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This study uses the most recent 2010 state tax data from the Internal Revenue Service.[ii]  Whether measured as a percent of all taxpayers or adjusted gross income, Maine has fewer high-income taxpayers earning more than $200,000 or earning more than $1 million when compared to the national average or neighboring New Hampshire (which has no individual income tax).  In fact, despite having nearly identical populations, New Hampshire’s millionaires significantly outnumber Maine’s (984 vs. 513) and have more income ($4.1 billion vs. $1.3 billion).[iii]

More troubling, Maine’s high-income taxpayers have been persistently losing ground.  Between 2001 and 2010, the adjusted gross income per taxpayer for Mainers earning over $1 million grew by only 5.1 percent.  In contrast, the national average grew by 12.3 percent and in New Hampshire by a whopping 55 percent.  Despite starting at nearly identical levels in 2001 ($2.5 million in Maine and $2.7 million in New Hampshire), the average millionaire in New Hampshire has nearly double the income by 2010 ($2.6 million vs. $4.1 million).

Additionally, Maine’s high-income taxpayers show a higher incidence of business ownership through vehicles such as partnerships and S-corporations (78.2 percent of taxpayers earning over $1 million) versus the national average (74.2 percent).  Since these are “pass-through” business entities, their taxes are paid through the individual income tax returns of the owners.[iv]  Therefore, Maine’s high-income taxpayers are more likely to be a hard-working business owner who only appears to be “rich” on paper due to this pass-through business income.

Rather than raising the tax burden on high-income taxpayers, Maine’s policymakers should instead find ways to encourage them back into the state or into productive activities.  If Maine had the same number of and average income of taxpayers earning more than $200,000 as the national average, Maine’s economy would have been up to $4.8 billion larger in 2010 and had higher state individual income tax of up to $410 million (taxed at 8.5 percent).  Much of this would have been business income, meaning even greater investment, job creation, and revenue.

Unfortunately, Maine’s policymakers, over the past few decades, decided to chase an ever shrinking pie of high-income dollars with ever higher tax rates.  This has created a vicious cycle where Maine’s high-income taxpayers are now fewer in number and poorer in income when compared to the national average or with neighboring New Hampshire.  Governor LePage’s reduction of the top individual income tax rate to 7.95 percent from 8.5 percent was an important step in reversing this vicious cycle and helping to grow the economic pie for all Mainers.

Maine Has Fewer and Poorer High-Income Taxpayers

Chart 1 and Table 1 show that Maine has fewer high-income taxpayers as a percent of all taxpayers in 2010.  Taxpayers earning over $200,000 in Maine account for 1.9 percent of all taxpayers, which ranked as only the 41^st highest in the country.  The number of these taxpayers in Maine was 63 percent of the national average and 59 percent of New Hampshire.

Taxpayers earning over $1 million in Maine accounted for 0.08 percent of all taxpayers, which ranked as only the 48^th highest in the country (ahead of Mississippi and West Virginia).  The number of these taxpayers in Maine was 42 percent of the national average and 55 percent of New Hampshire.

Maine clearly lags significantly behind in the number of high-income taxpayers.

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Maine’s natural rate of population growth in 2011 was only 180 people—that means there were only 180 more births than deaths.  A linear estimate shows that Maine’s natural rate of population growth may be negative in 2012.  A negative natural rate of population growth is the very definition of Demographic Winter, and Maine now stands at the edge of the population abyss.

Maine’s Demographic Winter will have severe negative economic consequences.  As shown in Chart 1, between 2000 and 2011, the number of people under the age of 18 has already declined 11 percent.  At the same time, the number of people over the age of 65 has increased by an even faster rate of 18 percent.  In economic terms, this means fewer workers available to businesses and fewer customers to buy their goods and services.

A shrinking economy will also adversely impact the finances of government.  The overall costs to government (federal, state, and local) increase approximately three-fold for people over the age of 65 compared to the cost of those under the age of 18.  At the same time, the taxes paid by people over the age of 65 plummets by approximately two-thirds, mostly due to declines in payroll and income taxes.

