Maine’s top tax rate would become the second-highest in the nation if voters in November approve a ballot measure that would tax the wealthiest Mainers and businesses to increase state education funding.

Backers say Question 2, which would add a 3 percent tax on personal income over $200,000 a year, is a countermeasure to tax cuts under Gov. Paul LePage that have reduced state revenue. It would help fund a decade-old voter mandate to have the state pay for 55 percent of the cost of K-12 education.

“It is indisputable (that) the majority of tax cuts have gone to the wealthiest Mainers. So at the same time the Legislature is saying there is no money for schools, we continue to give tax breaks to the wealthiest Mainers. That is not a sustainable path,” said John Kosinski, a lobbyist for the state teachers union and campaign manager for Yes on 2.

“It’s not good for kids. It needs to stop,” Kosinski said. “We’re just asking them to pay their fair share.”

Opponents say it’s too much of a tax burden and could drive individuals or businesses out of state.

“Our tax burden is an impediment,” said Dana Connors, president of the Maine State Chamber of Commerce and head of a political action committee opposed to Question 2. “It scares off any prospective investor because they look at that top marginal rate, it’s a signal to them that they’re going to pay more to do business in Maine.”

Former Education Commissioner Jim Rier, considered an expert on Maine’s complicated education funding formula, said he isn’t even sure it’s constitutional because the money raised would bypass the state’s General Fund and go straight to a special account – a charge supporters reject. He is part of the PAC opposing the measure.

“I am sure that the legislative language accompanying Question #2 will present a number of challenges and unknowns. It is poorly written, was not subject to any legislative hearings, and ultimately may not even be constitutional in Maine,” Rier said in written comments. “If it passes it requires a change to income tax rates, those new taxes to flow to a fund to be distributed by the administration (Commissioner of Education) all without any involvement by the legislative branch. And if that isn’t enough it seems to say that the Legislature cannot change any of those requirements.”

Question 2 funds, expected to be $159 million the first year, would be administered by the Department of Education and added to state funds that are put through the existing education funding formula. The state currently allocates about $921 million a year in General Purpose Aid to districts.

POLL IDENTIFIES STRONG SUPPORT

According to the legislation supporting Question 2, the money can only be used for “direct support” of students, and cannot be used for “the costs of administration,” expressly the salary and benefits paid for administrative or clerical staff.

The Department of Education must announce how much money is raised through the tax, and school districts must report to the department how they spent the money.

A recent poll by the Portland Press Herald/Maine Sunday Telegram found that although opinions were split along party lines, over 60 percent of respondents support the measure.

The poll found 32 percent oppose Question 2 and 8 percent are undecided.

Broken down by party, 80 percent of Democrats said they support it, compared to only 37 percent of Republicans who said they support it.

But wealthier respondents said they would support it: Among people reporting household incomes of $100,000 or more, 60 percent said they would vote for the measure, and 35 percent said they would not. In the lowest income bracket, those with incomes under $30,000, 66 percent said they support it, while 22 percent do not.

Kosinski said Question 2 has broad support because it increases state funding for education. The initiative was announced by a coalition of parents and teachers and supported by groups including the Maine Education Association, the Maine People’s Alliance and the Maine Center for Economic Policy, a left-leaning economic think tank.

In 2004, voters agreed the state should pay for 55 percent of the cost of K-12 education. The state got closest to that goal in 2009, when it paid for 53 percent of costs. Currently, the state’s contribution is at 47 percent.

An economic analysis for the Yes on 2 campaign found that because of tax cuts, state revenue will be decreased by $297 million in fiscal year 2017 alone. Question 2 would bring in $159 million in its first year, according to the analysis by the Maine Center for Economic Policy.

In a campaign finance report, MECEP reported about $3,500 in expenditures, mostly related to research for Question 2 and the minimum wage initiative also on the November ballot.

The Yes on 2 campaign also received a $300,000 cash donation from the National Education Association and in-kind contributions of $40,000 from the Maine Education Association and $40,000 from the Maine People’s Alliance.

KEY POINTS IN THE DEBATE

The measure would affect 16,000 households reporting $200,000 or more in personal income, according to David Heidrich Jr., spokesman for the Maine Department of Administration and Financial Services. Of those, 11,000 are small-business entities – say, a jeweler or a family-owned grocery store – that report their income on an individual tax return, he said.

