June 2007 Archives

There are many, many factors to consider when one talks about the "business climate" such as taxes, labor laws, environmental laws, etc. A new study titled "Risky Business" published by the American Justice Partnership has quantified another important part of a state's business climate--the liability climate.

The article defines this problem as ". . . threats to capital formation and, at times, the sustainability of many businesses, most companies fail to accurately account for the total costs of lawsuits and underestimate the importance of a state's liability climate when they make employment, plant location, and operating decisions. In today's unpredictable legal environment, the accounted costs of litigation--legal fees, settlements, judgments, and G&A--are just a starting point. The unaccounted costs are often far higher and far more dangerous: share value loss, damage to company and product reputation, higher litigation reserves, higher insurance costs, and poorer litigation results."

The study ranks the fifty states on a "green, yellow, red" basis." Green states are pro-growth and job creation, yellow states are neutral and red states discourage growth. Of all the New England states, only New Hampshire gets a green light and is ranked 17th best in the nation. Maine is a yellow state, though barely, coming in near dead last of all yellow states ranking 26th best.

This is what the article says about Maine: ". . . The Supreme Court majority and Attorney General Steven Rowe are viewed as activists. The Maine Legislature has not enacted any significant liability reform legislation. The state's liability climate is, at best, neutral to growth and job creation. Maine may well become a "red light" state in the next ranking." Yet another blow to our business climate . . .

In 2005, state government workers on average were compensated (wages plus benefits) 32 percent higher than private sector workers ($51,003 vs. $38,617).

The average wage for a state government worker was 13.2 percent higher than their private sector counterpart ($36,020 vs. $31,812).

The State of Maine recently revealed a new labor contract for 2008 and 2009 for employees who work in the executive branch bargaining unit. The contract provides a two percent raise in 2008 and a four percent raise in 2009. Additionally, in 2007, workers get a $700 lump sum bonus.

Inflation projections for 2008 and 2009 are approximately two percent. When adjusted for inflation, the wage increases are positive.

While a six percent wage increase over two years may seem modest to some, when compared to wage growth in the private sector it is quite significant. Real private sector per capita income has actually shrunk since 2001.

While the private sector pie is shrinking, the state government sector is increasing. How can policymakers justify such a scenario?

The Portland Press Herald today reports that the recently negotiated state contract for 10,000 state employees was signed today by the Maine State Employees Association. For FY 2008, state government employees will get a 2 percent raise and a $700 check cut on July 1, 2007. For FY 2009, they also get a step up on the pay scale (the lowest step is eliminated and a new top step is created) which results in a raise that is "closer to 4 percent."

This is bad news for Maine taxpayers for several reasons:

First, Maine state government employees are already highly compensated relative to private sector employees. Our recent report, "The State Government 'Gravy Train,'" revealed that "Maine state government employment on average receive 32.1 percent higher overall compensation than private sector employees.--$51,003 versus $38,617.

Second, the article does not mention how the higher nominal wages will also result in increased outlays for benefits. In fact, from our report: "benefits are the largest driver of the compensation gap with an average benefits package that is 120.2 percent higher ($14,982 versus $6,805) for state government employees versus those in the private sector."

Third, these raises exceed the forecasted rate of inflation. The Maine Consensus Economic Forecasting Commission's January 2007 forecast projects inflation in FY 2008 at 2.2 percent and FY 2009 at 2.1 percent.

Fourth, private sector income, after adjusting for inflation, has actually declined slightly since 2000.

Which begs the question: If real private sector pay is declining and the gap between the private sector and the public sector pay is already way out-of-whack, why is the new state contract boosting the pay scale of state government employees by almost twice the rate of inflation? If anyone knows the answer, please let me know.

The Taxation Committee spent the last six months studying Maine's tax code. In terms of the income tax, they concluded that a single flat rate with the elimination of all deductions and exemptions is good tax policy. The same logic also applies to tax credits. Credits narrow the income tax base requiring higher marginal tax rates to raise the same amount in taxes.

Now comes along this "Opportunity Maine Tax Credit" that has passed unanimously in the House and 27 to 8 in the Senate according to this Portland Press Herald article. The credit would be based on the student loan interest for those taxpayers who attended a Maine University and also stays in Maine after graduation.

This all sounds good, but did we not learn anything from the tax reform debates? This is the slippery slope to the current mess that is Maine's tax code. An exemption here, a credit there and before you know it; it is time to reform the tax code again. The Governor should veto this bill in the name of tax reform.

Ever wonder just how broad the reach of state government is? There are many metrics such as size of employment (26,248 in CY 2005) or state spending ($6.7 billion in fiscal year 2006). Here is another interesting way to look at--the number of agencies, divisions, bureaus, commissions and advisory boards that exist in Maine. According to the Maine State Government Annual Report, there are an astounding 355 such entities in Maine state government (click "read more" for a full list). Surely there is room for elimination and/or consolidation of many of these entities? You be the judge . . .

Another legislative session is coming to an end and the status quo reigns in Augusta. Unfortunately, there is precious little time to turn Maine's economy around. According to population projections from the U.S. Census Bureau, Maine's population will begin to DECLINE after 2025. In 2025, Maine's population is projected to peak at 1,414,402.

Eighteen years may sound like a long time, but in reality we have much less time to enact pro-growth policies because it will take several years for such changes to filter their way through the economy. Here is one modest suggestion for putting Maine on the right track . . . there is still time left on the legislative clock.

My recent blog "Tax Reform Plan is Not Revenue-Neutral" has been updated using a more refined estimate.

See Appendix C here for a full list.