This, in turn, suggests one potential way to fight back against Demographic Winter.  If income taxes are known to decline along with the size of Maine’s workforce, policymakers should proactively begin reducing Maine’s income tax now in order to spark new economic growth and jobs.  A growing economy and job base will encourage the in-migration of young families and slow the onset of Demographic Winter in order to find a permanent solution.

The Cause of Maine’s Demographic Winter

Maine’s Demographic Winter has been decades in the making.  According to the U.S. Census Bureau, Maine has been a net loser of young, single, and college-educated people in three of the four national censuses between 1965 and 2000.[2]  Put simply, these young people were the foundation of Maine’s future families.  As such, it is not much of surprise to see Maine’s birth rate decline along with having fewer families in their prime child-bearing years.

Chart 2 shows how the number of births in Maine has plummeted in just the last two decades.  Between 1991 and 2011, the number of births had fallen by 25 percent to 12,868 from 17,070.  This drop in births occurred at the same time that Maine’s overall population grew by 7 percent.  At the other end of the spectrum, the number of deaths in Maine has increased over the same time.  Between 1991 and 2011, the number of deaths increased by 13 percent to 12,688 from 11,197.

However, more telling than the gross number of births and deaths is the net difference between the two as shown in Chart 3.  In 1991, Maine’s net natural population growth (births minus deaths) was at its peak during this period at 5,873 people—this is the equivalent of adding the entire population of Rumford.   By 2011, Maine’s net natural population growth was a mere 180 people—this is the equivalent of only adding another Grand Lake Stream Plantation.

This dramatic downshifting in Maine’s natural population growth is a significant contributor to the decline in the number of Mainers under the age of 18.  As a consequence, the Maine Department of Labor is projecting that Maine’s working-age population will shrink by 47,000 people in 10 years and 101,000 people in 20 years (note that the contraction accelerates slightly after the first decade).[3]

Additionally, as Maine’s net natural population growth dropped, Maine’s total population growth has become more dependent on people “from away.”  As shown in Chart 4, between 1991 and 2011, Maine has historically been a strong net in-migrant state meaning more people move into the state than move out of it.  In the peak year of in-migration, 2003, Maine had an influx of 9,161 people—the equivalent of adding another Cape Elizabeth.  However, since 2003, in-migration has significantly trended down to the point that in 2011 only 72 more people moved into Maine than moved out—the equivalent of only adding another Highland Plantation.

Overall, the importance of in-migration is seen in Chart 5, which shows the total change in Maine’s population.  Between 1991 and 1996, all of Maine’s population increase was due to natural population growth as Maine was a net out-migrant state in those years.  This reversed after 1996 as in-migration and total population soared even as net natural population growth dropped below 2,000 people.  From 2008 to 2011, in-migration turned to out-migration, which led to an actual decrease in Maine’s total population for the first time since 1967.[4]

State-Level Data Hides More Troubling Demographic Picture

As shown in Table 1, the county-level data for the most recent year, 2011, shows there are currently “two Maines” in regards to Demographic Winter.  Generally speaking, the southern coastal counties that define the Portland Metropolitan Statistical Area (MSA) (Cumberland, York, and Sagadahoc) are faring better than the rest of the state.

First, while state-wide natural population growth increased by 180, there were 11 counties where natural population change was negative and they collectively lost 775 people (more deaths than births).  At the same time, there were 5 counties positive natural population growthand they gained 995 people (more births than deaths).  So the state-wide average hides the fact that Demographic Winter has already arrived in the vast majority of Maine’s counties.

Second, the county-level migration shows that in 2011 there was far more intra-state migration than inter-state migration.  There were 10 counties with net out-migration of 1,781 people while there were 5 counties with net in- migration of 1,853 people—Cumberland and York counties accounted for the vast majority of that growth.  As a result, Maine’s internal migration is drawing more people into the Portland MSA and away from the rest of the state.

As a result of natural population growth and migration, only 5 counties saw an increase in population for 2011 of 2,322 people with the vast majority of that growth occurring in just two counties—Cumberland and York.  The remaining 11 counties saw a decrease in population of 1,513 people.  Overall, the county-level data reveals a picture where the negative impact of Demographic Winter is significantly greater outside of the Portland MSA area.

