April 6, 2012

Maine Voices: Pension tax cuts are fiscally irresponsible and poorly targeted

Under the changes, state revenues would decrease just as demand for services increases.

By GARRETT MARTIN

AUGUSTA — In its waning days, the 125th Maine Legislature is rushing a raft of reckless – and in some cases dangerous – bills toward enactment with minimal public comment and scrutiny.

ABOUT THE AUTHOR

Garrett Martin is executive director of the Maine Center on Economic Policy.

Among these is a provision, Section RR in the governor's pending supplemental budget, that would reduce taxes on retirement income primarily to benefit wealthier retirees at the expense of everyone else. At a cost of more than $105 million annually when fully implemented in 2019, this fiscally irresponsible measure fails to deliver tax relief to those Mainers who most need it and will hurt efforts to fund education, health care and other vital services.

The pension tax proposal expands eligible income to include income derived from individual retirement accounts as well as employee retirement plans or pensions. It also increases the retirement income tax exemption from $6,000, applicable only to pensions, to $35,000 in 2019, applicable to both pensions and IRAs.

Gov. LePage's oft-repeated rationale for this specific proposal is that further cutting taxes on pensions will discourage wealthy retirees from fleeing Maine for states with lower rates.

The facts do not support this contention. Nationally, less than 1 percent of seniors moved from state to state after age 65 for any reason. For the population as a whole, more than half of American adults have never lived in any state other than where they were born, and just 3 percent of Americans move across state lines in a given year.

Even if the migration myth were true, this pension proposal eventually would leave Maine in a much more precarious financial position in the future.

Maine already has the oldest population in the nation. Under Part RR, state revenues will decrease at higher levels just as demand for services among older residents will increase. As Howard Gleckman, a resident fellow at the Urban Institute and contributor to Forbes writes: "While states may benefit in the short-run from attracting a few relatively young, healthy and wealthy pensioners, they may end up paying a substantial price when middle-income seniors become frail, go broke and require Medicaid long-term care services."

But, as with most of the tax proposals from the LePage administration and its supporters in the Legislature, this proposal undermines the progressivity of Maine's tax system and is poorly targeted.

Sixty-five percent of the benefits from this proposal go to the top 20 percent of taxpayers. The bottom 20 percent will receive an average benefit of two cents per year, compared with an average of $438 per year for the top 1 percent. That's a ratio of 1 to 21,900 – a far cry from the 1 to 115 ratio of average income for these two groups of taxpayers.

Older Mainers most in need of tax relief are those who lack the retirement security to stop working. Maine already exempts Social Security income. A much more fair and effective way to ease the burden on seniors would be to expand state Earned Income Tax Credit eligibility to working Mainers 65 and older and make the credit refundable for all who are eligible. Restoring the property tax relief program to its full level for everyone and streamlining the enrollment process to encourage greater participation would also benefit Maine seniors who need it most.

This and other tax cuts enacted or proposed during the 125th Legislature are fiscally irresponsible. When fully implemented, the pension tax cuts, combined with last year's income and estate tax cuts and the massive income tax cut contained in L.D. 849, will have an annual impact on Maine's budget of nearly $800 million – more than 25 percent of Maine's current General Fund budget.

In order to claim credit for these massive tax cuts today, their proponents give away one of every four dollars in revenue and pass the buck to future governors and legislatures to figure out how to pay for education, health care and other essential services.

Maine's wealthiest 1 percent already benefit from an effective state and local tax rate significantly lower than everybody else. Working families pay more than 17 cents in state and local taxes out of every dollar they earn, while the wealthiest households pay less than 10 cents. Policies like this pension tax proposal will only skew this picture even more.

Investments in education, research and development and infrastructure would do far more to increase Maine's long-term competitiveness, create jobs and grow Maine's economy.

It is not in the public interest to provide tax relief to those who least need it.

– Special to the Press Herald

 

Were you interviewed for this story? If so, please fill out our accuracy form

Send question/comment to the editors




Further Discussion

Here at PressHerald.com we value our readers and are committed to growing our community by encouraging you to add to the discussion. To ensure conscientious dialogue we have implemented a strict no-bullying policy. To participate, you must follow our Terms of Use.

Questions about the article? Add them below and we’ll try to answer them or do a follow-up post as soon as we can. Technical problems? Email them to us with an exact description of the problem. Make sure to include:
  • Type of computer or mobile device your are using
  • Exact operating system and browser you are viewing the site on (TIP: You can easily determine your operating system here.)