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It's now possible to understand rationale behind tax reform
A paper by a Maine economist should be required reading for all interested in the topic.

Dick Woodbury recently published an excellent paper, The Struggle for Tax Reform in Maine 2003-2009.

Woodbury is a Yarmouth-based economist with the Boston Fed who also served on the Legislature's Joint Committee on Taxation from 2005 to 2008. He has had a front-row seat in a political dialogue that has dominated Maine politics for the past decade.

His paper, which can be found on the bank's Web site, www.bos.frb.org, details the history of various approaches to tax reform and describes the impact of the Tax Reform Bill that was recently passed, with a clarity that the non-economists will appreciate.

Woodbury starts with a review of the conditions that led to calls for a reform of Maine's tax structure: the fact that the Tax Foundation had ranked Maine as having the highest tax burden in the nation every year from 1997 to 2006, the fact that Maine's top income tax rate of 8.5 percent was one of the highest in the nation, the fact that Maine's property taxes were also some of the highest in the country, and finally the fact that Maine's sales tax base was narrow and volatile, exacerbating the impact of lower collections in an economic downturn.

While all of these issues have been well-documented, Woodbury is particularly good in providing state-by- state comparisons that give a sense of the significant difference among states on tax policy.

Given these conditions, many of us who follow Maine politics have long thought that tax reform is an essential part of better positioning the state for economic growth.

Yet in spite of strong support from the governor and notable bipartisan efforts in which Woodbury himself was a driving force, major tax reform legislation was effectively thwarted until this year, when a tax reform bill, LD 1495, finally passed.

This legislation addresses two of the key issues in the tax reform debate: it lowers Maine's income tax rate from 8.5 percent to 6.5 or 6.85 for the highest incomes, and it broadens the state's sales tax base.

The tax changes are meant to be revenue-neutral, that is, the decrease in income tax revenue is offset by the increase in sales tax revenue.

Since much of the sales tax revenue increase will come from those out of state, the overall tax burden for Maine residents should decline by almost $50 million. Moreover, about 90 percent of taxpayers should see a drop in their combined income and sales tax burden.

While many view this legislation as a good first step in addressing Maine's tax structure, there remains significant opposition. Republican Party leadership has submitted signatures to the Secretary of State for a potential people's veto. If these signatures are validated, there will be a public referendum on this issue in 2010.

Meanwhile, there have been claims and counterclaims on the "real" impact of the reduction in the income tax rate.

Woodbury's paper is particularly good at assessing the impact of the new law on various types of taxpayers. It is an excellent reference should Maine need to vote on this issue in 2010.

In a final section of the paper Woodbury addresses the efforts to put limits on the growth of taxes and spending. In particular, Woodbury frames the issues regarding the TABOR II initiative that will be on the ballot in November.

TABOR II proposes a growth limit on government spending that allows for inflation and population growth, but not productivity growth.

Woodbury suggests a more appropriate measure might have included all three of these elements. Moreover, he is concerned that TABOR II imposes restrictive limits on spending indefinitely.

This aspect turned out to be problematic in Colorado, where their TABOR law has been "put on hold" for five years to attempt to work out more flexibility.

Finally, there is the issue of overriding the limits that would be imposed by TABOR II. The earlier version of TABOR – voted down by the electorate – required a two-thirds vote of a governing body (i.e., the state Legislature, a town council or a school board).

TABOR II eliminates this two-thirds vote of the governing body and requires only a majority public vote to override the limits. TABOR II supporters point out such a vote is already required to approve school budgets that exceed growth targets.

Although Woodbury does not take a position on TABOR II, this section of his paper should be required reading for citizens who want to be well-informed before voting on this issue.

All in all, Woodbury has provided a well-researched, accessible piece on Maine tax reform. He has illuminated the public debate on this complex issue in an unusually constructive way.

If all economists wrote this clearly, we might have to rename the "dismal" science.