The Economic and Fiscal Consequences of Demographic Winter

Economically, for Maine’s businesses, Demographic Winter is akin to a slow-moving economic depression by moving population growth to population decline.  With a growing population, businesses can plan on new customers simply because there are more people.  However, with a shrinking population, businesses not only lose the prospects of new customers, they must also face losing existing customers.  If businesses are unable to find new markets, they will be faced with ongoing declines in revenue—or, put simply, an economic depression.

Demographic Winter will also have a negative fiscal impact on federal, state, and local governments.  First, people over the age of 65 impose significantly more costs to government than younger age cohorts.  Figure 2 shows that a typical person over the age of 65 costs government nearly three times as much for a person under the age of 18—even with educational costs factored in.  While these costs predominantly fall on the federal government (Social Security and Medicare), Maine’s state government should be prepared for a significant spike in Medicaid costs for those over the age of 65, especially driven by the cost of nursing homes.[5]

Second, while expenses soar for those over the age of 65, the taxes paid by this age cohort drops by two-thirds as shown in Figure 3.  The primary culprits for this drop are the payroll and income tax, which naturally decline as people retire from the labor force.  As such, the primary fiscal concern for Maine’s policymakers moving forward is the eroding income tax base as the state continues to age.

Fighting Maine’s Demographic Winter

There are many reasons, both economic and social, why Maine’s birth rate has declined so precipitously to the point where natural population change may be declining in the near future.  As such, it is unlikely that a rapid turnaround in the birth rate will occur in time to prevent this decline.

For the immediate future, policymakers should instead focus on reviving the flow of in-migrants, especially of young people and families.  This will only occur if Maine is creating enough good-paying jobs to draw them to Maine.  What is the best way to create these jobs?  The answer lies in Figure 3.

An aging workforce, if left unchecked, will mean ever-declining tax receipts from Maine’s income tax.  Rather than wait for the inevitable, policymakers should proactively phase out the income tax.  This would not only help Maine’s small businesses that mostly file through the individual income tax code (sole-proprietorships, partnerships, LLCs, and S-corporations), but would also help young families by lowering their tax bills and put more money in their pockets for diapers, clothes, and education.

A quick glance over the border to New Hampshire, which does not have an income tax, shows the promise of such a plan.  To be sure, New Hampshire is facing the same demographic challenges, though not as severe as in Maine, thanks in large part to a stronger level of in-migration.  Over the last two decades, New Hampshire has seen an influx of 69,487 people versus Maine’s 23,948.  Many of those new people were young families since New Hampshire net natural population growth in 2011 was 3,017 versus Maine’s 180.

Of course, encouraging strong in-migration will not solve Maine’s Demographic Winter problem by itself.  But, as illustrated by New Hampshire, in-migration can buy some much-needed time to find longer-term solutions.  Eliminating Maine’s income tax is an important first step in that process.  To do nothing condemns the majority of Maine to living under a never-ending economic depression.

Notes and Sources

Bangor

Wednesday, August 22, 2012

Sea Dog Brewery, 26 Front Street

Luncheon  12:00 p.m. to 1:30 p.m.

“Fiscal Impacts of Demographic Winter”

For more information, please contact Amanda Clark

by phone at 207-321-2550 or by e-mail at aclark@mainepolicy.org

Portland

Thursday, August 16, 2012

DiMillo’s On the Water
25 Long Wharf

Luncheon
 11:00 a.m. to 12:30 p.m.

“Fiscal Impacts of Demographic Winter”

For more information, please contact Amanda Clark

by phone at 207-321-2550 or by e-mail at aclark@mainepolicy.org

The people who chose to leave Maine from 1995 to 2009 took over $661 million in income to other states. The loss of that income has caused Maine state and local governments to lose at least $87 million in income taxes, sales taxes and property taxes.

The actual losses in income and taxes is much higher because its does not account for the compounding and multiplying effects of income over time. Every dollar that is spent often becomes $3 or $4 in total economic activity.

The report, “Maine Loses People and Their Income to States with No Personal Income Tax,” by Scott Moody, chief economist for MHPC, shows the desire of residents to migrate from Maine, which has the nation’s sixth-highest tax burden, to states with no income taxes.

