As the Republican candidates for President have struggled to reach the front of their race over the last several weeks, we’ve heard lots of talk about tax reform — flat taxes, optional taxes, postcard sized tax return forms and 9-9-9 taxes. While the candidates’ plans naturally focus on the federal tax system, it is interesting to examine how some of the principles they espouse might apply to Maine. Ignoring the local irony that Maine Republicans rushed to repeal the only serious tax reform to win legislative approval in a generation, it is nonetheless instructive to look at how the “broaden the base, lower the rate” cries of their ambitious national colleagues might apply here in Maine.

The best way to do that is by perusing the latest Maine State Tax Expenditure report prepared every two years by Maine Revenue Services for the Legislature’s Joint Standing Committee on Taxation. According to the report, a tax expenditure is “any provision of state law that results in the reduction of tax revenue due to special exclusions, exemptions, deductions, credits, preferential rates or deferral of tax liability.” In other words, the report is a list of the categories and fiscal values of Maine’s sacred cows. If the Republican mantra of “simplify, broaden and reduce” is ever to take hold in Maine, this is where it will have to start.

In 2010, the state of Maine collected approximately $1.6 billion in income related taxes — individual income taxes, corporate income taxes, estate taxes and insurance company taxes. Over the same period, the state of Maine did not collect approximately $1.2 billion in income related taxes because of “special exclusions, exemptions, deductions, credits, preferential rates or deferrals of tax liability.” In other words, a truly comprehensive, complete, no exceptions allowed, postcard-sized income tax in Maine could give every filer a 75 percent tax cut and still raise the same amount of money just by eliminating all the “special exclusions, exemptions, deductions, credits, preferential rates or deferrals of tax liability.”

On the sales tax side, the story is even starker. In 2010, Maine raised approximately $1.3 billion in sales type taxes — defined broadly to include not merely the “official” sales tax, but also the service provider tax and cigarette, liquor and fuel taxes which are just sales taxes by other names. At the same time, the state did not collect approximately $1.9 billion in sales type taxes because of “special exclusions, exemptions, deductions, credits, preferential rates or deferrals of tax liability.” In this case, the state doesn’t collect more than it does collect in sales type taxes. If we truly followed the “broaden the base, lower the rate” mantra, we could lower our sales tax to 2 percent and raise the same $1.3 billion that we did last year, perhaps even more if the lower rate stimulated more sales and thus more collections.

Obviously, such radical changes would create lots of winners and losers. Indeed, virtually all citizen in the state would pay less in taxes in some parts of their lives and more in others. Even the whiff of such a radical change in the air would provoke a stampede of sacred cows the likes of which Augusta has never seen. And their legislative minders would have a field day riding the ranges of the third floor of the Capitol. Talk about never hearing a discouraging word!

I’m not suggesting that eliminating all “special exclusions, exemptions, deductions, credits, preferential rates or deferrals of tax liability” is a realistic goal for tax reform. Over $900 million of them are simply the result of conforming to federal income tax rules such as allowing employers to deduct the cost of paying for some or all of the health benefits they provide to employees (a state income tax loss of $129 million) and allowing home owners to deduct the property taxes they pay to their town (a state income tax loss of $38 million). Another $1 billion or so comes from giving service providers (everyone from doctors and hospitals to lawyers and consultants and mini-golf operators) a free pass on the sales tax.

No, I’m the first to admit that the skies would be cloudy all day if true tax reform were ever proposed in Maine.

But, if the discontent now so evident in the “Occupy” movement and in the Tea Party movement and in the emergence of a pizza king at the head of the Republican presidential race is ever to amount to anything, true tax reform, meaning careful examination of all the sacred cows, will have to be part of the outcome.

Charles Lawton is senior economist for Planning Decisions, a public policy research firm. He can be reached at: clawton@maine.rr.com

 

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