The debate around the destructive 3 percent surtax on Maine’s individual income has turned largely toward one key issue: How many high-income residents will leave Maine to avoid being punished by this sudden 42 percent increase in their individual income tax rate?
Based on a report from Maine Biz magazine, it’s easy to see that if we don’t make a change, we will lose some high-income earners. I’ve already spoken to three people myself who are making plans to leave – and they are taking their income, tax revenue, and charitable donations with them.
Now, groups like the Maine Center for Economic Policy, the Maine People’s Alliance and the Maine Education Association would have you believe that this tax hike will result in more money for Maine’s schools and won’t drive away many of the high-income earners who already carry 62 percent of Maine’s individual income tax burden.
What they are not telling you is how many new jobs or households Maine will need to add to compensate for the loss of each one of these high earners.
I requested Maine’s latest tax incidence tables from The Office of Policy and Management (OPM) to illustrate my point.
The top 1 percent of Maine’s earners, those most likely to leave to avoid being punished for their success, would currently pay $324 million in state income taxes. That is 6,999 households paying on average about $46,400 per household in state income tax.
With the 3 percent surtax added, these same households would end up paying, on average, $61,800 in state income tax.
And the liberals cheer! Punish the rich, make them pay their fair share, right?
But here is a harsh reality – when one of these households, just one, says enough is enough and decides to declare residency at their home in Florida, all that money, not just the additional 3 percent, is gone.
It’s gone not just for this year, but forever.
One of three things then must happen; a spending cut to compensate for the loss of revenue, a tax increase to compensate for the loss of revenue, or economic growth to make up for the loss of revenue.
Assuming that liberals will not sign on to a spending cut, and conservatives will refuse another tax increase, we are now left to look to economic growth to make up it.
So, how many middle-income households must migrate to make up that lost income tax revenue?
According to the tax incidence table, a whole bunch! The 70,000 Maine households in the 40-50 percent income tax decile pay about $837 per household in state income taxes. What does that mean? It means that Maine needs to add about 74 of these middle-income households immediately just to make up for the loss of one high-income household migrating out of Maine.
Yet the OPM estimates as many as 1,255 high-income households would leave to avoid the 3 percent surtax.
If one high-income household migrates out of Maine and we need 74 middle-income households to make up for the loss of that income tax revenue, how would an exodus on the scale predicted by OPM affect us? Let’s say OPM is really high in their estimate, and only 10 percent (125 households) pack up and leave Maine, taking their income and $61,800 in state income tax payments with them.
We now need to create 74 middle-income households for each of those 125 high-income households that are leaving, or, in total, 9,250 households with earnings between $44,800 and $56,200.
If OPM is projecting the out-migration to only be twice as bad as it actually turns out to be, we need to compensate for the loss of 627 high-income households, and we need to create over 46,000 new middle-income households to compensate for this loss of revenue.
If OPM is correct and has hit this prediction on the nose, well, we are going to need to figure out how to grow our population because we don’t even have the people to fill the jobs and households we need to make up for the loss of this kind of revenue.
Maine cannot afford to lose its job creators, and if the 3 percent surtax is not reversed by the Maine Legislature, the progress state leaders have made with Maine’s economy will start to erode. Employers will flee, jobs will be lost at an alarming rate, and we will re-enter an era of economic hardship all too familiar to the people of Maine.