“Opponents of eliminating Maine’s personal income tax will, quite predictably, lament the loss of state tax revenue,” said Moody. “However, the analysis clearly shows that the loss revenue is significantly lower than commonly assumed. The economic benefits of stemming, or even reversing, the out-flow of people and their income to states with no personal income tax would be a major boon to our economy.”

“These residents are voting with their feet, and they are taking over $44 million a year with them,” said Lance Dutson, CEO of The Maine Heritage Policy Center. “The evidence strongly suggests that eliminating the personal income tax would help level the playing field and give Maine a fighting chance to convince residents to stay put. Retaining these residents and their income would also help Maine’s small businesses and would create new jobs.”

Download full report here (PDF)

Download the Full Report (PDF)

Of course, this large personal income tax burden comes at an economic price which manifests itself, in part, through the out-migration of people and income to greener pastures. This study examines Maine’s net migration to states without a personal income tax from 1995 (the first year of available data) to 2009 (the latest year of available data) based on data from the Internal Revenue Service.[4] [5]

Analysis of this migration data shows that Maine has lost people and their income to the nine states that have no personal in-come tax for nearly every year in this time-period. Cumulatively, as shown in Table 1, Maine has lost 11,486 people and $661,274,000 in income. The lost income is a conservative estimate because it does not account for the compounding of in-come over time and the multipliers of the income as it ripples through the economy.

Additionally, this lost income has consequences for Maine’s state and local governments through reduced tax receipts. Table 1 shows that Maine’s state and local governments have, conservatively, lost $87,004,000 over this time-period.

The first step in the long road back to economic recovery is to give these out-migrants a reason to stay or return home. This evidence strongly suggests that eliminating the personal income tax would help level-the-playing-field and give Maine a fight-ing chance to convince residents to stay put. It would also help Maine’s small businesses and create new jobs.[6]

Voting with Their Feet 

Chart 1 and Table 1 shows how much income, as measured by taxpayer’s Adjusted Gross Income, that Maine has lost between 1995 to 2009 to states with no personal income tax. On average, every year $44,085,000 in income leaves the state to never re-turn. Chart 1 shows that not only would Maine’s net in-migration of income be higher than it was for nearly every year over this time-period, but that the last two years of net income losses would have remained positive.

Chart 2 and Table 1 shows how many people, as measured by taxpayer’s claimed exemptions, that Maine has lost between 1995 to 2009 to states with no personal income tax. On aver-age, 776 people leave the state to never return. Chart 1 shows that Maine’s net in-migration would have been higher than it was for nearly every year over this time-period.

As a result of this out-migration of people and their income, Maine’s state and local governments have also suffered through reduced tax receipts. Table 1 shows that Maine’s state and local governments have, conservatively, lost $87,004,000 in income taxes, sales taxes, property taxes, etc. over this time-period.

Keep in mind that all of the income and tax loss estimates are based on the net out-flow of income in only the year of migration. However, this income is lost forever which means the compounded losses are significantly larger—$1 lost 15 years ago is worth $15 compounded in every year. Also, these income and tax loss estimates do factor in the lost multipliers this money would have had on Maine’s economy as it ripples through the economy—$1 spent may eventually become $3 or $4 in total economic activity. As such, these are very conservative estimates.

Conclusion 

Opponents of eliminating Maine’s personal income tax will, quite predictably, lament the loss of state tax revenue. However, this analysis clearly shows that the loss revenue is significantly lower than commonly assumed. The economic benefits of stem-ming, or even reversing, the out-flow of people and their income to states with no personal income tax would be a boon to the economy.

On a static basis, eliminating Maine’s personal income tax, in FY 2010, would cost the state approximately $1.3 billion. On a dynamic basis, which would factor in things like reversing out-migration and the creation of new businesses and jobs, the loss in state revenue would be significantly lower. This study only highlights the economic benefits of stemming Maine’s out-migration to states with no personal income tax.

In the near future, a more comprehensive dynamic tax analysis will be performed to get a fuller accounting of the positive bene-fits of eliminating Maine’s personal income tax on taxpayers, the economy, and state and local government. Stay tuned.

