New revenue surplus should prompt real tax reform

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In late November, the Revenue Forecasting Committee (RFC), a branch of the Maine Legislature’s Office of Fiscal and Program Review, released its latest projection of tax revenue expected to reach state coffers by the end of the current two-year biennial budget cycle ending June 2023, as well as the next biennium.

Buoyed by higher-than-expected consumer spending and corporate earnings, wage growth, employee tax withholdings, and pass-through income growing significantly over the first three months of the fiscal year, the RFC estimates that the State of Maine will take in about $820 million more in taxes in both the current and next two-year budget cycles.

How will Governor Janet Mills and lawmakers react to this large influx of revenue? In the days since the RFC’s report, Mainers have heard several different approaches.

While the governor has thus far been quiet on her plans, on the day of the RFC’s announcement, her office issued a statement noting “the increased costs of electricity, home heating fuels, gas at the pump, and other necessities are putting a real strain on the budgets of Maine people, which is even more difficult during the harsh winter months,” so they are looking at ways “to provide direct financial relief to folks hard hit by these increases.” To this end, Mills plans to bring a supplemental budget to the legislature to appropriate the greater-than-anticipated revenue.

Minority Republicans responded to the governor’s call noting that they “stand ready” to help Mainers hurting from rising costs. Longtime veteran of the state budget process, Rep. Sawin Millett of Waterford, expressed to the Bangor Daily News his interest in returning half of this money to Maine people as another round of direct payments.

The Republican proposal might seem like a safe bet. It would return the money to Maine people, instead of funding new or existing programs like Mills and allies did in their “majority budget” passed this year. But, is this plan bold enough to stare down the immense challenges facing the Pine Tree State over the next decade or longer? The $300 direct payments to Mainers who made less than $75,000 per year ($150,000 for joint filers) included in the budget barely made a dent in the financial situation of struggling Mainers; plus, people didn’t receive them until November. Maybe it’s time to try a new approach.

This year, both New Hampshire and North Carolina passed state budgets which pare down income taxes and phase out corporate taxes over time. Surely, there are more substantial ways to aid Mainers gasping under the weight of price inflation, rising energy costs, and the stagnating effects of supply chain disruptions and workforce shortages than one-time payments.

Maine needs radical tax reform to drive long-term, structural economic growth.

Turns out, $800 million is a lot of money. The State of Maine takes in about $3.6 billion every two-year budget cycle by taxing personal income earned by the people. Mainers making up to $50,000 per year make up only about 7% of overall income tax liability, but make up nearly 60% of those who file income taxes.

These workers are the ones struggling most to keep up with inflation at its three-decade high. Energy is one of the biggest contributors to today’s price inflation; the price of gasoline shot up 4.8% in October alone, and Mainers are experiencing a 30% increase in their power bill due to recently approved rate increases. Gas and fuel taxes affect the poor 20 times more than the wealthy.

Based on an analysis of the latest income tax liability distribution table, cutting state income taxes on income up to $50,000 per year would cost less than $300 million over the biennium. This would do much to help low-earning Mainers in the daily struggle against steadily climbing food and energy costs. It would save the average taxpayer earning between $25,000 and $50,000 per year—about 25% of filers and the bulk of Maine’s lower-middle class—about $700 every year.

Lawmakers could build a foundation for a more competitive tax environment with Massachusetts, to say nothing of income-tax-free New Hampshire. After cutting to zero tax on earnings up to $50,000, start the first bracket on income earned between $50,000 and $100,000 at 5%; for earnings over $100,000 per year, set the rate at 6.5%. 

This reform package would greatly simplify the system, deliver the greatest benefits to the lowest income earners, and cost less than $750 million over the biennium, well within the realm of projected revenues for the next two biennia. It would be the biggest tax cut in Maine history, overshadowing the LePage tax cuts of 2011. By championing this reform, Speaker Ryan Fecteau, Senate President Troy Jackson, and Governor Mills would make an historic stand for the future growth of the state. 

The opportunity for lasting, monumental reform is upon us. Instead of answering calls from lobbyists and big-spending Portland-area legislators who always want more of other people’s money for their pet projects and programs, Gov. Mills and her allies should embrace this moment and send a message around the nation that the people of Maine are ready to flourish.

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