Imagine a ‘life spiral’, where the decrease in tax burden spurred more economic activity, which allowed us to further reduce the tax burden, which in turn stimulated even more economic activity.

We can create this dynamic by charting a course for a zero percent income tax.

Eliminating the income tax would put Maine into a group of states that are leading the nation in economic growth. These are the states that are currently taking our businesses, taking our retirees, and taking away our children when they graduate from college.

Picture a young couple, just out of college, ready to begin a family, and deciding where to settle down. Right now, this couple can move to an income tax-free state like Florida, with more job opportunities, and use their tax savings to send their kids to private school, take a vacation, or save to start the small business they have dreamed about. But imagine how an extra $4,000 a year would impact their decision to stay in Maine. Imagine how a thriving economy would impact this decision.

Maine lost people and their incomes to the nine states that have no income tax almost every year from 1995 to 2009. This works out to nearly 12,000 people and over $661 million in income lost. Conservative estimates show this out-migration cost state and local government over $87 million in revenue over this time period.

Maine has the opportunity right now to end the exodus of businesses and young people.

Here’s why we know it can be done:

First, we didn’t always have an income tax. It wasn’t until the beginning of the three-decade Democrat dynasty in Augusta that we adopted it.

Second, there are nine other states that function without an income tax, and these states are thriving economically.

And third, the reduction of government necessary to make this happen is not draconian – we merely have to return to the spending levels we had before Angus King and John Baldacci exploded the role of government in our lives.

Over the next several months, the Maine Heritage Policy Center will be rolling out a solid path forward toward eliminating the income tax. We are fortunate that the current administration shares our perspective on reducing the tax burden on our citizens, and the need to create a friendlier business climate. The people of Maine have struggled for long enough, and now is the time to present them with a clear vision for a prosperous future.

That vision is a zero percent income tax, and we look forward to a robust discussion about how to get there in the coming months.

Lance Dutson is the Chief Executive Officer of the Maine Heritage Policy Center.  Email him at lance@mainepolicy.org.

*Note: If you would like to learn more about “Getting to Zero” please consider attending MHPC’s luncheon this Thursday in Portland, Maine at noon for a discussion on eliminating the income tax with Lance Dutson, MHPC’s Economist Scott Moody, and Maine’s Commissioner of Administrative and Financial Services Sawin Millett. Click here for more information and to register.

1 COMMENT

  1. Thank MHPC for clearly explaining the opportunity to promote liberty and prosperity, and to reduce government tyranny. “Nine other states…function without an income tax, and these states are thriving economically… the reduction of government necessary to make this happen
    is not draconian – we merely have to return to the spending levels we
    had before Angus King and John Baldacci exploded the role of government
    in our lives.” Let’s go for it, the sooner the better!

  2. It makes way too much sense.
    This could severely alter the course of the Democrat’s “war on Maine.”
    I believe the working people of Maine are for this.
    Weak politicians need not apply.
    Let’s start with the death tax.

  3. Let’s compare the nine states that MaineWire claims “are thriving economically” to Maine, using rates of unemployment:

    SDakota: 4.3% (3rd)
    NH: 5.2% (tied 5th)
    Wyoming: 5.3% (7th)
    Alaska and Texas: 7.0% (tied 20th)
    MAINE: 7.2% (23rd)
    Tenn: 7.9% (32nd)
    Wash: 8.3% (35th)
    Florida: 9.0% (43rd)
    Nevada: 12.0% (50th)

  4. Expecting something from your government for nothing is a bad idea.

    As costs rise, income taxes are and increasing burden. Reducing government expenses with care is important, but so is maintaining revenues to provide essential services.

    By reducing revenues derived from state income taxes to the level that existed in 1994 there would be a gigantic gain in the pockets of many Maine citizens, yet the savings to particular individuals would depend upon where they fall on the income curve.

    More importantly, this suggestion ignores another essential reality: the costs associated associated with government services would not revert to what they were 18 years ago absent divine intervention.

    The result, unfortunately, would be the impossibility of delivering those services without dramatic increases in some other income flow. Folks forget that states without an income tax have either another source of revenue to sustain government service or have substandard services.

    You can’t have it both ways.

