January 2008 Archives

At Mainebiz Online, I, along with seven other Maine economists, make their economic forecasts for 2008. One point of clarification: where I was quoted as saying "I would keep my eyes on Augusta;" I mean from the perspective of taxation. There have been folks calling for higher taxes to close the current $100 million plus budget deficit. Including Christopher St. John from MECEP--who, by the way, is not an economist. No economist would recommend raising taxes as the economy slips into a recession.

Last week it was reported in an article titled "Tourism still No. 1, but ..." that "Tourism is Maine's biggest producer of jobs and tax revenue. It's just not as big as advertised . . . It generated $10.06 billion in sales, 140,000 jobs and $429 million in taxes . . ."

However, the article is wrong in that tourism is not Maine's biggest industry. Instead, it is the U.S. Federal Government. For Federal Fiscal Year 2005 (the latest data available), the federal government poured in $11.356 billion into Maine's economy--making the federal government the largest industry in Maine.

In case you missed it, I had an op-ed in Sunday's Portland Press Herald discussing the economic evils of double-taxation.

Also, on the same day, John W. Porter had an op-ed titled "Are taxes really high in Maine?" which is filled with misleading information about Maine's tax burden. He makes that point that, according to the Tax Foundation, Maine has only the 36th highest federal tax burden--one of the lowest in the country. Therefore, when you look at federal, state and local taxes, it's not that bad in Maine. (FYI, I authored the mentioned Tax Foundation study for several years when I was with TF).

However, the federal tax angle begs the question: "Why is Maine so relatively poor?" New Hampshire has the 7th highest per capita income while Maine is 39th. Maine's poor economic performance can not be due to federal taxes since there is no difference in the federal tax code between Maine and New Hampshire. Rather, Maine's lower federal tax burden is generally a consequence of Maine's failed state and local tax policies, not a cause.

Mr. Porter also fails to mention that New Hampshire's total tax burden jumps from 49th (state and local only) to 29th when federal taxes are taken into account. Why isn't New Hampshire suffering under this much higher tax burden? Again, a state's federal tax burden is generally a consequence of one's economic situation, not a cause.

This is not to say that federal taxes do not distort local economies--they certainly can, especially because the federal tax code is not indexed for difference is the cost of living. However, given the many similarities between Maine and New Hampshire, differences in the federal tax code/burden are much less important to economic development than Maine's own home-grown high tax burden--despite what Mr. Porter says.

A new report by J Dwight and I find out--click here for the report.

At our bi-weekly state house breakfast seminars on January 22, 2008, I discussed potential tax savings that exist within the state government workforce. In a nutshell, Maine could save $400 million if state compensation and employment ratios were at the national average--see here for more details.

Policymakers have a unique opportunity to reach this goal--the retirement of 40 percent of the state government workforce over the next 10 years. However, doing so will require a solid game-plan that is put in place before the exodus begins.

During my presentation, I presented an idea to institute a "cap and trade" system that will gradually reduce the state workforce in line with estimated retirements while also ensuring that the most important state jobs remain fully staffed.

Cap and Trade would:
1) Limit the total number of positions and/or payroll available to state agencies. This would be similar to the salary caps employed by the NBA or NFL.

2) State agencies and departments would "bid" against one another for the limited number of positions and/or payroll slots available.

3) The bidding would establish a clear value for every job available within state government. Just as prices set the value for the goods and services that Mainers purchase every day.

4) With a clear value established, higher valued jobs will be retained while lower valued jobs will be phased out.

The end result is lower state spending and lower taxes for all Mainers. I plan to further develop this idea with more concrete details, so stay tuned to this blog . . .

For the past few weeks, the Education Committee has wrestled with trying to repair the troubled school district consolidation law. The Education Department came to the Committee in early December with a bill to fix some of the cost-shift and other technical problems with the law, and it was hoped that this bill, LD 1932, would zip through the Committee, go to the House and Senate floors for a vote in early January, and become law immediately as a so-called “emergency enactor.�

A few things happened along the way, however…

The Alliance for Worker Freedom recently released their brand new study called the 2007 Index of Worker Freedom: A National Report Card. Not surprisingly, Maine earned a C- for worker freedom. Here is what the study had to say about Maine:

"Maine received an IWF score of two out of 10, earning the state a "C-" grade, the third lowest grade. Maine must enact legislation to reform financial protection and basic workers rights."

"Maine must seek to pass right to work and paycheck protection legislation so workers are not forced to pay union dues and that those who are dues paying union members know that their money isn't being used on unwanted political activity."

"Next, Maine's minimum wage is automatically replaced with the Federal minimum wage rate if it is higher than the State level. Maine should use the powers granted to the state in our federalist government and repeal its state minimum wage laws--thus automatically pegging them to that of the federal government, not higher."

