The Maine Heritage Policy Center on Monday released a new policy brief, “A Lost Cause: The Local-Option Sales Tax.” The analysis examines LD 1254, a carry-over bill that would allow municipalities to enact by local referendum a one percent local option sales tax (LOST) on meals and lodging sales within their jurisdictions. The bill will be considered when lawmakers return to Augusta in January for the second session of the 129th Legislature.
When LD 1254 was first considered by lawmakers earlier this year, a number of Augusta politicians and local officials made promises about how a local option sales tax would improve local services and reduce property taxes. However, the report released Monday casts serous doubt on these claims.
In the brief, MHPC explores the impact of LOSTs on low-income Mainers and dissects how the imposition of a LOST would alter consumer behavior to hurt Maine businesses.
First, few municipalities have a lot to benefit from the imposition of a LOST. For example, if all municipalities in Maine implemented a broad-based LOST of one percent, 10 municipalities would generate roughly 42% of all LOST revenue generated statewide. Meanwhile, 356 jurisdictions, or 70 percent of all municipalities, would generate revenue under $100,000.
Similarly, imposing a LOST specifically on meals and lodging would do little to help the average municipality. Here, too, the revenues would be concentrated to a small number of service centers. Based on 2018 meals and lodging sales data from Maine Revenue Services, the LOST within LD 1254 would generate $38.4 million in new revenue if enacted statewide.
Ten municipalities – Portland, Bangor, South Portland, Bar Harbor, Ogunquit, York, Wells, Augusta, Scarborough and Auburn – would generate approximately 45 percent of that revenue.
In addition, what has been the lost in the ongoing debate is how an increase in the sales tax hurts struggling Mainers the most. The lowest 20 percent of income earners in Maine pay an effective sales and excise tax rate of 6.1 percent. Maine’s top earners pay just 0.7 percent. Any increase to the sales tax hurts low-income Mainers far more than those who are economically secure.
In 2017, the U.S. Census Bureau estimated 12.9 percent of Mainers live in poverty. Interestingly, six of the 10 municipalities that have the most to gain from a broad-based LOST – Auburn, Augusta, Bangor, Biddeford, Portland and Waterville – have poverty rates that exceed the state average. For example, Augusta and Bangor had poverty rates of 21 percent and 22.6 percent, respectively, in 2017.
While these municipalities could raise hefty sums from a LOST, they would do so on the backs of their poorest residents. Sales taxes are regressive and punish those who already struggle to make ends meet in Maine, and this is no different with a LOST.
Perhaps most troubling is the effect a LOST would have on Maine businesses. Imposing a LOST in Maine would further incentivize cross-border consumption. Research shows that as long as consumers are within a reasonable commuting distance (31 to 38 miles), LOSTS increase cross-border shopping from high-tax jurisdictions to low-tax jurisdictions by 10 to 14 percent.
Worse, Maine border counties already struggle to compete with New Hampshire Border Counties. Because New Hampshire does not levy a sales tax, businesses in Maine border counties lose customers to their counterparts in the Granite State. Per capita retail sales in New Hampshire border counties ($19,644) outperform per capita retail sales in Maine border counties ($11,962) by nearly $7,700 per person. Establishing a LOST in Maine would only grow this disparity.
And while LOST proponents claim the tax is a way to offload the state’s tax burden on tourists, our citizens pay for these services as well. According to Maine Revenue Services, about 70 percent of meals sales and 30 percent of lodging sales are paid for by Mainers. Proponents also claim that the revenue generated by a LOST would help reduce municipal property tax burdens. However, nothing within existing state law or the language of LD 1254 requires municipalities to offset or reduce property tax collections by establishing a LOST.
In other words, there is no guarantee the revenue it generates would provide meaningful property tax relief in the jurisdictions that enact them.
The full brief can be read here.