Maine Rejects Tax Reform Measure

June 9, 2010

Maine voters have rejected the income tax and sales tax reform by a wide margin. Business Week is reporting a 61% to 39% vote to pass the referendum, which asked, “Do you want to reject the new law that lowers Maine’s income tax and replaces that revenue by making changes to the sales tax?”

As a quick refresher for those not following Augusta politics, Maine passed legislation last year that reduced the income tax from 8.5% to 6.5% for individuals earning under $250,000. It was initially designed to be one flat rate but the governor insisted on a second rate of 6.85% for high-income earners. In order to pay for this reform, the sales tax of 5% was expanded to a number of different services. Additionally, the meals and lodging tax was raised from 7% to 8.5%.

The Tax Foundation reported positively on the ideas in the initial reform. The governor’s changes weakened the bill, but it was still viewed as net a positive step for the state. The sales tax base was expanded in order to reduce the rate on the income tax.

A number of Mainers (probably 39% of the state) are wondering what went wrong. There are a number of things that added to the defeat of the efforts. First, the governor weakened the proposal by adding a high-income earners’ tax and exempting some of the services being taxed. Second, the reform went after tourists in an attempt to export a greater fraction of the tax burden. Since Maine relies heavily on tourists’ revenue, this would negatively impact a major industry. Third, the reform was designed to be revenue neutral when it actually ended up slightly increasing revenue. Fourth, the ballot was a bit confusing. Since the reform had gone into effect, a “yes” vote was a vote to overturn the reform, and a “no” vote was a vote in favor of the reform. This is no hanging chad.

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