June 30, 2009
Maine Steps Up on Taxes with Sweeping Overhaul of Income Tax Structure
Despite Baldacci's Ill-Advised Changes, Including "Millionaire Tax," Reform Still Worthwhile
Washington, DC, June 30, 2009 - As State Sen. David Trahan (R) leads the revolt against Maine's recent tax reform package—the most sweeping changes to the state's tax code since the establishment of the income tax in 1969, an analysis by the Tax Foundation shows that an alternative reform plan passed by the legislature but opposed by the Gov. John Baldacci (D) would have created a simpler, more neutral system.
In Tax Foundation Fiscal Fact No. 174¸ Staff Economist Kail Padgitt examines the differences between LD 1088, the original legislation that included a single flat rate individual income tax of 6.5 percent and an expansion of the sales tax, and LD 1495, the revised bill that Baldacci signed into law. The latter includes a "millionaire tax" of 6.85 percent on income greater than $250,000, as well as additional exemptions and exclusions for certain industries.
"While the reform effort has a number of appealing qualities that are worth highlighting, such as attempts to create a more neutral tax system and stabilize revenue, there are a number of downsides that need to be considered as well," Padgitt said. "One of the principles of sound tax policy is broad bases and a low rate, and LD 1495's provision targeting the rich goes against that principle."
Padgitt also cited other problems with the reform plan. By extending its sales tax to previously untaxed services, Maine would improve the fairness and efficiency of its own sales tax, but it would also lengthen the list of services that are less expensive in New Hampshire. Maine also is attempting to shift some of the tax burden off their citizens and onto out-of-state residents through new taxes on rentals, entertainment and recreation services, including raising the rates on lodging and prepared food from 7 percent to 8.5 percent. "This tax-your-neighbor strategy is likely to draw retaliation from neighboring states and distort economic decision making," Padgitt noted.
Additionally, the 6.5 percent rate on incomes less than $250,000 does not represent the full effect of all the new tax provisions —many families would lose part of the new credit, making their effective marginal tax rate 8 percent. And while the reform is being touted as revenue neutral, there's a chance the services targeted for the sales tax will recover faster than the rest of the economy, resulting in greater tax revenue.
"The Maine legislature should remain focused on creating a tax code that pushes for simplicity, neutrality and stability," Padgitt concluded. "Whether this marks the beginning of a larger tide of beneficial tax reform or the high watermark is yet to be seen.
Fiscal Fact No. 174 can be found at http://www.taxfoundation.org/publications/show/24775.html. The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
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