Kosinski said those 11,000 businesses make up 4 percent of Maine’s small businesses. The Yes on 2 campaign is also supported by the Maine Small Business Coalition, an affiliate of the Maine People’s Alliance that represents more than 3,400 businesses.

In Maine, the top 2 percent of income earners make $225,000 or more a year and pay 30 percent of all income taxes paid to the state, according to the Department of Administration and Financial Services. The top 10 percent pay 60 percent of all income tax collected.

If Question 2 passes, the tax rate of 10.15 percent for income over $200,000 would be the highest rate in the country at that income level, and the second highest tax rate for any income level after California, which has a 13.3 percent rate for personal income over $1 million, Heidrich said.

Maine’s top tax rate has dropped twice under LePage, from 8.5 percent to 7.95 percent in 2011, and then to 7.15 percent in 2015.

LePage has set a goal of cutting the top tax rate to 5.75 percent, according to a memo leaked to the Press Herald this summer from LePage’s senior policy adviser, Kathleen Newman, and sent to senior administration officials. He has also pushed to eliminate Maine’s income tax entirely by 2020.

Funding education is notoriously complicated, and that has muddied the waters around Question 2. State education funds are allocated through a formula that takes into account the value of property in a town and its enrollment levels. Generally speaking, wealthier towns get less state money, while less affluent towns get more.

Debate over the ballot question has focused on several key points:

• Opponents say the measure isn’t fair because it won’t increase funding for some towns. That’s correct, but it’s because the referendum doesn’t change the funding model. The Question 2 funds would go through the state’s funding formula, which gives towns varying amounts of state money based in part on their local valuations. Wealthier towns are called “minimal receivers,” getting as little as 6 or 8 percent of their educational costs covered by the state, while poorer towns – such as a town with closed mills – get more than 80 percent of their costs covered.

Since Question 2 doesn’t change the funding formula but simply supplements the existing state contribution, that means some towns would not see additional Question 2 funds, while others would see big increases.

• Opponents question whether the money will wind up “disappearing” in the same way that lottery funds or casino funds earmarked for education seem not to have made a significant impact. Question 2 stipulates that the money would be to supplement, not supplant, state funds.

• The only prohibited use of the funds is administration costs, but critics say they interpret that to mean the funds can’t be used for construction. Proponents say the money can be used on construction, or textbooks, or equipment.

• If the tax generates money beyond the state’s 55 percent share, those funds would remain in the fund and be rolled over to future years.

• Because Question 2 is pegged to an income amount, not a percentage of top earners, the amount of revenue raised by the proposal could rise or fall depending on the economy. If the tax had been in place in 2007, it would have raised $103 million from 9,144 households. Two years later, in the recession, it would have raised only about half that amount, $55.5 million, from 7,181 households. On the flip side, if the economy surges, far more revenue could be generated.

CRITICS: ‘IT’S THE WRONG SOLUTION’

Critics also question whether the money will flow to students the way it is intended. In a radio address in August, LePage criticized the initiative, saying the funds “would be subject to the whims of the Legislature’s Appropriations Committee – and they could spend it however they wish.” Others question whether the state could just decrease the amount of money allocated to education, knowing the fund is there.

Kosinski said he was not concerned the money could be misdirected, since the Legislature holds the Department of Education accountable and school budgets are a public process at both the state and local levels.

“Legislators know our schools are underfunded. They are going to be bird-dogging this money,” he said.

Funding education in Maine is a perennial issue, with multiple studies and work groups analyzing the state’s funding formula and considering changes. This year, the Legislature convened a “blue ribbon” commission that is currently studying the formula. A comprehensive $450,000 review of the formula, called the Picus report, found it effective but underfunded.

In the past, Moody’s Investors Service criticized Maine for failing to meet the 55 percent mandate, saying the state budget puts pressure on municipalities because it increases the burden on local property taxes and leaves cities and towns with tough decisions about how to make up the difference.

To avoid program and staff reductions, many Maine communities have opted to raise property taxes, a 2013 Maine Policy Review paper found, putting more pressure on local taxpayers.

Supporters of Question 2 say they expect the additional funding to lead to lower property taxes, since state funding will increase.

Connors, a leader of the opposition group, said Question 2 opponents recognize that education needs more funding, they just don’t support this method.

“For us, it’s the wrong solution to a pressing problem,” Connors said. “We’re trying to resolve in this question a complicated education reform proposal in sound bites, and it just doesn’t work. It might arise out of frustration, but that doesn’t mean this is the way we should resolve this very important issue.”

 

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