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 firstname.lastname@example.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.