Every two years, the Maine Office of Tax Policy releases a lengthy report on tax expenditures, the multitude of carveouts in state law that reduce the tax liability of certain taxpayers.
Buried at the end of the 239-page report is a separate analysis of tax incidence, including a distributional evaluation of Maine’s tax code. Simply put, it breaks down the state and local tax burden by income group, showing how much poor families pay relative to the middle-class and the wealthy. Since the analysis draws on confidential tax records and the latest available data, it provides by far the most accurate picture of how Maine’s tax code affects different income strata.
Two facts stand out in the most recent report, issued in February.
First, the top 5 percent of income-earners (those making more than $179,000 annually) pay nearly half of the $1.3 billion in individual income taxes collected in Maine. In contrast, families earning from $33,000 to $42,000 pay just 2 percent of all individual income taxes, while the poorest quintile of the population has a negative income tax liability and gain nearly $30 million per year through the tax code thanks to refundable tax credits like the Earned Income Tax Credit.
The already steeply progressive structure of our individual income tax is inconvenient for left-wing activists calling for higher taxes on the rich, but should be central to any discussion of income tax reform. One can hardly redistribute the tax burden without a good grasp of its current distribution. Calling for additional taxes on a small sliver of the population that already finances more than one-quarter of state government is an odd way to achieve fairness.
The second important finding from the Maine Office of Tax Policy’s report debunks a common assumption regarding the corporate income tax on Maine businesses. The effective corporate tax rate on the lowest-income Maine families — those earning less $17,462 per year — is 0.28 percent, compared to 0.12 percent among the richest 1% of families. That’s right: As a percentage of their income, the poorest Mainers pay more than double what the top 1% of families pay.
That might seem strange. Don’t corporate taxes fall on the backs of wealthy business owners and shareholders? How do the poor wind up bearing some of the burden, when so few of them own businesses or stocks? The fact is that while a corporate officer might sign the check to Maine Revenue Services, the money to pay corporate taxes comes from both capital owners and employees in the form of lower wages; some estimates suggest that for every dollar collected in corporate tax revenue, workers lose more than a dollar in income.
The Tax Foundation estimated that the federal tax reform law passed in 2017, which slashed the federal corporate tax rate, will boost wages by 1.5% (mostly at the bottom and middle of the income distribution) and lead to 339,000 more jobs.
Despite these realities, progressive groups in Maine like the Maine Center for Economic Policy and the Maine People’s Alliance continue to urge policymakers to jack up corporations’ taxes while positioning themselves as advocates for low-income families and champions of progressive tax policies. Perhaps these groups haven’t bothered to check the numbers.