The "Maine Milk Commission - Target Milk Prices" raises $4,557,425 over the biennium and the "Changes in the Milk Handling Fee" raises $3,569,143 over the biennium. Now, these two items may not fully qualify as "tax increases," but I point them out because I was shocked by the tremendous amount of government regulation over the milk industry. It can't be fully articulated on this blog, but check it out for yourself here. Whatever you want to call it, "free-market" it is not.

More disturbingly, are the 15 "Enforcement" items on the list totaling $12,962,000 in revenue over the biennium. Items such as " Sales Tax Enforcement - non-Maine businesses doing business in Maine," or "Sales Tax Enforcement - delinquent income and sales tax." Now, I'm all for enforcing the law but there are two points of concern:

First, how do you book collections before the enforcement takes place? To a large degree, these amounts are, at best, a guesstimate, or, at worst, a budget gimmick. If this money is truly there, it should be booked in the next budget after it has been collected, not before.

Secondly, these amounts will create quotas that officials at Maine Revenue Service will feel compelled to reach--whether the money is actually there or not. How many Maine taxpayers will be subjected to unnecessary audits in order to reach these quotas?

According to the Bureau of Economic Analysis, if Maine were a county of New Hampshire, in 2005, it would have been the second poorest county. Coos county is the poorest in New Hampshire with a per capita income of $30,121. Maine's per capita income is $30,808. Strafford county New Hampshire would come in third at $31,210.

Read these following quotes. Can you determine how these people voted yesterday on the budget?

In reference to the $6.3 billion state budget in front of the Maine State Senate last night:

• Senator Nancy Sullivan: “I don’t know if this is a rising sun or a setting sun.�
• Senator Libby Mitchell: “This is an extraordinary risk.�
• Senator Peter Mills: “This whole effort may fall flat on its face.�
• Senator Elizabeth Schneider: “I have serious doubts regarding the projected savings.�
• Senator Bill Diamond: “This is the mother of all experiments.�
• Senator Richard Rosen: “I don’t claim that this guarantees property tax relief.�

And how did all of these people vote?

Despite all of their reluctance, equivocation, and hesitation – they all voted to approve a nearly half billion dollar spending increase accompanied bynew taxes on Maine people and businesses.

With such confidence in their support of the single most important function of the Legislature, Mainers should be quite concerned about legislators' votes on less important issues.

In the current session of the Legislature Maine became one of a handful of states to introduce so-called “net neutrality� legislation. A few other states, especially Maryland, have withdrawn or soundly defeated Internet regulation. Still, Maine Senator Ethan Strimling has waved the Net Neutrality flag, presumably to garner support for his next political campaign.

Strimling’s original bill was a stark call for Internet regulation: “As the federal government continues to shirk its responsibility, Senator Strimling has stepped up to propose a net neutrality bill in the Maine legislature.� [Strimling campaign website]

But on the road saving the Internet, Strimling was derailed by his colleagues’ interest in access to broadband and the jobs that accompany this investment. Senator Carol Weston wrote in the Bangor Daily News that the Strimling bill “will cost Maine jobs, harm the economy and stifle investment.�

Oh sure, the tax reform plan winding its way through the Taxation Committee is designed to be "revenue-neutral" from the perspective of the state government. However, the plan does not consider how it will interact with the federal tax code. The Taxation Committee plan will lower the income tax, but raise the sales tax to compensate. The downside is that the income tax is deductible for purposes of the federal income tax, the sales tax is not (technically there is a sales tax deduction but only the higher of income or sales taxes can be deducted, helpful for states like Texas with no income tax, but a high sales tax, but not much help for Mainers. Oh, and even that goes away after 2007 unless extended by Congress).

The end result is that many Mainers will lose a significant portion of their federal tax deductibility for their state income tax. Since most Mainers who itemize are in the higher income ranges, the effective federal income tax rate is significant--about 20 percent. The Taxation Committee's most recent estimate of the income tax reduction is $218,807,000. Multiply that by the effective federal income tax rate of 20 percent, and Mainers could face up to $43,761,400 in increased federal income taxes because of reduced state income tax deductibility. So much for "revenue-neutrality."

In addition, the Taxation Committee plan calls for a property tax reduction of $98,084,000 via increases in the homestead exemption and circuit breaker. This too will be offset by an increase in the sales tax. Like income taxes, property taxes are also deductible against your federal income tax. However, this is more complicated since there is no guarantee that this will actually reduce overall property tax collections. For instance, towns could "capture" the state property tax relief by raising property taxes higher than they would have otherwise. But, assuming no "capture" by towns, this property tax relief could cost Mainers up to an additional $19,616,800 in higher federal income taxes.

Overall, the Taxation Committee's tax reform plan could actually cost Mainers up to $63,378,200 in higher federal income taxes. This is in addition to the higher sales tax compliance costs of up to $14,936,000 that I discuss in this Issue Brief.

We knew it had to happen. Faced with at least a $100 million shortfall in the budget, taxes were going to have to go up to balance the budget. While it appears that the highly visible cigarette tax increase will not pass, other less visible increases are in the budget. Here are two increases that we have found thus far.

1) The first comes to us via an Ellsworth American article by Victoria Wallack. She states that there will be "an increase in the amount of the sales tax the state will automatically collect for tax-free items purchased out-of-state or on the internet. That so-called use tax increases from .04 percent of a taxpayer's adjusted gross income to .08 percent to raise $1 million more a year from those who don't itemize what they purchase."

2) The second comes to us via a recent AP article. The article states "About half of the funding for the final add-backs is to come from subjecting enterprises known as captive insurance companies--usually wholly owned subsidiary of a corporation not in the insurance business, according to state tax officials--to the state corporate income tax." This appears to be a tax increase of around $10 million.

Stay tuned for more hidden taxes and fees in this budget as we distill the fine print . . .