May 1, 2013

Maine's in as a lab for tax reform

A major proposal, due out today, would slash the state income tax and is similar to plans in other states.

By Steve Mistler smistler@pressherald.com
State House Bureau

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.

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In this April 15, 2010 file photo, taxpayers sift through tax forms a government office. 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. (AP Photo/Seth Perlman)

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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.

(Continued on page 2)

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