Pine Tree Beat

As Maine’s state government grapples with budget shortfalls in the Department of Health and Human Services budget and a recent lawsuit aimed at rolling-back necessary pension reforms, the calls for higher taxes on Maine’s beleaguered private sector will grow louder. However, policymakers must resist the siren call for higher taxes as Maine’s tax burden is significantly higher than commonly believed.

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The standard methodology for calculating tax burdens is to divide total state and local (S&L) tax collections by total personal income. This method is flawed because personal income includes both private and public sector sources of income. This distinction between the two sectors is important because only the private sector creates new income.

The public sector can only redistribute income through taxes and spending. More specifically, public sector spending consists of personal current transfer receipts (Medicare, Medicaid, Social Security, etc.) and government employee compensation (federal, state and local).

As shown in Chart 1, under standard tax burden calculations, Maine’s S&L tax collections as a percent of personal income was 11.7 percent in Fiscal Year (FY) 2009. Nationally, the tax burden was 10.5 percent.

However, as previous research has shown, Maine’s private sector as a percent of personal income was a dismal 63.9 percent in 2010—the 12th smallest private sector in the country.[1] In the long run, this matters to overall economic well-being since, on average, a 1 percentage point increase in the size of the private sector yields an increase in household income of $2,561.

Therefore, a more appropriate measure of Maine’s tax burden is using S&L tax collections as a percent of private sector personal income. Under this measure, as shown in Chart 1 and Table 1, Maine’s tax burden soars to 18 percent of private sector personal income in FY 2009—the 6th highest in the country and the highest in New England. In fact, Maine’s tax burden as a percent of private sector income is 54 percent higher when measured as a percent of personal income (11.7 percent versus 18 percent).