Governor Mills is preparing to unveil her budget proposal for the next biennium and we’re about to learn if she resisted the pressure from her legislative allies to shift more of Maine’s tax burden onto the shoulders of top-earners.
Whether or not she chooses to violate her campaign pledge to not raise taxes in her first budget, any significant proposals to change Maine’s tax code will likely revolve around the income tax — a new income bracket, perhaps, or a flurry of tax credit expansions.
Since Governor LePage’s earliest days, most of the political discussion on Maine’s tax code on both the left and right has centered around the income tax. Far less attention has been paid to the sales tax, the other major source of state tax revenue. That’s understandable; historically, reforming the sales tax has proven politically perilous.
But while it might be a heavy lift politically, enacting fundamental changes to Maine’s sales tax is a no-brainer among economists.
Since its inception in 1951, Maine’s sales tax has been structurally flawed, taxing most sales of goods but exempting the majority of services. At the time, tax administrators doubted their ability to enforce taxes on services, which were harder to monitor than transactions involving tangible goods. Besides, the vast majority of consumer spending in the 1950s was devoted to goods, so taxing services wouldn’t have generated much revenue anyway.
Today, the landscape is quite different. Services now make up more than two-thirds of household spending, and methods of enforcing sales taxes are more effective and sophisticated than ever. But the sales tax base hasn’t changed much over the last 68 years. Only a handful of services are currently taxed in Maine.
The rationale for expanding the sales tax base is simple. If you tax a larger number of things, the rate can be lower and the tax burden can be distributed more equally. From an economic standpoint, sales taxes should apply to all final personal consumption. That way, government-induced market distortions are minimized. If people want to spend more of their money on services rather than goods, it should because of market forces, not tax incentives.
Under Maine’s current laws, paradoxes abound. Hiring a carpet cleaner? Exempt. Buying carpet-cleaning products? Taxed. Getting a pair of shoes resoled? Exempt. Picking up a new pair of sneakers? Taxed. Visiting a dentist? Exempt. Buying a toothbrush? Taxed. You get the picture. In thousands of cases, services receive preferential tax treatment over comparable goods.
No one has come up with a comprehensive estimate of how much revenue these loopholes represent, but given their breadth, it could easily approach $1 billion annually. With that kind of money, the sales tax rate could be dramatically lowered or tax relief could be provided in other ways.
There would be resistance, of course. Every carveout in the sales tax corresponds to a small group of vocal special interests. Caving to one lobby would inevitably lead to a concession for the next.
Expanding the taxation of services would make the sales tax fairer and help Maine’s economy. And it would give Governor Mills the distinction of having accomplished what has eluded her recent predecessors: fundamental tax reform.
