SOUTH PORTLAND — Gov. Paul LePage’s two-year budget includes a tax plan to reduce income and estate taxes and increase sales taxes. His plan is similar to the Democratic plan from 2009 (which he and 61 percent of voters rejected). Both plans are poorly designed tax policy based on incorrect facts or myths. Proponents of the governor’s plan continue to grossly overstate the impact of income tax and understate the impact of property taxes and consumption taxes.
The governor has said his plan is different, because the earlier plans were just tax shifts, while his plan has an estimated projected net tax reduction of $267 million by year 2019. However, within the proposed two-year budget that ends on June 30, 2017, there is no net tax cut as total taxes increase. The governor’s $6.5 billion budget is $200 million greater than the current budget.
All of the proposed sales tax increases are included in the two-year budget proposal, but many of the tax cuts would be phased in later. This is the same budget trick used by the governor with his earlier tax cut (really a tax shift). The result was a revenue shortfall in 2013 and 2014, which was filled with the “temporary” sales tax increase, cutting the property tax circuit breaker rebate program from $58 million to $21 million and cuts to revenue sharing to the cities and towns.
REAL CULPRIT: PROPERTY TAXES
The governor’s “Biennial Budget Briefing” includes statements on the need to “modernize” our tax structure. The document repeats some of the 2009 plan’s inaccurate information on sales taxes, including a misleading 2007 study of states that tax services.
Proponents of the governor’s plan apparently believe that consumption taxes are “modern” and income taxes are a thing of the past and that Mainers pay too much income tax.
In 2007, the U.S. Census Bureau reported that Maine’s total state and local taxes ranked 7th highest. However, most of that high tax ranking was caused by high property taxes. Property tax collections ranked as 6th highest out of the 50 states and Washington, D.C., based on its percentage of income. This compared to income taxes that ranked 17th highest and consumption taxes that ranked 21st highest.
The governor’s plan continues the myth that Maine’s consumption taxes are comparatively low and that most states tax services. Both are untrue. Consumption taxes also include gas and tobacco taxes, which are both high in Maine, so to leave out those consumption taxes hides the truth.
With regard to taxing services, the vast majority of states did not in 2007 or today, tax most of the services that would be taxed in the governor’s plan. For example as of 2013, only three states taxed professional services. For the year ended June 30, 2015, Maine’s total budgeted consumption taxes is $1.68 billion, while the total budgeted individual and corporate income tax combined is slightly less at $1.65 billion.
FAULTY TAX ASSUMPTIONS
The governor’s plan includes elimination of the estate tax based on two false premises: “to preserve Maine family businesses” and to stop wealthy retirees from moving out of state.
IRS data on estates for the year 2011 show that family businesses represented only 12 percent of estate assets. The other 88 percent was made up of stocks, bonds, real estate and other assets.
IRS data on state to state migration for the years 2009 and 2010 show no significant migration to the states without an estate tax. The largest migration was to Florida and the average income of those taxpayers was only $39,500.
With regard to Maine income taxes, most over-estimate what they pay and many assume that most taxpayers pay taxes at the top rate of 7.95 percent. Maine Revenue Services estimated for the year 2009 that the average income tax paid by all Mainers was about 3 percent of their income.
Even the top 1 percent, with incomes over $323,000, paid Maine income taxes (after federal tax benefit) of only 4.1 percent of their incomes.
The most overlooked problem with the governor’s tax plan is that federal income taxes would increase for Mainers because state income taxes are deductible on the federal form and sales taxes are not.
The total federal income tax increase will be about $80 million on the $547 million Maine income tax reduction in the fiscal year 2017 budget.
Also, the governor’s plan also does not allow itemized deductions on Maine income tax returns. This will result in a net tax increase for many middle income taxpayers who itemize.
EMPLOYERS WANT SKILLED WORKERS
The biggest myth supporting an income tax cut is that lower income taxes with draw companies to Maine and create thousands of good paying jobs. First, the tax cut is not significant, and, second, income taxes are not a major factor in a company’s decision to locate in a state. Much more important factors include location, a skilled workforce, overall labor costs, energy costs and property and sales and use taxes.
In addition to overstating the favorable impact of income tax cuts, many ignore the unfavorable impact of increasing sales taxes.
Rather than reducing income taxes, “tax reform” should include allowing the 2013 sales tax increases to sunset and reinstating the full property tax circuit breaker program from 2009.