    Only seven states (not nine) have no income tax. Tennessee and New Hampshire both tax interest and dividend income. Additionally, Texas and New Hampshire make up the shortfall by having some of the highest real property taxes the nation. Alaska reaps it’s revenues from one source: the oil business. Nevada has gambling. It’s a simplistic view that holds that folks who live in states without income taxes pay less overall to fund their state government absent a sugar-daddy. Would we, for example, invoke a “View Tax” on Maine property owners as they do in New Hampshire, or Texas’ “MUD” tax?

    Already strained by cuts in funding, without income tax revenues or some new source of funds, Maine’s ability to allocate money to infrastructure maintenance and repair, education, essential health services, public safety, administrative and judicial services and environmental and recreational resources would collapse.

    So exactly where are the funds necessary to balance Maine’s budget going to come from assuming providers of goods and services to the government aren’t going to agree to drop their pricing to 1994 levels?

    I look forward to reviewing The Maine Heritage Policy Center’s proposal.

  5. Hi!

    The Maine income tax is unlawful as it “steals” the labor of the people of Maine plus there is NO law at the federal level that allows an income tax on the people either.

    It is corporate law ONLY, and there are plenty of Supreme Court cases that proves it.

    The general government has NO delegation of authority to deal with the people directly and especially ‘steal” the people’s labor.

    Thank you!

    Lise from Maine

  6. Gerald, unemployment figures alone are only a small part of the economic condition of a state. Maybe you knew that.

  7. Yeah ! Yeah !  ta hell with our bills ! let’s just stiff the retirement system that we borrowed from for decades ! Let’s let those bonds that built bridges and schools default !
    We don’t need no stinkin’ bills ! Money, we need to keep our money and spend it where we want – more skidoos , more coffee brandy, more , more …..

  8. Few would describe a state with 9 or 12 percent unemployment as “thriving economically.” Florida has a population of 19 million with an estimated 835,665 unemployed.

    That’s the equivalent of the entire working age population of Maine.

  9.       Florida’s unemployment problem would be worse with an income tax. You think taxing something gives you more of anything but people and businesses running from it?

          Simply put, states with fewer taxes do better by in large that states who have more taxes. Also consider how much of Maine’s money goes to New Hampshire because of lack of sales tax. At last we have a Governor who gets it. I hope he can stay long enough to make those good changes.

  10. My nephew who is employed as a construction foreman in Florida, says that illegals are a large percentage of the workforce, I wonder how much of a effect that has on the rate of unemployment?

  11. I’m a former New Hampshire-ite, now a Mainer.
    My fear is this:  Get rid of the income tax, but don’t reform govt’ – enough and permanently – and you end up with no income tax but a massive property tax burden and excessive “fees” (aka hidden taxes).

    That said, and I’m sure there are good ideas on how to make sure that DOESN’T happen. So I’m 100% behind the shrinking of gov’t, the decrease of the welfare roll and role, and the elimination of the income tax, and the death tax.

    Let’s start with our home state and move it to the federal level.

  12. Well said, Cris, and much more eloquent than my short “watch out for high property taxes if you increase the income tax”.  Coming from NH, where the motto should be “Live, FEE’ed, then die”  I can attest to the excessive property tax, the “view” tax, and the fee upon fee for everything as not being anything like the low-tax-state that everyone seems to think NH is.  It can be great if you have a big salary, and rent.  It’s not so good if you have your own business and own a home/property.

    Looking forward to seeing the MHPC proposal as well.  Hopefully it will be a roadmap to success in smaller government and lower taxes for Maine.

  13. Hi!

    Will eliminating the Maine income tax replace it with another tax, for ex., the flat tax or some other unnamed tax at this point?

  14. That “essential services” argument is way over-used. People are always asking those of us who wish to curb government if we would like to forego fire, police, road and school services. Of course we would not, and sending us on a guilt trip by accusing us of being irresponsible is bad politics.
    For all the money we pay in sales and income taxes, I see bad roads, a lot of welfare payments, questionable police and fire services, and a DOT that insists on spreading harmful chemicals on our highways to control ice and snow in the winter.
    Just how much money does it take for police and fire? Not nearly as much as for schools. Our school budget, overall, in Maine is huge and our students are performing more poorly than ever before. How come that is the case when we also are spending more on schools than ever before?
    Every time we are offered a new revenue source, such as the Maine State Lottery and now enterprises like Hollywood Slots, we are told they will help pay for public services. Yet, our income taxes keep climbing even while we supposedly are reaping millions of income from these sources. Where does the money go? The liberals in the Legislature spend it as fast as they can get their hands on it.

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