Neutrality for All

September 1, 2009

An editorial ran yesterday in support of a referendum to repeal Maine’s tax reform effort under the title- Wrong place, wrong time for Maine tax.

It’s tough for small business owners just over the New Hampshire border in Maine. They compete for that customer dollar with a state that has no sales tax and often watch as Mainers seep over the border for everything from a loaf of bread to major appliances. Maine ranks No. 40 among states for the worst business climate, according to the nonprofit Tax Foundation.

A quick refresher on the Maine’s tax reform: the legislature lowered the income tax rate and reduced the number of brackets from four to two. The revenue-neutral reform expanded the sales tax base to include a number of services. Both of these should be considered positive steps for Maine and, if fully implemented, will likely lead Maine out of the bottom 10 states on the State Business Tax Climate Index.

The first major part of the reform, lowering the rate on the income tax and moving to a flatter rate structure, is a fairly non-controversial move. This will lower the distortions created by the excessively high rates.

The second part of the reform, expanding the sales tax base, is a bit more controversial. Many on both the right and left don’t understand this issue fully. A consumption tax, of which a retail sales tax is one type, should attempt to tax as large a swath of consumption as possible and this consumption should only be taxed a single time. In general, the legislature should not decide what industries should be selected for taxation and which should be exempt. In doing so, the legislature can pick business winners and losers. The success of a business is best left to the market. The editorial board seems to already internally understand this point when it stated that unfairness is associated with certain exemptions:

Notably missing from this list are golf courses and ski resorts, which were exempted after owners raised a stink.

My question is why should lectures and the theatre be exempt if books and dvds are not?


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