Earlier this week, Maine politicians reacted with surprising unanimity to the TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation’s new State & Local Tax Burdens report. Governor John Baldacci (D) and Republican and Democratic leaders in the state legislature all acknowledged that Maine’s personal income tax, with a rate that tops out at 8.5%, is too high and needs to be cut.
Gov. John Baldacci said Monday he would propose lowering Maine’s personal income taxes in the January session of the Maine Legislature, but how much depends on the state budget now being developed…
Baldacci said the recent Tax Foundation study that ranked Maine as having the 15th-highest tax burden did note the personal income tax rate in Maine is among the highest in the nation and contributes to the overall tax burden.
“They were right not to include property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es paid by out-of-staters, but they were also right to point out our high income tax rate,” he said. “I was concerned about that last year and I am concerned about that this year.”
This year, improved data availability enabled us to apportion property taxes to the home states of property owners. This reduced Maine’s calculated burden, as many vacation homes in the state are owned by non-residents, and commercial properties are often owned by corporate shareholders all over the country. Maine’s #15 ranking is a significant decline from rankings issued before we could apportion the property taxes.
Commendably, Maine lawmakers appear to be responding constructively to the report and looking to improve their tax code. Instead of taking the ranking drop to mean that they didn’t have a tax problem, they realize that Maine remains in the top third of burdened states and could particularly benefit by cutting its income tax.
Maine’s 8.5% is the seventh-highest state income tax top rate, exceeded only by California, Iowa, New Jersey, Oregon (which has no sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. ), Rhode Island, and Vermont. Maine compares particularly poorly to its closest competitor states: Massachusetts has a flat, 5.3% income tax, and New Hampshire imposes no tax at all on wage income. And most Maine taxpayers do pay the 8.5% rate, which kicks in at just $18,250 of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. for a single filer.
One aspect of the report about the tax changes is troubling:
Baldacci declined to say whether he has a target for reducing the income tax, or whether he will propose reducing the 8.5 percent maximum rate or seek to reduce the taxes Maine residents pay by other adjustments to the tax code. For example, increasing either the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. or the personal exemption levels would reduce the amount of income tax a person pays, even if the person still pays taxes at the 8.5 percent rate.
The best way to improve Maine’s individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. would be to cut rates, particularly the top rate. Expanding deductions and exemptions (increasing the amount of income taxpayers get to exclude from taxes) would reduce Mainers’ tax bills, but it would not generate many of the economic benefits that come from cutting tax rates. Particularly, it would leave most workers’ net marginal wage rates—the earnings they receive net of taxes for an extra hour worked—unchanged. By contrast, rate cuts would raise net marginal wage rates, reducing distortions against work.
Furthermore, Maine is already relatively generous on the deduction/exemption side, offering the full standard deduction and nearly the full personal exemption used for federal income tax. Only a handful of states set higher deductions and exemptions, while many states set lower ones. As such, increasing its standard deduction and exemption would just set Maine further out of step with most states.
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