Taxes

Income tax reductions will help tackle Maine’s demographic challenges

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Lawmakers frequently pursue legislation under the guise of improving Maine’s economy and attracting people to our state, but rarely is legislation enacted that meaningfully achieves either goal. Oftentimes these efforts to boost economic activity and address the state’s demographic woes feature dumping more money into ineffective programs (or whole government departments) to ensure we have “the best” health care or education. However, this type of spending rarely yields positive results.

Fortunately, legislators have an opportunity this session to fundamentally strengthen Maine’s economic standing by returning surplus government revenues to taxpayers in the form of tax cuts. Given the gains Maine’s economy has made in recent years, coupled with strong revenue projections for the years ahead, Maine has a chance to enact meaningful tax reforms that would improve the lives of everyday Mainers while leaving plenty of cushion in the budget – far more than Governor Mills’ budget proposal – to protect taxpayers from future tax increases.

The Taxation Committee today will hold a public hearing on LD 107, sponsored by Rep. Jeff Hanley, a bill that would make incremental cuts to Maine’s individual income tax until phasing it out entirely, potentially by 2024. The hearing is scheduled for 1 p.m. in Room 127 of the State House.

The individual income tax hinders economic growth, accelerates out-migration, and places Maine at a competitive disadvantage with other states by discouraging work and investment. This is particularly true considering Maine shares a border with only one state – New Hampshire – that does not impose an individual income tax, and enforces the second highest top marginal income tax rate in New England.

In essence, we are isolated in a corner of the country at a distinct economic disadvantage to our neighbors. Florida, a popular destination for Maine’s many snowbirds, also does not impose an individual income tax.

Maine’s top marginal individual income tax rate is one of the highest in the nation at 7.15 percent. A 2018 report by the Tax Foundation shows that Maine has the 12th highest top marginal individual income tax rate in the nation (including Washington D.C.). Not only does this make Maine uncompetitive compared to other states, but it deters in-migration.

Research from 2016 shows that in-migration to low-tax states with friendly business climates is much higher than in-migration to high-tax states that impose burdensome rules on businesses. Thus, states like Florida and Texas that do not subject their residents to an individual income tax continue to enjoy a higher influx of in-migration.  

Lowering or repealing the individual income tax would also benefit small businesses in Maine. Many small businesses are considered pass-through entities that report revenue from their business on their personal income tax return. In 2016, 111,750 tax filers in Maine reported business income on their returns.

Incrementally repealing the individual income tax would allow business owners and job creators to keep more of their money to reinvest in their businesses, expand their operations and give to their employees.  This would benefit the state’s economy by providing more jobs and increasing wages for employees.

It would also enable hard-working Mainers to keep more of their paychecks to reinvest in the state economy. Since these funds are currently collected by government and do not always make it back into the economy, they do not always create tangible benefits for Maine citizens.

Accomplishing meaningful tax reform, however, requires the state to control spending, ask hard questions during budget season and live within its means. This is the opposite of what has been proposed in Governor Janet Mills’ biennial budget proposal, which would balloon state spending to more than $8 billion over the next two years and use virtually every penny of projected revenue, along one-time budgeting gimmicks, to reach the highest spending levels in state history.

In contrast, on his way out the door, the budget proposal former Governor Paul LePage handed off to Governor Mills proposed returning surplus revenues to taxpayers in the form of a 20 percent tax reduction.

Lawmakers may not have the appetite this session to pursue a proposal as ambitious as LD 107, but any reduction in Maine’s individual income tax will measurably improve the state’s prospects as a destination for job creators and young, talented workers looking for opportunity and a new place to call home.

About Adam Crepeau

Adam Crepeau serves as a policy analyst at The Maine Heritage Policy Center. He can be reached at acrepeau@mainepolicy.org.

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