Maine voters – by a margin of less than 1 percent – approved a 3 percent income tax “surcharge” on incomes greater than $200,000 for the purported purpose of funding public education. The Maine Office of Fiscal and Program Review estimated the measure would raise $142 million in the first year. Voters also approved (with an 11 point margin) an increase in the minimum wage to $12 per hour from $7.50 by 2020, adjusted for inflation each year following. For tipped workers, the minimum wage jumps from $3.25 per hour to $5 this year—and by $1 per year until equal with other workers. Good intentions aside, both measures pose a significant threat to Maine’s economic well-being.
This 3 percentage point hike in the personal income tax rate to 10.15 percent qualifies Maine as number 4 in terms of highest personal income tax rates. Only California, New York and Oregon impose higher rates. Unsurprisingly, the level of income tax strongly inversely correlates with domestic migration. According to the latest numbers from the Census Bureau, of the nine states with no personal income tax, seven experienced positive domestic migration in 2015 totaling more than 460,000. On the other hand, eight of the nine states with the highest personal income tax rates experienced net domestic out-migration exceeding 361,000 in aggregate. Maine fared not much better, gaining a paltry 2,169 people from domestic migration.
But what of the need for additional educational tax dollars in Maine? In fact, according to the latest data from the U.S. Census Bureau, Maine spends more per pupil ($12,707 annually) than 36 other states and 15.4 percent more than the nation as a whole. In the 40 year period beginning in 1972, Maine increased spending per pupil in real terms by nearly 175 percent even as the SAT scores adjusted for participation and demographics declined by nearly 3 percent. Hardly a return on the investment. Other states are actually obtaining better results with lower spending.
For instance, approximately 35 percent of Maine 8th graders are rated at or above proficient in mathematics by NAEP. Of the 17 states with a greater percentage of students falling in this desirable category, 8 spend less per pupil than Maine. For instance, 38 percent of Utah’s eighth grade students rank proficient or higher at mathematics, although expenditures per pupil ($6,500) are barely half of Maine’s. The state of Washington spends $10,202 per pupil—yet enjoys a proficiency rate of 39 percent. This small sampling of data suggests lack of funding may not be the primary culprit behind less than satisfactory educational outcomes in Maine public schools.
Doubtless, voters with the best of intentions approved the minimum wage increase as well. The small fraction of those earning at or below the federal minimum wage (9.5 percent of hourly part-time workers and 1.8 percent of full-time workers) include a disproportionate number of the young and under-educated. A teenage worker is five times more likely to be in a minimum-wage job than someone 25 or older (15 percent vs. 3 percent). Additionally, only about one in five workers is under the age of 25; yet nearly one in two minimum-wage workers have yet to reach this milestone. Those without a high school diploma are more than three times as likely to earn the federal minimum wage or less (7 percent vs. 2 percent).
But economists David Neumark (University of California) and William Wascher (Federal Reserve Board) concluded in their well-known 1995 paper that “such increases raise the probability that more-skilled teenagers leave school and displace lower-skilled workers from their jobs. We find that the displaced lower-skilled workers are more likely to end up non-enrolled and non-employed.” In effect, increasing the minimum wage is unintentionally pricing those who need these entry level jobs out of the jobs market. With teenage labor force participation stagnant near 35 percent (nearly 20 percentage points lower than pre-2000), sawing the lower rungs of the economic opportunity ladder does not bode well for those who most need work experience.
Fortunately, the Maine legislators hold the power to undo all of the damage caused by these two policy changes. A 1908 constitutional amendment does provide “any measure referred to the people and approved by a majority of the votes given thereon” becomes law. However, nothing within the Maine Constitution precludes the legislature from effectively repealing such an initiative upon passage. This benefit to act as a safeguard against rash proposals is not enjoyed nationwide. For instance, repeal of a voter initiated statute in Michigan requires a three-quarters supermajority. Likewise, a repeal In Mississippi requires a two-thirds vote of the legislature and submission of the repeal to the voters. In Wyoming, legislators must wait two years before enacting a repeal. All told across the country, 13 of the 24 states with a citizen initiative process impose limitations or outright prohibitions on “legislative tampering” regarding voter-initiated statute. But in Maine, a bare majority vote with no time limitations is sufficient to bring a repeal to the governor’s desk.
The Pine Tree State cannot afford to become yet more uncompetitive. The 9th edition of Rich States Poor States ranked Maine 44th in economic performance. Gross domestic product growth from 2004-2014 was smaller than any other state except Michigan. And the negative nonfarm payroll employment growth over this same period was rivaled only by Michigan and Rhode Island. Now, the hard fought modest gains in economic outlook (from 48th in 2011 to 38th this year) largely attributable to recently enacted tax reductions are threatened to be largely undone with these tax and minimum wage increases.
Full repeal of the minimum wage increase may not be politically possible. However, the damage can be mitigated by eliminating the automatic inflation adjustments, stretching out the timeframe of the additional increases and exempting tipped employees from additional adjustments. Certainly, the income tax increase can be eliminated, thus sparing Maine the economic millstone of the fourth highest income tax burden. These steps could at least secure a fighting chance at continuing to improve the state’s economic outlook in 2017.