October 9, 2008
Waldo County Opinions
Maine’s income tax rate killing the economy
AUGUSTA (Oct 9): In August, Gov. John Baldacci pleasantly surprised us when he announced that reducing Maine’s income tax rates would be a top priority of his last two years in office.
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The governor didn’t explain his thinking, but it’s safe to assume the obvious — he knows that our top tax rate is a major reason our economy is so sluggish.
And when the economy is in the doldrums, so are tax revenues that fund the state’s countless programs. The states that are doing well financially are the ones that tax the least. The high-tax states keep losing jobs, people and voters.
Maine’s 8.5 percent personal income tax rate is one of the highest in the nation. To compound the problem, that top rate kicks in at about $19,000 a year for a single tax filer. In other words, Maine imposes its highest marginal tax rate on people working at just above the minimum wage.
That’s more than unfair; it’s economically foolish. Our high taxes put Maine at a huge disadvantage when it comes to attracting the kind of business investment that creates good jobs. Nine states don’t even have an income tax, including New Hampshire.
Republicans have recognized this problem for years and have offered one bill after another to fix it. Unfortunately, our efforts have always been shot down by the majority party in the Legislature. With the governor now on board for a tax reduction, his legislative allies may feel pressure to follow suit.
Still, it will be tough going. That same party has controlled the Maine House for 34 straight years. During this era of one-party rule, they have created one of the biggest and most expensive medical welfare systems in America. We provide free medical and dental care to 270,000 people — that’s 20 percent of the state population under age 65. It costs taxpayers more than $2.4 billion a year. Moreover, the average Medicaid recipient in Maine costs 90 percent more than the national average for Medicaid clients. That’s a heavy load for our poor state to bear, especially when working Maine families pay the second-highest health insurance costs in the country.
To keep feeding this massive Medicaid system and other welfare programs, the majority party has imposed punishing taxation on Maine residents. We now pay 14 percent of our incomes in state and local taxes, an average of more than $5,000 per person. That’s 27 percent higher than the national average.
Democratic tax policies generally have been disastrous. Thanks to our job-killing taxation, we have a severe shortage of good jobs. Our incomes run $12,000 below the New England average. While creating a huge and growing welfare class, we’ve also driven out many of our best and brightest young people to states that offer better career opportunities and lower taxes. Those young Mainers are the future of our state — and they are leaving.
Maintaining our current tax system virtually guarantees that Maine will remain an economic backwater. We already have the oldest population in America, and the smallest percentage of residents younger than age 18. As the saying goes, demographics are destiny. Unless we take significant action to rejuvenate our economy, Maine will grow older, poorer and less able to afford our enormous welfare programs.
The governor did not get specific about lowering tax rates. Republicans think it’s reasonable to aim for a top rate somewhere near the national average — around 4 percent. Republican Sen. Douglas Smith has already submitted a bill for the next Legislature that would cut Maine’s income tax rate in half over a three-year period.
To pay for such a reduction, state spending must be held to a level Maine taxpayers can afford. The last budget was up $468 million over the previous one, a huge increase during a time of low inflation and low population growth. We also must bring our per capita Medicaid expenditures to the national average. That move alone would save Maine taxpayers $346 million a year, without removing even one person from the Medicaid rolls.
Any actual budget cuts will set off tremendous wailing and gnashing of teeth by special interest groups that feed on tax dollars. But ironically, lower tax rates actually produce higher tax revenues. Lower rates generate increased economic activity — more companies, more jobs, more buying and selling.
When President Kennedy cut taxes, federal revenues jumped 50 percent from 1961 to 1968. Total tax revenues soared by 99 percent after President Reagan cut taxes in the early 1980s. Across the country, governors and state legislatures are currently drafting proposals to repeal their income taxes altogether to promote economic development. Massachusetts and Rhode Island have reduced income tax rates to improve their competitive positions.
A big drop in our tax rate will reinvigorate our economy. It will encourage entrepreneurs to build new companies and create new jobs. It will bring investment into our state. And it will finally get Maine moving again. We can’t afford not to do it, and we’re gratified that the governor is now on board with us.
Rep. Mike Thibodeau, R-Winterport, a first-term legislator, serves on the Legislature’s Utilities and Energy Committee.