The tax reform plan currently proposed by Gov. Paul LePage would change Maine’s tax system to one that has consistently failed to produce the claimed results at the national level and in several states. The primary results of the federal income tax cuts enacted during the 1980s and 2000s have been a massive increase in our national debt and greatly increased income inequality across American society, a process repeated at the state level in the past decade. Both outcomes have reduced the stability and efficiency of our economy and greatly contributed to the 2008 financial crisis.
A review of similar efforts across the country shows that it is extremely difficult to replace the revenue sacrificed by income tax reductions. The federal government and the states that have tried this are now struggling with large budget shortfalls, which they are addressing by reducing expenditures for education, social services and highways.
Kansas is the latest jurisdiction to experience fiscal difficulty after it enacted a large income tax cut in 2012. In the most recent fiscal year, each month has produced less revenue than anticipated – a shortfall of $280 million is expected for this year and more than $600 million for the fiscal year that begins in July. Kansas also has experienced credit rating downgrades, and the level of job creation has not increased; in fact, for the period 2012-14, job creation lagged behind previous levels.
Gov. Sam Brownback has been forced to make large cuts to the education budget and the highway system. A recent court ruling declared that the education system is underfunded, and two school districts now plan to close schools earlier than previously planned. Brownback is now considering a package of consumption taxes to make up some of the lost revenue, effectively transferring the tax burden from the wealthy to the middle class.
Before he initiated the cuts to the income tax, Brownback could have looked at other similar efforts. In Wisconsin, Gov. Scott Walker has initiated $2 billion in tax cuts since 2011, resulting in a revenue shortfall that has forced a delay to bond payments and a reduction of $300 million for the university system. Louisiana has experienced the same fate after income tax reductions and business incentive tax breaks were enacted. It now faces a $1.6 billion shortfall. This is after large cuts to the education and health services budgets, sectors that are in line for further cuts. Less-than-anticipated job growth has not made up the gap. Pennsylvania is confronted with a $3 billion budget gap after tax reductions four years ago and is scrambling to find solutions today.
Now, consider what has happened in Minnesota. When he came into office in 2011, Gov. Mark Dayton inherited a $6.2 billion deficit, a 7 percent unemployment rate and an economy that had created only 6,200 new jobs in the previous eight years. Dayton increased the top income tax rate by two percent (now 4th highest in the country) and is increasing the state minimum wage to $9.50/hour by 2018. Despite predictions that businesses would leave the state, 172,000 new jobs have been created in the last four years, reducing the unemployment rate to 3.6 percent. The current budget shows a surplus of $1 billion and Dayton plans to put a third of that into education. Coincidentally, Minnesota is now ranked 9th in the country for business climate by “Forbes” magazine.
The plan put forward by LePage would shift the tax burden from the wealthy to the middle class and have a detrimental effect on income inequality in Maine. Despite having per capita income below the national average, Maine does reasonably well regarding income inequality. That, however, is changing. Data from the U.S. Census Bureau show that in the period 2009-13, income for the middle quintile (20 percent) of Mainers declined by 5.8 percent, but for the top quintile, income grew by 2.2 percent. This compares with national averages of minus 4.3 percent for the middle quintile and growth of 0.4 percent for the top quintile. Maine’s position as a relatively egalitarian state is eroding.
The current tax reform proposal will only compound that trend by putting more money in the pockets of the wealthy and taking more money from the middle class in increased property and sales taxes.
This will have a negative effect on the state’s economy because most people will have less money to spend. The driver of an economy is not how much money the wealthy have to invest, it is how much money the middle class has to spend. Businesses hire people in response to demand so that they can satisfy that demand, not simply because they have more money.
The missing piece of the governor’s plan is how to make up for the lost revenue (income tax revenue comprises about half of the state’s revenue). Increasing property taxes will transfer the burden to those at the middle and lower end of the economic spectrum. Taxing nonprofits is a dangerous idea. Other states have considered it, but none have adopted it. Maine does not need to be the guinea pig for this risky policy.
In 1980, tax cuts for the wealthy were identified by George H.W. Bush as voodoo economics for a good reason. They have not worked as advertised at the national level, nor have they worked in Louisiana, Wisconsin, Pennsylvania, Minnesota and Kansas. They won’t work in Maine.
Clyde “Buck” Jardine is a resident of Bar Harbor.
Chad Smith of Bar Harbor also attached his signature to this piece.