Apparently, Gov. Janet Mills is expecting a $2 billion visit from the tooth fairy. While introducing the third two-year budget of her tenure in office last week, Mills explained that she intends to spend yet another $2 billion more with her new two-year budget and, she says, “It does all of this without raising taxes.” This statement, of course, is nonsense. If she spends $2 billion more dollars and it doesn’t come from taxes collected from citizens, what is the source of this windfall?
During her recent reelection campaign Mills told voters, “I have pledged not to increase taxes. I have not increased taxes. We have reduced taxes.” However, according to her State Controller, the current budget (FY 22-23) which she crafted with legislative Democrats while excluding Republicans from the process entirely, includes an increase in revenue from taxes of $3 billion, a 40% jump over just two budget cycles. While I am no accountant, I am not aware of any mathematical formula wherein a $3 billion increase can be described as a reduction.
The revenue collected to support this current biennial budget includes the largest tax increase in Maine history. This is a simple numerical fact. Her proposed $2 billion increase for the next budget would again hike tax revenues by nearly as much. Perhaps she will soon explain exactly where this money will come from, if not taxpayer’s pockets.
About 86% of the revenue included in every state budget comes from two categories—“Individual Income Tax” and “Sales and Use Tax.” Mills’ latest proposal cannot spend an additional $2 billion overall without taking an additional $1.72 billion from taxpayer pockets in these two categories. This new budget proposal, then, amounts to an average increase of $2,540 per taxpayer. A jump of this size in what is expected of those who “contribute” income and sales taxes is nearly double the $1,300 Mills has given to some Mainers in inflation relief checks ($850) and is about to give in heating assistance ($450).
This proposed budget is possible thanks to revenue that resulted less from wages and earnings and more from handouts from the federal government. In all, Uncle Sam sent $17 billion to Maine in the name of COVID-19 assistance. Now that the pandemic has faded as a primary focus, this flow of cash has come to an end, and the benefits from it will soon dissipate, leaving large holes in the budget with only one major source of revenue to tap—taxpayers.
According to the U.S. Treasury, the passage of the so-called “Trump Tax Cuts” just prior to the arrival of the pandemic led to remarkable, massive increases in federal revenue the likes of which the nation has never seen. In 2021, income to the federal government soared by 26% despite the economic downturn caused by the pandemic. In 2022, the feds took in an additional 22.3% in revenue on top of the 2021 windfall. This statistical reality proves a long-argued maxim that cuts in tax rates lead to greater government revenue as they did after major rate cuts under presidents Reagan in the 1980s, Clinton in the late 1990s, and then Bush in the 2000s.
The unprecedented recent spike in federal revenue made possible the gifts from Washington to Augusta that Democrats in state government and those who received stimulus checks and other cash grants promptly spent. To the surprise of no one with even basic knowledge of economics, this massive federal giveaway led to record inflation, causing sharp increases in prices everywhere from the grocery store to the gas pump, to the home heating bill. It allowed lawmakers to pass budgets based on this temporarily elevated cash flow as if this level of revenue was the new normal rather than a short-term, artificially induced event.
Lump sum payments lead to greater spending as people, suddenly flush with cash, use most of it to make purchases or pay debt immediately. This sudden spending increases demand for products and services which drives prices up. This is the very definition of inflation, which reduces the buying power of the stimulus money. This inflationary effect remains in place long after people have spent their stimulus money, meaning the rising cost of things soon reduces their “real” income indefinitely. People may earn more in dollars, but when the price of a loaf of bread and a gallon of gas or milk, for example, jumps faster than their wages, they actually earn less.
All of this temporary cash presented an unprecedented opportunity for legislators and Mills to create fundamental change and lasting economic growth, rather than a one-time burst of spending. Instead of throwing cash in every direction, state leaders had the opportunity to make significant cuts to the individual income tax and extend the benefits of the sudden, unprecedented flow of federal cash into something permanent.
By reducing the tax rates on individual people permanently, the economic stimulus effect could have been stretched out over a long period and with a lasting impact. Having fewer tax dollars taken out of one’s paycheck each month, for example, allows them to make payments on a new car, instead of buying a used snowmobile with their one-time stimulus. By thus stretching out the positive economic impact, the risk of inflation is greatly reduced while the benefit to both taxpayer and the state budget become long-term rather than just a temporary blip.
Not only has this positive impact been proven by four major federal tax cut initiatives since the 1980s, it also happened here in Maine not much more than a decade ago.
In 2011, Gov. Paul LePage signed a bill, passed by the Republican-led Legislature, that lowered tax rates for Maine people. The cuts took 70,000 lower income Mainers off the tax rolls entirely, and reduced rates for nearly all others. Over the seven years that followed, state government had major budget surpluses and its people enjoyed remarkable economic growth. The day the cuts took effect, for example, Maine ranked dead last among states in the growth of the average weekly wage according to the U.S. Department of Labor. From the start of 2013 to the end of 2015, Maine led the nation in wage growth (by percentage).
From 2013 through 2019, Maine’s inflation rate averaged just 1.3%, and in 2015 its unemployment rate dropped to a record low and remained there for a record period.
Contrary to the belief that government spending, as with stimulus payments, is the solution to every problem, tax cuts leave money in people’s pockets so that they can spend it, rather than their government. The result from 2011 to 2018 was real, lasting prosperity from which we all benefited.
In 2016-17, following the tax cuts, Maine led the nation in the reduction of child poverty. Last month, following stimulus payments, we learned of a report showing that Maine saw a 12% increase in the number of children living in food insecurity and a 41% jump in the number of hungry people overall, far worse than the national average. “The group attributes much of the increase to inflation.”
Maine women fared much better under tax cuts than stimulus payouts. When Governor Mills took office, Maine’s “gender pay gap” was second smallest in the U.S. behind only California. The latest data from the U.S. Department of Labor shows that we fell from 2nd to 47th among states in just two years.
On the heels of the tax cuts, Maine led the nation in women’s equality in the workplace and politics, and in gender parity. From 2012 to 2018 Maine led the nation in the growth of women’s business earnings, and employment vitality for women from 2014-2019. In 2022, data from the U.S. Small Business Administration Office of Advocacy showed that Maine now has the widest gap between the number of small businesses owned by men versus women.
With billions of dollars of excess revenue over the last three years, Maine’s state government had a once in a lifetime opportunity to make a bold move toward reducing the tax burden on its citizens and extending the period of record economic prosperity that began with the 2011 tax rate cuts. Instead, it has taken the approach of gathering all of the revenue it can to itself and then redistributing it in ways that have resulted in higher poverty, hunger, a worse economic environment for women, higher inflation, and a dangerous reliance on federal funding that is now evaporating.
Depending on which study one reads, Maine ranks from 3rd (WalletHub, CNBC, Forbes) to 9th (Tax Foundation) in the nation for its tax burden, with a shrinking and aging workforce and high energy costs. In desperate need of major economic investment and attracting more younger people, tax policy is one category we can control. Instead of choices that use up all our unexpected resources in the immediate future, lawmakers should instead work to improve the long-term economic outlook by finally reforming our tax code in ways that have proven effective time and again—by reducing tax rates.
