It’s no secret that Maine state government’s primary sources of revenue are generated through the individual income tax and sales tax. According to the latest revenue forecast, Maine is projected to collect $1.77 billion from the individual income tax in 2020 and $1.85 billion in 2021. In other words, income tax revenues comprise nearly half of all funding that is used for the general operations of state government.
This is a stark contrast from New Hampshire, a state that has resisted the urge to tax the income of its residents to feed state coffers. In fact, New Hampshire Governor Chris Sununu has embraced his state’s economic freedom, saying that he’d veto any legislation that would impose an income tax and “throw away the New Hampshire advantage.”
According to the Tax Foundation, Maine has the 11th highest top marginal income tax rate in the nation. Unfortunately, lawmakers passed up a perfect opportunity to reduce the income tax last session, especially when you consider the state continues to collect higher than expected revenue and is projected to collect $345 million more over the 2020-21 biennium than in the previous budget cycle.
An income tax reduction would make the state more competitive with other jurisdictions in the region, particularly New Hampshire and Massachusetts. Massachusetts’ top marginal income tax rate is 5.05 percent whereas Maine’s lowest is 5.8 percent, and as previously mentioned, New Hampshire does not impose an income tax.
For a single filer, Maine currently collects 5.8 percent on income below $21,050; $1,221 plus 6.75 percent on income between $21,050 and $50,000; and $3,175 plus 7.15 percent on income above $50,000 after deductions are applied. The funds collected as a result of these income taxes are sent the general fund, an account that is used to fund almost all operations of state government.
Largely due to the current economic climate, state revenue is projected to continue growing into the future. The state is supposed to collect $2 billion through the income tax annually by 2023. Because the state is projected to collect more revenue in the future, it only makes sense for the legislature to return some of these excess funds to taxpayers.
Representative Beth O’Connor last session introduced LD 1292, a bill that would have made marginal reductions to the individual income tax across each bracket, with the largest cuts going to the lowest bracket. Here is how the tax reductions were distributed under LD 1292:
- The top rate would be lowered from 7.15 percent to 7 percent
- The middle rate would be lowered from 6.75 percent to 6 percent
- The lowest rate would be lowered from 5.8 percent to 5 percent
According to Maine Revenue Services, under current law, tax filers who earn between $25,000 and $50,000 pay an average net tax of $706 through the individual income tax. If LD 1292 were passed and enacted, the average net tax amount for this income group would decrease to $594, saving these filers $111. Similarly, filers who make between $50,000 and $75,000 would save an average of $275.
This is not an insignificant sum and would cast a wider net than the new law sponsored by Speaker of the House Sara Gideon and signed by Governor Mills. This law will make direct payments of $100 to property owners in an attempt to alleviate Mainers’ property tax burden. The best way to reduce the tax burden on Mainers is to reduce the income tax and allow individuals to keep money in their own pockets, not redistribute it.
According to the same analysis, a family of four with two dependents that claims $90,000 through a married joint return would save approximately $451 under LD 1292, or 18.4 percent of their total tax burden ($2,446) after deductions and credits.
This savings equates to two trips to the grocery store or an automobile payment. Regardless of how the savings would be used, individuals and families know how to spend their money more efficiently than state government.
Some groups and lawmakers argue that a reduction in the individual income tax would result in less money for services such as education and healthcare. However, opponents of income tax reductions never question whether this additional funding is needed for these services, or if government should be funding them in the first place.
LD 1292 would not have put a large financial strain on state government — $166 million, or approximately 4 percent of total annual revenue for state government, would not be collected from taxpayers.
Other groups are concerned about tax reductions primarily benefiting the wealthy and ignoring the lower and middle-class. However, LD 1292 would have given the largest rate reductions to filers in the lowest brackets. The lowest tax bracket would realize a 14 percent reduction, the middle bracket would receive an 11 percent cut while the top bracket would be trimmed by just two percent.
In the work session for LD 1292, Rep. Ryan Tipping, the House Chair of the Taxation Committee, said, “some of the income tax reduction bills we’ve seen in the past have been focused entirely on the top rate, and I do applaud the sponsor for looking at the lower rates as well and actually, I think from what I see, a larger decrease in the low rates versus the top rates.”
After applauding the intent of the bill, Rep. Tipping proceeded to claim the bill did not have “an actual funding mechanism” to offset the reduction in revenues generated.
Our tax dollars fund state government, not vice versa. There will never be a funding mechanism for a tax reduction, unless other taxes are increased to offset the loss in revenue or projected revenue exceeds the amount that would be lost. Rep. Tipping must have forgotten that state revenue is growing, and is projected to grow substantially. If the legislature maintains this attitude on taxes, Mainers will never realize another reduction in the income tax.
Regardless of one’s political persuasion, there is no denying that LD 1292 would have provided small but necessary financial relief to all Mainers, and focused this relief to those individuals who need it the most. The bill would have accomplished this without significantly reducing general operating funds and jeopardizing essential services.
LD 1292 should have passed in the first session because it was one of a few bills that would have actually made a substantial difference for Maine families. Unfortunately, lawmakers and the governor elected to spend our surplus and projected revenues without returning anything to Maine taxpayers.