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Latest attempt at meaningful tax reform is long overdue

Maine's current income tax rate is too high and its sales tax base too volatile in economic downturns.

 

According to the Page One headline in the April 3 Press Herald, "Most at hearing oppose shift in state's tax burden."

But what Mainer could really be against it?

The story reported on the hearings by the Legislature's Taxation Committee on LD 1088, a bill that seeks to lower the state income tax rate from 8.5 percent to 6.5 percent.

The revenue loss from this change would be recovered by broadening Maine's sales tax to apply to more items, such as movie tickets, ski lift tickets and auto repairs.

In addition, the proposal would increase Maine's meals and lodging tax from 7 percent to 8.5 percent.

Happily, the net effect of this would be an estimated $75 million per year savings for us Maine taxpayers – even though the overall impact will be for the state to collect the same amount of tax revenue.

This windfall for Maine taxpayers occurs because the proposal anticipates that $75 million more of our tax revenue would be paid by out-of-staters. Visitors to the state will pay a significant share of the increase in the meals and lodgings tax and a share of additional taxes such as those on ski lift tickets.

The state would lower its nearly highest in the nation income tax rate to middle-of-the pack range. Our high state income tax is often cited as a principal detractor to the state's economic development efforts. It is also widely unpopular within the state because most Mainers pay the top rate, as it kicks in well below the median family income.

Moreover, our sales tax base is one of the most narrow (applying to fewer items) and most cyclical in the country.

Currently, 30 percent of sales tax revenue comes from just two items, new car sales and building materials. Both of these items are highly volatile, spiking up in good economic times and declining sharply in difficult economic times.

Much of the currently forecast $800 million dollar shortfall in the state's budget comes from the precipitate decline of sales tax revenue in the current economic downturn.

Over the past several years, economists such as Charles Colgan of the Muskie School and statewide studies of the Maine economy such as that by the Brookings Institute and the Report on Maine's Future Prosperity from the last Legislature have all called for a broadening of Maine's sales tax base and for reducing Maine's income tax rate.

The chief architect of the current tax reform proposal is House Majority leader John Piotti, D-Unity. Working with legislative leaders from both parties and representatives of the business community, Piotti has shaped a fair proposal that makes significant progress in the state's quest for tax reform.

Lost in the Press Herald's headline was the fact that this proposal was endorsed by several business leaders and the Portland Chamber of Commerce. In his testimony to the Taxation Committee, Chris Hall, the chamber's senior vice president, said that LD 1088 represents a step in the right direction, particularly compared to the history of tax reform failures that "litter the landscape of prior legislative sessions."

Hall pointed out that Maine voters would have the opportunity in November to adopt new limits to the growth in government spending through a statewide referendum on a new version of the spending limitation reform known as the Taxpayer Bill of Rights, or TABOR II, which the chamber also supports.

The combination of both of these proposals, Hall said, would strengthen Maine's economic vitality significantly.

Back to my original question – with so much going for Piotti's proposal, who could be against it?

The answer, of course, is many of those whose businesses would be subject to additional taxes by this approach – and many, but not all, Republican legislators who simply don't trust Democrats to shift taxes in a way that is truly revenue neutral.

To those business owners who may be affected: I understand your concerns, but this proposal is clearly in the best interest of all Maine citizens, and the specific tax increase is unlikely to be significant or even noticed by the average skier, moviegoer, or hotel guest. Think about the last time you checked lodging tax rates when planning your ski vacation.

To those Republicans who are concerned: Take heed of the Portland Chamber's approach – support of TABOR II for spending limits to alleviate concern about the rate of overall spending growth.

This proposal is a good first step in the process of strengthening Maine's economy.

Let's move forward – meaningful tax reform is long overdue.