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.

Like its counterparts in other states, the Maine proposal slashes the state’s income tax in half and pays for the cut with an increase in sales and excise taxes.

Similar proposals, including the less dramatic one overturned by Maine voters in 2009, have sparked controversy while fueling the national debate about state tax policy. Local opposition from affected industry groups awaits the Maine bill, as does the national scrutiny that has met tax overhaul plans under consideration in Louisiana, North Carolina and Ohio.

In each instance, the debate illustrated that tax reform aimed at establishing equity can produce winners and losers.

The Maine proposal, should it gain traction with lawmakers and Gov. Paul LePage, will be 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 is 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 nonresidents and visitors.

Sen. Dick Woodbury, an independent from Yarmouth, is the proposal’s architect. Woodbury, who has a doctorate in economics from Harvard University, says his plan is transformative by design and could spur economic growth.

He told MaineToday Media on Monday that his bill is “budget-neutral,” meaning its projected $700 million revenue could fill most of the state’s anticipated two-year budget gap. Woodbury said it could replace LePage’s plan to fill the gap with an array of controversial spending cuts, including a contentious proposal to suspend $200 million in aid to municipalities.

A draft outline of the coalition proposal shows that the plan generates revenue by raising the state’s sales tax from 5 percent to 6 percent and eliminating a host of exemptions. Meals and lodging taxes also are increased, as are excise taxes on tobacco, beer and wine and auto rentals.

The proposal is similar to those of other states that also are trying to reduce income tax rates 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 to economic growth.

Drenkard consulted Louisiana Republican Gov. Bobby Jindal’s proposal to eliminate the state’s income tax and pay for it with increased sales taxes. He said income taxes effectively tax “wealth creation and profitable ideas.”

He said sales taxes — also known as consumption taxes — were less of a growth hindrance because an individual already has decided to buy a product or service, thus increasing the likelihood of economic activity.

He said a “tax swap” such as what Woodbury is proposing might 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 warned that increasing sales taxes above the rates in neighboring states could create “leakage” — instances in which residents in towns bordering a state with a lower rate buy goods there rather than in Maine.

If true, it’s possible that such leakage already occurs. Maine has a 5 percent sales tax, the seventh-lowest in the country. New Hampshire doesn’t have one.

However, Gordon, with the Brookings Institute, warned that there are other consequences leaning too heavily on sales taxes.

That’s because many tax policy experts believe sales taxes are more regressive and disproportionately affect low- and middle-income residents.

“Low-income people tend to consume more of their paychecks,” Gordon said. “A sales tax is a tax on consumption, so a sales tax affects them.”

The progressive Institute on Taxation and Tax Policy had a stronger assessment of Jindal’s plan. It found that the poorest 60 percent of Louisiana taxpayers would see a tax hike.

Earlier this year, the same group published a report showing that lower-income people already pay a higher percentage of their annual income in taxes than high earners. Individuals earning an average salary of $11,800 devoted 6.2 percent of their earnings to sales and excise taxes, and an individual earning $25,100 paid 5.1 percent. The percentage of earnings devoted to sales taxes decreased commensurate with higher wages, with those earning $328,000 or more paying an average of 0.7 percent in sales taxes.

A draft of the coalition plan appears to anticipate such effects on low-income earners. The draft highlights a “tax fairness credit” that provides low- and middle-income families with a $1,000 cash payment to offset the regressivity of sales taxes.

Drenkard said similar offset schemes were common in other states weighing tax swaps. He acknowledged that progressive tax groups often cite the regressivity of sales taxes. However, he said the effect on low-income residents could lessen if the proposal spurs growth.

“If all income groups are getting better because of the economy, then the distribution shift doesn’t matter as much,” he said.

That’s one argument that Maine lawmakers will consider after the so-called “Gang of 11” presents its plan Wednesday. There are many others, including reducing the state’s corporate tax and eliminating its estate tax.

Woodbury said all of the tax cuts are designed to provide tax relief for Mainers, lure part-time residents to pick the state as their primary domicile, and attract businesses.

The migration of businesses because of tax policy is an ongoing national debate.

Gordon said the evidence is “murky” that businesses migrate to state’s because of corporate taxes.

“Businesses tend to care more about an educated workforce, access to infrastructure and affordable health care and their ability to attract and retain workers,” she said.

Drenkard said businesses consider corporate taxes when weighing location decisions.

Businesses also have proved to be influential in the tax policy debate.

In April, Jindal announced he was temporarily shelving his no-income-tax proposal amid outcry from businesses affected by the plan.

Woodbury and the coalition think their plan is pro-growth, pro-business. However, it, too, is expected to meet resistance from some influential industry groups.

 

Steve Mistler — 620-7016
[email protected]
twitter.com/stevemistler

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