Download the Full Report (PDF)

Notes and Sources: 

[1] Moody, J. Scott, “Higher Taxes? Not with Maine’s High Tax Burden,” The Maine Heritage Policy Center, Path to Prosper-ity, February, 23, 2012. http://www.mainepolicy.org/wp-content/uploads/Path-to-Prosperity-Maines-Tax-Burden-022112-2.pdf

[2] State tax data is from the U.S. Department of Commerce: Census Bureau and can be found here: http://www.census.gov/govs/statetax/ 

[3] Keating, Raymond J., “Small Business Survival Index 2011,” Small Business & Entrepreneurship Council, November 2011, pg. 40. http://www.sbecouncil.org/uploads/SBSI2011%5B1%5D.pdf The top rate will fall to 7.95 percent in 2013 which would drop Maine to the 9th highest in the country.

[4] The IRS state migration data by state can be found here: http://www.irs.gov/taxstats/article/0,,id=212683,00.html 

[5] The states without a personal income tax include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

[6] Moody, J. Scott, “Who are Maine’s ‘Rich?’,” The Maine Heritage Policy Center, Path to Prosperity, April, 11, 2012. http://www.mainepolicy.org/wp-content/uploads/Path-to-Prosperity-Who-Are-Maines-Taxpayers-031812.pdf 

In these dark economic times, the siren call of “tax the rich” is hurled at policymakers as the solution to Maine’s budget woes. The accusation is that the rich are just sitting on their money and having government take it from them in order to spend it will get the economy moving again.

Of course, this caricature of the rich does not stand up to reality. This study analyzes data from the Internal Revenue Service for 2009 that shows the dramatic differences in the composition of income by various income groups.[1] Simply looking at total income can be misleading if one does not understand the underlying income dynamics because today’s tax code includes a mishmash of personal and business income. This study also provides an illustrative example of how this can happen.

Download Full Report Here (PDF)

The “Rich” are Overwhelmingly Married and Entrepreneurial 

Chart 1 shows the various characteristics of Maine’s taxpayers by income group as a percent of tax filers within each income group. The first item to note is how marriage affects the perception of “rich” versus “poor.” For those earning under $50,000, the percent of married filers is 24.6 percent, but for those earning over $200,000 the percent of married filers is 86.6 percent.

This makes perfect sense since in today’s economy where both husband and wife are in the workforce, marriage often results in a doubling of household income. A single person earning $40,000 would fall in the “under $50,000” category whereby a couple earning a combined $80,000 would show up in the “$75,000 to $100,000” category. By this metric, the married couple misleadingly looks better off economically than the single person.

The second item to note is that the percentage of taxpayers that have some kind of business income soars at the income levels over $200,000—93.2 percent of taxpayer have interest income, 71 percent of taxpayers have dividend income and 63.3 percent of taxpayers have capital gains income.

More importantly, the percentage of taxpayers that have partnership/S-corporation income is dramatically higher for those earning over $200,000 (45.2 percent). This is almost three times as high as those earning between $100,000 and $200,000 (15.9 percent). The income from S-corps is particularly problematic because, unlike C-corps, S-corp income is taxed at the personal level. This pass-through income is not necessarily indicative of the taxpayers actual financial condition (see next section).

Along the same lines, the Tax Foundation published a booklet titled “Putting a Face on America’s Tax Returns” which shows that “the vast majority of taxpayers who face the highest marginal tax rates [meaning high-income] tend to be married couples. But aside from being married, they also tend to be dual-income, residents of high-cost urban areas, older, college educated, and engaged in business activities.”[2]

Graduated/Progressive Marginal Income Tax Rates Discriminate Against Entrepreneurs 

For tax year 2011, Maine’s had four tax rates: 2 percent, 4.5 percent, 7 percent and 8.5 percent. These increasing tax rates are called a “graduated” or “progressive” income tax rate system and can lead to all kinds of economic distortions. To see how, let’s compare two hypothetical taxpayers—a single taxpayer with wages of $50,000 and a married couple (with two children) with combined wages of $100,000, S-corp income of $50,000, capital gains income of $20,000 and interest/dividend income of $5,000.

As shown in Table 1, taxes for the single taxpayer are straightforward and amounts to a tax bill of $2,842. As a percent of total and actual income (there is no difference for this taxpayer), this amounts to a tax burden of 5.7 percent.

