Taxes

Systemic tax reform is better than one-time gimmicks

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This week, Maine lawmakers will vote on LD 221, Governor Janet Mills’ supplemental budget proposal. Also known as the governor’s “change package,” the bill would tack on about $200 million more to the state’s biennial budget out of the more than $900 million in new tax revenue projected for fiscal years 2022 and 2023, which is set to begin on July 1.

The group of legislators tasked with marking up budget bills, the Appropriations and Financial Affairs Committee (AFA), dealt with the measure during work sessions last week and over the weekend. Out of those negotiations, lawmakers on both sides of the aisle agreed to spend about $150 million to send $300 checks to each of roughly a half-million Mainers who make less than $75,000 per year and filed taxes last year. 

Minority Republicans attempted to include short-term tax relief of up to $10,200 for all taxpayers, not just for those business owners who received federal Paycheck Protection Program (PPP) loans or workers who filed for unemployment insurance (UI) over 2020. Instead, both Republicans and Democrats on AFA unanimously chose to advance the $300 one-time payments since tax reform was a non-starter for legislative Democrats.

But, $300 more will not mean very much for struggling, working Mainers. The unemployed have received that amount just in federal UI benefits per week, on top of weekly state UI and other benefits for low-income earners. Federal policymakers have spent the last year and a half spending trillions of dollars on, among other things, direct “stimulus” payments to Americans. As inflation hits record levels, revealing considerably tepid economic growth, Gov. Mills and Maine lawmakers should reconsider this strategy and instead look to policy that will ensure real economic gain in the long-term.

Still, more than 28,500 Mainers who were in the labor force in January 2020 have not yet returned. As employers across the state and across industries attempt to rally for workers to help them deal with spiking summer demand, Gov. Mills and Maine legislators may accomplish more by using this extra state money for systemic tax reform, instead of going along with another cheap gimmick.

A bill presented to lawmakers during 2019 would have provided some level of long-term tax relief for those hard working Mainers who earn their living through income. Though far from what some would consider “radical” tax reform, LD 1292 would have marginally lowered all three of Maine’s tax brackets, more so for the lowest and middle brackets affecting those making less than $50,000. 

Today, 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; or $3,175 plus 7.15 percent on income above $50,000 after deductions. The funds collected as a result of these taxes are sent to the general fund, an account that is used to fund almost all operations of state government. Under LD 1292, taxpayers in the lowest tax bracket would save about 14 percent, the middle bracket about 11 percent, while top bracket earners would save just two percent.

An analysis by Mike Allen, Associate Commissioner for Tax Policy, conducted in August 2019, looked at the potential costs of enacting this plan. His calculations suggested that the cost of these marginal changes in tax rates would have cost state coffers around $165 million versus the status quo, and returned about $250 annually to the average Maine taxpayer.

Even though lawmakers were facing another higher-than-expected batch of revenue during last session, Ryan Tipping, then House chair of the Legislature’s Taxation Committee, rejected the bill because it did not contain tax revenue offsets for that which it proposed to cut.

Fast forward to today, where Maine lawmakers look to send $150 million to about 500,000 Mainers for a one-time benefit of $300 per person. Looking back, it seems especially ridiculous that legislative leadership would be unwilling to spend just $15 million more to enact the kind of lasting tax relief contained in LD 1292.

Yes, cutting taxes means that the state will receive less revenue year-over-year, not just in the immediate future. In the same token, because a change in law similar to what LD 1292 from 2019 would have implemented would cut taxes for Mainers in the future, it would provide greater stability for businesses and working families, both in Maine and those looking at a potential move to the state.

As we at Maine Policy have warned since last year, lawmakers should be wary of policy that uses short-term tricks versus spurring long-term growth. There is no substitute for a healthy economy, and no measure of giveaways can stimulate the real growth that requires saving, investment, and time to create significant value. Citizens who want a growing economy instead of a stagnant one must constantly keep up the pressure on politicians who would rather look to easy gimmicks than transformational reform.

About Nick Murray

Nick Murray, of Cornish, currently serves as Policy Analyst with Maine Policy Institute, writing, researching, and bringing Mainers together over the issues facing the state. Previously, he served as Outreach Coordinator, planning events to spread the word about Maine Policy's work to new audiences around Maine.

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