One of the little-noticed results of the Nov. 8 election – at least in Maine – was the vote on referendum Question 1 that passed in Massachusetts.
After decades of trying, Question 1 constitutionally amended the Bay State’s 5% flat income tax rate with a 4% surcharge on incomes above $1 million, making an effective top rate of 9%.
Why is that important for Maine? Because for decades, tax policy here has been driven by the opposite premise: the perceived need to reduce the top income tax rate because it supposedly made Maine “uncompetitive.”
The same forces drove the “Reagan revolution” that dramatically lowered income taxes and was supposed to accelerate economic growth by putting more capital in private hands. It didn’t.
Lower top rates did dramatically increase income inequality, with private fortunes – like CEO pay – rising stratospherically. Finally, what went up is coming down.
The first sign was successful implementation of President Biden’s 15% minimum corporate tax, which brings in billions and prevents companies like Apple and Amazon and Google from “off shoring” profits and otherwise reducing their tax liability to zero, or near it.
The Massachusetts vote is equally significant for New England, and especially Maine. During the early years of the century, legislative Democrats united around the idea of bringing down Maine’s top rate, then 8.5%, closer to a flat rate of 5%.
The effort ended in political disaster. Democrats forced through a dramatic expansion of the sales tax that brought the top rate to 6.5%. Republicans immediately launched a successful people’s veto attempt that nullified it in 2009.
Even though the plan was revenue-neutral, all the focus was on the sales tax expansion to services, not on reduced income tax rates. That in turn facilitated the election of Paul LePage in 2010 on an anti-income tax platform which he pursued for eight years and talked about again in his 2022 comeback attempt.
As it stands, the top rate was reduced in two steps from 8.5% to 7.15%, while the sales tax went up from 5% to 5.5%. Has anything been accomplished?
The fervor behind income tax reduction, such as it was, focused on two points: Massachusetts’s lower rate, and the belief that wealthy people “shop around” for a place to live based on state tax rates.
The first objection has been removed and the second, it turns out, was a myth – though one widely believed.
There are few studies that consider such residency decisions. But one, ingeniously, combined Census and IRS data to track relocations by top earners between New Hampshire, with no broad-based income tax, and Maine.
The results: More millionaires moved from New Hampshire to Maine than in the opposite direction.
This only makes sense. People with money can choose to live wherever they want; state income tax rates, far lower than the federal tax, just don’t make that much difference.
Meanwhile, there are few things more popular across the political spectrum than imposing higher taxes on those who can most afford to pay them, while giving those with little a break.
Starting in the 1990s, states increased consumption and sales taxes, especially on cigarettes, that are highly regressive, meaning they bear more heavily on the poor than the rich.
Most people don’t follow the details of tax policy, but they know an unfair system when they see it, and that’s what we’ve created.
Maine once had a highly progressive income tax. The first version, enacted in 1969, started at 1% and rose gradually to 6%. Since it sharply reduced property taxes, it was so popular that a 1971 referendum to abolish failed by a stunning 3-1 margin.
I’ve seen no evidence Mainers have fundamentally changed their minds since then. No one likes paying taxes, but since we must pay to get services we want and need, we should have a fair system to support those needs.
After the Massachusetts vote, Maine no longer has any disadvantage over income tax rates, and plenty of room to restore something closer to the original, highly popular, progressive tax.
Not that it will be easy, or simple, as the 2009 debacle demonstrated.
But a well-qualified, well-funded commission to study reform, if created by the Legislature in 2023, could finally recapture some bipartisan ground on an issue dominated by black-and-white rhetoric. A bill, anyone?
The results should go on the statewide ballot, because any plan will likely end up there anyway. It would be refreshing to see a replacement for Maine’s much-amended, crazy-quilt revenue system receive a true test.
It may be the only way to give people a tax system closer to what they actually want.
Douglas Rooks, a Maine editor, commentator and reporter since 1984, is the author of three books, and is now researching the life and career of a U.S. Chief Justice. He welcomes comment at drooks@tds.net
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