The married couple’s tax bill is not so simple. The problem stems from the S-corp income which is derived from a family-owned business that is in financial trouble. The business needs to make some necessary investments to stay competitive so, for the next few years, all profits will be retained to fund them. However, the profits must still be distributed to shareholders for taxation. So, this family’s share of profits comes to $50,000 even though they won’t actually receive $50,000—this is often referred to as “phantom income.”

As a result of having to pay taxes on the S-corp income, the family will have to sell some stocks resulting in $20,000 worth of capital gains. They also receive $5,000 in interest and dividends from personal savings for col-lege/retirement. The end result is that they will owe $12,413 in Maine income taxes.

While on paper it looks like this family is better off than the single taxpayer, the single taxpayer is getting a much better tax deal with a tax burden on actual income of 5.7 percent. The family’s income may be 3.5 times higher, but their tax bill is 4.4 times higher thanks to Maine’s increasing marginal tax rates. Adding insult to injury, their overall tax burden is significantly higher, almost double the single taxpayer, at 9.9 percent of actual income—keep in mind that they never received the $50,000 from the S-corp which was kept by the business as retained earnings.

Conclusion 

This simple illustration shows that the interplay between personal and business income within the tax code can lead to misleading conclusions about the actual financial condition of taxpayers. A “high-income” family with children and a business could be one step away from financial disaster while a “low-income” single taxpayer may be more stable and well-off.

As a result, comparing a taxpayers in the “under $50,000” income category with a taxpayer in the “over $200,000” income category is not an apples-to-apples comparison. Only 3.3 percent of taxpayers earning less than $50,000 have any partnership/S-corp income while 45.2 percent of all taxpayers earning more than $200,000 have partnership/S-corp income. It is absurd to compare the income of an individual with that of a doctor’s office, yet that is exactly what is happening when using income tax data to make such comparison between aggregate income groups.

Download Full Report Here (PDF)

Notes and Sources: 

[1] The IRS income tax data by state can be found here: http://www.irs.gov/taxstats/article/0,,id=171535,00.html 

[2] Hodge, Scott A., “Putting a Face on America’s Tax Returns,” The Tax Foundation, 2005. http://taxfoundation.org/files/dba37618d9c2d2df02f24766ac4cc39d.pdf 

[3] Nutter, Sarah E., Wilkie, Patrick J. and Young, James C., “Corporate Business Activity Before and After the Tax Reform Act of 1986,” 1996 SOI Winter Bulletin. http://www.irs.gov/pub/irs-soi/86cobusact.pdf 

[4] For more information, see SOI Bulletin Historical Table 21: http://www.irs.gov/taxstats/article/0,,id=175902,00.html 

A report released today by the Maine Heritage Policy Center shows that Maine’s high-earning individuals are working married couples with dual incomes and risk-taking entrepreneurs who create jobs. This is in stark contrast to recent cries denouncing supposed “tax cuts for the rich” in response to modest income tax relief passed last year.

The report, Who are Maine’s “Rich?” profiles various levels of income tax filers, and shows that those earners who are in the higher categories are primarily families and small business owners. Mainers who earn $200,000 or more are primarily married (86.6%) and many are business owners (45.2%). Because of the higher income, often a result of business income that is held to cover liabilities and make business investments, these so-called “rich” pay higher effective tax rates than filers who earn less.

“This report shows how important a reduced income tax burden is to hard-working Maine families and small businesses,” said Scott Moody, the Chief Economist for the Maine Heritage Policy Center. “The big government advocates on the left are yelling about tax cuts for the “rich” but what they don’t seem to understand is that the people helped most by income tax reductions are entrepreneurs who create jobs.”

The study uses a hypothetical situation of two different taxpayers – one is single and makes $50,000 and the other is a family of four who has two incomes, some business income, and some capital gains totaling $175,000. In this scenario, the “rich” taxpayer is taxed on $50,000 in business “profits” that won’t actually be received by the individual, but will instead be invested back into the company. Still, this business income, combined with the dual incomes of husband and wife, leave the “high-income” taxpayer with a 9.9% tax burden as percent of actual income, while the single taxpayer, earning $50,000, has a tax burden of just 5.7%.

