Tax Reform Deal Jeopardized by Myths, Fear of Change

The obstacles to Maine tax reform illustrate almost perfectly the seeming impossibility of achieving bipartisan political solutions.

People say they want political cooperation to produce positive results, but then refuse to support compromise and insist on keeping their positions.

When it comes to tax reform in Maine, such positions may be based on opinion not supported by fact.

That same attitude is one reason why legislation dealing with the deficit, guns, immigration, or health care, all sorely needed, cannot get past deadlock in Washington.

This year, independent Sen. Richard Woodbury, a highly qualified economist, led a group of Democrats and Republicans to come up with a set of tax reform proposals that are both balanced and sensible.

They demonstrated just the kind of bipartisan cooperation that voters overwhelmingly say they want, but are not getting.

In brief, the proposed tax package does two things.  It would move Maine more into the mainstream of state taxation.  And it would take advantage of changing state characteristics, with emphasis on taxing tourists and catering to the state’s older population.

Maine ranks near the top in income tax rates, and it taxes the income of average people heavily.  If politicians want to do something for middle-class taxpayers, as they frequently say they do, then the best thing they can do is cut tax rates that target them.

Of course, the state would lose a lot of revenue if it cut the income tax.  The only other place to make up the loss is the sales tax, where Maine’s rate is low.  Maine ranks 43^rd out of 50 states.

A sales tax increase is the key to tax reform.  But doing anything about the sales tax means facing the myths surrounding it.

The proposal calls for an increase from five percent to six percent.  And it would put more items under the sales tax than now are covered.

Other states with six percent and more items covered produce no evidence that these factors cut the volume of sales or harm lower income people.

In fact, Maine has had a six percent sales tax without a significant impact on sales.  And its sales tax covers about 25 of the 168 items that other states may include.

Merchants resist tax reform, because they believe that they will lose sales.  They say that going up one percent would hurt them.  It simply stands to reason, they say.

Economic research finds no evidence that a one percent increase in the cost of consumer goods has such an effect.

Would thousands of Maine men trek across the border to New Hampshire, with no sales tax, to get their haircuts just to save about 78 cents – the added cost of the sales tax?

On the other hand, tens of thousands come to Maine to vacation.  They would pay the higher sales tax.  And they would pay a higher lodging tax also set in line with other states’ rates.

The proposals have something for each party.

The Republicans would see the end of the inheritance tax or, as they call it, the “death tax.”  The state would lose relatively little income and could reasonably expect some of its wealthy retirees, who now leave to avoid that tax, to stay home.  And there would be a flat income tax rate of four percent.

The Democrats would get tax breaks for lower-income people to cushion the effect of the change in the sales tax.  And everybody would get a bigger break on property taxes with the homestead exemption going to $50,000.

As the economy changes over time, the tax system needs to change along with it to ensure that the right people are paying.

Those who claim taxes will increase probably fear some of the tax burden will shift from others to them.

For example, in the United States the sale of services has skyrocketed compared with the sale of goods.  But Maine’s sales tax continues to focus mainly on automobiles and building supplies.

Tourism has become the state’s biggest business.

And Maine, which has become the state with the highest median age, drives away the many of the most affluent older people.

The changes in the economy since Maine’s tax rates were adopted suggest that there’s no way to know exactly what will happen to revenues if the bipartisan proposal were put into effect.  But it would be more fair.

In effect, Woodbury and his Republican and Democratic colleagues have called the bluff of those who demand bipartisanship. 

Do we really want compromise – in either Augusta or Washington?