A Plan to Reform and Reduce Maine’s Taxes

Read the full report | Mainers have been hit with a barrage of tax reform proposals from the Maine Legislature, but no clear plan that will reduce the Maine tax burden. The proposals beg the question, “Where’s the beef?” Like the iconic Wendy’s slogan, which was implemented to chastise their competitors for selling an inferior product, Mainers should be asking an analogous question, “Where’s the tax reduction,” in reference to the inferior tax proposals.

The Maine Heritage Policy Center has cut through the rhetoric and identified the “beef.” The result is a straight-forward proposal that is transparent, boosts economic activity, and reduces Mainers’ high taxes.

Table 1 shows the elements of the MHPC plan contrasted to the Taxation Committee plan. The Taxation Committee proposed a “revenue-neutral” plan that would reduced individual income and property taxes, paying for the cuts with increases in the corporate income and sales tax. However, the Taxation Committee is erroneously touting their plan as “tax reform.” In fact, the damage done to the economy by expanding the sales tax is not offset by the reductions in the individual income and property taxes. These negative economic effects also undercut the “revenue-neutral” moniker.

There is one element of the Taxation Committee plan that does make good policy—the reform of the individual income tax. The income tax proposal would enact a flat-rate of 6 percent and give taxpayers a choice of: (a) eliminating their deductions (standard or itemized) and exemptions in favor of a refundable tax credit; or, (b) keeping their itemized deduction (with a cap) and repeal of the Alternative Minimum Tax.

Therefore, MHPC proposes to provide Mainers with real tax reform and real tax reduction by keeping the Taxation Committee’s individual income tax reduction but jettisoning the rest of the tax package. The result is an estimated $218,807,000 in fiscal year (FY) 2009 for Maine taxpayers, greater economic activity, and a more simple tax code.

The income tax reduction can be funded in a “neutral” manner through expenditure adjustments. Two spending adjustments are: (a) reducing Medicaid spending per-recipient to the national average saving up to $346 million[2]; or, (b) reducing the compensation gap between state government and private sector employees to the national average saving up to $275 million[3]; or, (c) some combination of A and B. In any case, $218 million in spending reductions to pay for real tax reductions is very achievable.

For more spending reduction ideas, such as repealing the Dirigo Choice program, see the 2007 Maine Piglet Book. ..

About the author

J. Scott Moody is the Chief Executive Officer of MHPC. Scott has over 15 years of economic policy research and economic modeling experience from his work with The Tax Foundation and The Heritage Foundation. He has authored and co-authored over 150 published articles and books. He has testified twice before the House Ways and Means Committee of the U.S. Congress.