Read the full report | Since LD 1495, which replaced LD 1088, became the law of the land, everyone from the Governor on down has been crowing about the economic benefits of the lower, flat 6.5 percent marginal tax rate for most Mainers. Unfortunately, standard tax analysis demonstrates that other provisions in the controversial bill will result in most Mainers facing tax rates that are significantly lower in some cases and in other cases are far higher than the statutory 6.5 percent tax rate.
This analysis calculates the effective marginal tax rate (EMTR) under LD 1495. The EMTR is measured by taking the change in tax liability divided by the change in income. For example, a change in tax liability of $80 per $1,000 in income yields an EMTR of 8 percent. EMTR is important because work effort and entrepreneurship are determined on the margin. Put simply, people work less if the EMTR becomes punitively high.
Chart 1 and Table 1 plot the changes in the EMTR for income ranges, as measured by adjusted gross income (AGI), between $0 and $300,000 for a married couple with two children under prior law, LD 1495 and “The MHPC Plan” for calendar year 2010 (when LD 1495 takes effect). The analysis shows that this family will only have an EMTR of 6.5 percent if they earned income between $46,000 and $54,000 or between $204,000 and $250,000. If they earned income between $56,000 and $201,000 they will face an EMTR of 8 percent – only 0.5 percentage points less than previous law! Furthermore, if their earned income is less than $33,000 they will face an EMTR that is zero or, more disturbingly, even negative.
In summary, LD 1495 is not a 6.5 percent flat rate as advertised. Maine taxpayers would be far better served if the state adopted a handful of meaningful changes to the tax code, as detailed in this report, in place of LD 1495.