"Additionally, Maine state statute gives the authority to either side of a collective bargaining session the ability to request that the session be closed to the public. To ensure transparency and accountability, Maine should seek to repeal its collective bargaining laws."

"Further, in having the 9th highest workers compensation premium at $3.21 per $100 of payroll, Maine is taking money from business owners that could be used for hiring expansions, lowering the price of goods and services, or paying current employees more--all things which lead to a higher degree of worker freedom."

In a recent blog I showed the latest migration data from the Census Bureau showing a net loss of Mainers to other states. Unfortunately, the Census Bureau does not have detailed profiles of those migrants. However, after a little digging, I found this interesting data showing the changes in Maine's population by age between 2000 and 2006. Here are the highlights of the data (click "continue reading" to view graph).

1. For the age categories of those "under 19" and "30s" shows what most folks already know--Maine's young families are declining. The chart shows those two age cohorts have been shrinking by around 3,000 to 4,000 people per year.

2. The fastest growing age cohort are those folks in their 50s. That age cohort has been growing by an average of 7,000 people per year. The second fastest age cohort has been those folks in their 60s.

3. Finally, the most interesting aspect of this data is what it shows about folks who are in their 40s. In 2001, that age cohort grew by 3,000 people, but by 2006 it was shrinking by 2,000 people. This is troubling because folks in their 40s are nearing the peak of their income earning years (they also pay the bulk of taxes too). Their declining numbers suggests that Maine's economy may also be contracting.

While this data does not directly show the age profile of Maine's migrants, in all likelihood such migration is reinforcing the trends shown. As such, it is not much of leap to conclude that young families are leaving Maine and being replaced by older empty nesters. This trend will only exacerbate Maine's aging problem and Maine already has the highest median age in the country. An older population also means lower taxes being paid to government, but more expenses being paid out.

Two articles caught my eye today that highlight the fact that taxes matter:

First, the Wall Street Journal ran a story titled "Moving Across the Country to Cut Costs." (page B4) The article chronicles the reasons why a small industrial-parts distributor moved from Rancho Santa Margarita, CA to Mooresville, NC. The article states: "Now approaching its three-year anniversary in Mooresville, Industrial Motion has 42 employees. Mr. Kozlowski estimates the he pays average wages of between $35,000 and $45,000 per worker, down from close to $60,000 back in California. And he says his 42-person workforce is more mature and better educated. Property taxes are half what the company once paid. Worker's compensation insurance costs just one-tenth as much as its former rate . . ." [Emphasis added] And some folks in Maine say businesses never mention taxes as a reason to relocate?!

Second, an article by the Associated Press on the Portland Press Herald website touts the arrival of Vingtech in Biddeford. But I found this passage telling: "Vingtech also was swayed by tax incentives offered under a state program targeted at areas in need of economic development, the availability of job training, strong support from the City of Biddeford and the influential role of Maine's U.S. senators on defense issues, he said." If taxes do not matter, then why the need for tax incentives? In fact, the state government and local governments all over Maine provide tax breaks, especially the ever popular Tax Increment Financing (TIF) scheme. Must be the classic case of "double-think."

A Letter-to-the-Editor that I had sent into the Portland Press Herald was published today. Also, in response to one of the comments, the 2007 data is technically for July 1, 2006 to July 1, 2007--more similar to a fiscal year rather than a calendar year.

The Portland Press Herald ran a story today about how lawmakers want to close a "loophole" in the corporate income tax that would force Plum Creek to pay more taxes on their proposed development on Moosehead Lake. The article states:

"Legislation submitted this week could make Maine the first state to force real estate investment trusts, including Plum Creek, to pay corporate income tax on windfall profits. The trusts, or REITs, pay little or no tax on income at the corporate level because they pass their earnings directly to shareholders, who pay income taxes in their home states."

This legislation shows a clear lack of understanding about how the tax code works and its effects on the economy. REITs, like Subchapter S Corporations, were a half-hearted attempt by the U.S. Congress to address the issue of double-taxation inherent within the current income tax system. In essence, income is taxed once at the business level and again at the individual level--which is double-taxation. The complete solution is to either repeal the business level tax or the individual level tax. Instead, Congress opted to create various hybrid entities, like REITs and S-corps, that allow business income to flow to shareholders where it is taxed--ONLY ONCE!

While not a perfect way to deal with the issue of double-taxation, REITs and S-Corps, were a step in the right direction. Removing this so-called "loophole" would move Maine's tax code in the wrong direction. This is why Maine would be the first state to remove this "loophole" since everyone else realizes that it is not loophole. REITs and S-Corps are a solution to the bigger problem of corporate double-taxation.

If Maine truly wants to be the first in the nation to enact a law that actually improves the tax code; why not eliminate the corporate income tax altogether and settle the double-taxation issue?