“What we see consistently is that folks who are taxed at higher rates for their earnings are the very people we rely on to create jobs and move our economy forward,” said Moody. “When the Governor and Legislature did the smart thing and gave these job creators much needed tax relief, the calls came out from the left to “tax the rich” – well I have news for them, the “rich” are Maine small businesses and hard working families.”

__________________________________________________

For more information or to schedule an interview, please contact Peter Steele at psteele@mainepolicy.org or by calling 207-321-2550.

As Maine’s state government grapples with budget shortfalls in the Department of Health and Human Services budget and a recent lawsuit aimed at rolling-back necessary pension reforms, the calls for higher taxes on Maine’s beleaguered private sector will grow louder. However, policymakers must resist the siren call for higher taxes as Maine’s tax burden is significantly higher than commonly believed.

Download full study here (PDF)

The standard methodology for calculating tax burdens is to divide total state and local (S&L) tax collections by total personal income. This method is flawed because personal income includes both private and public sector sources of income. This 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. More specifically, public sector spending consists of personal current transfer receipts (Medicare, Medicaid, Social Security, etc.) and government employee compensation (federal, state and local).

As shown in Chart 1, under standard tax burden calculations, Maine’s S&L tax collections as a percent of personal income was 11.7 percent in Fiscal Year (FY) 2009. Nationally, the tax burden was 10.5 percent.

However, as previous research has shown, Maine’s private sector as a percent of personal income was a dismal 63.9 percent in 2010—the 12th smallest private sector in the country.[1] In the long run, this matters to overall economic well-being since, on average, a 1 percentage point increase in the size of the private sector yields an increase in household income of $2,561.

Therefore, a more appropriate measure of Maine’s tax burden is using S&L tax collections as a percent of private sector personal income. Under this measure, as shown in Chart 1 and Table 1, Maine’s tax burden soars to 18 percent of private sector personal income in FY 2009—the 6th highest in the country and the highest in New England. In fact, Maine’s tax burden as a percent of private sector income is 54 percent higher when measured as a percent of personal income (11.7 percent versus 18 percent).

A study released today finds that allowing workers to decide whether or not to join a union can be great for a state’s economy. The report from The Maine Heritage Policy Center  (MHPC) shows that Mainers are leaving the state and moving to “Right-to-Work” states, or states where workers cannot be forced to join or financially support a labor union a t their place of employment.

According to the report, 15,694 Maine households, representing nearly 25,000 Mainers, moved from Maine to Right-to-Work states between 2003 and 2008. This out-migration of Maine workers represents $801 million in adjusted gross income.

On the other side of the spectrum, Oklahoma, since becoming a Right-to-Work state in 2003, has seen growth in population, gaining nearly 41,000 people and $99 million in income from 2003 to 2008 alone. Of the new Oklahoma residents, 31,367 relocated from non-Right-to-Work states. Before passing Right-to-Work, Oklahoma had lost 10,681 households representing $1 billion in income between 1995 and 2002.

“What is clear from the Oklahoma example is that Right-to-Work states are attracting new business, new residents and economic growth,” said Scott Moody, Chief Economist for The Maine Heritage Policy Center. “Maine has suffered from ‘brain drain’ and out-migration to Right-to-Work states for many years, and this study shows us one reason why – Right-to-Work states are providing better economic opportunity than we are.”

Additionally, the report found that by instituting Right-to-Work in Oklahoma, the GDP of the manufacturing industry, a staple of Oklahoma’s economy, increased by 45 percent from 2003 to 2010. This growth can be directly attributed to an increasingly productive workforce.

“Maine has a great opportunity to make a move that will undoubtedly boost our economy without costing taxpayers or government a dime,” said Moody. “By implementing Right-to-Work here in Maine, we are opening the door to increased workforce productivity and less out-migration of Mainers to Right-to-Work states.”

“For too long, forced unionization has held back economic growth in Maine,” said Lance Dutson, CEO of The Maine Heritage Policy Center. “This study demonstrates just how damaging that can be to the workforce and our population. It’s time to protect our workers individual liberty and open the door to economic prosperity by bringing Right-to-Work to Maine.”

Download the full report here (PDF)