AUGUSTA – Maine will become one of five states to consider sweeping tax changes this year when a bipartisan coalition of lawmakers releases its highly anticipated reform plan Wednesday.
Like plans in other states, Maine’s proposal would cut the state’s income tax in half and pay for the cut with an increase in sales and excise taxes.
Similar proposals, including the less dramatic one that Maine voters overturned in 2009, have sparked controversy while fueling a nationwide debate over state tax policy. Opposition from affected industry groups awaits the Maine bill, as does the national scrutiny that tax overhaul plans in Louisiana, North Carolina and Ohio have received.
In each instance, the debate has shown that tax reform aimed at establishing equity can produce winners and losers. Maine’s proposal is no different.
“Tax reform is hard,” said Tracy Gordon, an economic studies fellow at the Brookings Institute. “Economists, in general, believe that having lower tax rates is good, all things being equal. But the question always is, how do you raise adequate revenues to continue to fund government and provide the services that residents and businesses count on?”
Proponents of the Maine plan say it could stabilize the state’s economy and equalize the tax burden by shifting more taxes to non-residents and visitors.
State Sen. Dick Woodbury, an independent from Yarmouth, is the proposal’s architect. Woodbury, who has a Ph.D. in economics from Harvard University, says his plan is transformative by design and could spur economic growth.
He told the Portland Press Herald on Monday that his bill is “budget neutral,” meaning its projected $700 million in revenues could fill most of the state’s anticipated budget shortfall for the next two fiscal years.
Woodbury said it could replace Gov. Paul LePage’s plan to fill the gap with an array of controversial spending cuts, including a proposal to suspend $200 million in aid to cities and towns.
A draft outline of the coalition’s proposal shows that the plan would generate revenue by raising the sales tax from 5 percent to 6 percent and eliminating a range of exemptions. Meals and lodging taxes also would increase, as would excise taxes on tobacco, beer and wine, and auto rentals.
The proposal is similar to those in other states that are trying to reduce income taxes with increased sales taxes.
Scott Drenkard, an economist for the Tax Foundation, said Tuesday that some states have become laboratories for sweeping tax reform. He said many have come to realize what many economists have been saying for years: High income taxes are the “most destructive” taxes for economic growth.
Drenkard said he was a consultant on Louisiana Republican Gov. Bobby Jindal’s proposal to eliminate that state’s income tax and pay for it with increased sales taxes. He said income taxes effectively tax “wealth creation and profitable ideas.”
Drenkard said sales taxes — also known as consumption taxes — hinder growth less because people who pay them have already decided to buy products or services, thus increasing the likelihood of economic activity.
He said a “tax swap” like Woodbury is proposing may be good policy.
“That doesn’t mean that every state should reconstruct their tax code to be sales-tax heavy and income-tax light,” he said. “It doesn’t work for every state.”
Drenkard also said that raising sales taxes above the rates in neighboring states could create “leakage” — residents buying goods in those states with lower rates.
That surely occurs now. Maine’s 5 percent sales tax is the seventh-lowest in the country, but neighboring New Hampshire has none at all.
Gordon, with the Brookings Institute, said there are other consequences to leaning too heavily on sales taxes.
Many tax policy experts believe that sales taxes are more regressive, disproportionately affecting low- and middle-income residents.
“Low-income people tend to consume more of their paychecks,” Gordon said. “A sales tax is a tax on consumption, so a sales tax affects them.”
The progressive Institute on Taxation and Economic Policy had a stronger assessment of Jindal’s plan. It found that the poorest 60 percent of Louisiana taxpayers would pay more in taxes.
Earlier this year, the same group published a report showing that lower-income people already pay a higher percentage of their annual income in sales taxes than high earners.
According to the report, Mainers with an average annual salary of $11,800 devoted 6.2 percent of their earnings to sales and excise taxes, while individuals earning $25,100 paid 5.1 percent. Those earning $328,000 or more paid an average of 0.7 percent in sales taxes.
A draft of the Maine coalition’s plan appears to anticipate such effects. It highlights a “tax fairness credit” to give low- and middle-income families $1,000 cash payments to offset the regressivity of sales taxes.
Drenkard said similar offset schemes are common in other states that are considering tax swaps. He acknowledged that progressive tax groups often cite the regressivity of sales taxes, but said the impact on low-income residents could lessen if the plan spurs growth.
“If all income groups are getting better because of the economy, then the distribution shift doesn’t matter as much,” he said.
That’s one argument that Maine lawmakers will consider after the “Gang of 11″ coalition presents its plan Wednesday. There are many others, including reducing the state’s corporate tax and eliminating its estate tax.
Woodbury said all of the tax cuts are designed to provide tax relief for Mainers, lure part-time residents to make the state their primary home, and attract businesses.
The migration of businesses because of tax policy is an ongoing national debate. Gordon said the evidence is “murky” that businesses choose states because of corporate taxes.
“Businesses tend to care more about an educated work force, access to infrastructure and affordable health care, and their ability to attract and retain workers,” she said.
Drenkard said businesses do pay attention to corporate taxes when they consider location.
Businesses have proven influential in the tax policy debate. In April, Jindal announced that he was temporarily shelving his no-income-tax proposal in response to an outcry from businesses that would be affected.
Woodbury and the Maine coalition believes its plan is pro-growth, pro-business. But it, too, is expected to meet resistance from some influential industry groups.
Steve Mistler can be contacted at 620-7016 or at: