Testimony Against Raising Taxes to Fill the Budget Gap
January 13, 2010Author: Scott Moody, Chief Economist
Source: The Maine Heritage Policy Center
Testimony in Opposition of
Raising Taxes to Close the Budget Deficit
by
J. Scott Moody
Chief Economist
The Maine Heritage Policy Center
Senator Diamond, Representative Cain, member of the Joint Standing Committee on Appropriations and Financial Affairs and Senator Perry, Representative Watson and members of the Joint Standing Committee on Taxation, thank you for the opportunity to submit written testify this afternoon. I am sorry that I am traveling on business and not able to appear in person. My name is Scott Moody and I am the chief economist for The Maine Heritage Policy Center.
While some are promoting tax increases as the response to Maine’s latest budget deficit, I commend Governor Baldacci for holding firm against tax or fee increases within his proposed supplemental budget.
Let’s be clear. Maine’s tax burden is already too high. Using standard tax burden calculations, Maine’s state and local taxes as a percent of personal income was 12.4 percent in Fiscal Year (FY) 2007—the 6th highest in the country. However, this methodology is flawed because personal income includes both private and public sector sources of income.
Yet, the distinction between the two sectors is important because only the private sector creates new income. The public sector can only redistribute income through taxes and spending. Maine’s private sector as a percent of personal income was a dismal 66.5 percent in 2008—the 10th smallest private sector in the country.
Therefore, a more appropriate measure of Maine’s tax burden is as of a percent of private sector personal income. Under this measure, Maine’s tax burden soars to 18.3 percent of private sector personal income—the 5th highest in the country. Keep in mind, the fundamental source of all taxes is from the private sector (see Chart 1).
More disturbingly, the tax burden has been climbing as a share of private sector personal income. In fact, the all-time high of 18.5 percent was reached in 2006. This is up 9.3 percent from only five years earlier when the tax burden was 16.9 percent in 2001. Clearly this trend is unsustainable.
Additionally, taxes matter a great deal to the overall economic well-being of a state. Table 1 compares the top 10 and bottom 10 states with the highest (lowest) tax burdens in the country—as measured conventionally—between FY 1997 and FY 2007 (the latest year of available data) for several key measures including population growth, personal income growth and private employment growth.
