Maine ranks 33rd in business tax climate. Here’s what lawmakers can do to improve next session.

Source: Tax Foundation

On Thursday, the nonprofit Tax Foundation published its 2022 Business Tax Climate Index, a ranking of the 50 states by their various taxes: personal income, corporate earnings, sales, property, and unemployment insurance (UI) taxes. This year, Maine placed 33rd overall, from 29th last year, 33rd in 2020, and 30th in 2019.

Neighbors Massachusetts (34th), Rhode Island (40th), Vermont (43rd), and Connecticut (47th) weren’t far behind. Per usual, the regional standout is New Hampshire, taking sixth place overall. Wyoming, South Dakota, Alaska, Florida, and Montana made up the top five.

In the last seven years of the Index, the only portion of the index in which Maine has cracked the top 10 is for sales tax. This is due to a broad base of taxable goods, no additional local sales taxes, and the fifth-lowest rate in the nation at 5.5%. On certain services such as telecommunications, Maine levies a 6% “Service Provider Tax” instead of the sales tax.

Maine ranked 43rd for corporate taxes because it’s home to the sixth highest top rate in the nation (8.93%), in addition to multiple income brackets which are not indexed to inflation, leading to simultaneously higher taxes and reduced consumer purchasing power.

Source: Tax Foundation

As for property taxes, no state in New England or the northeast scores well in the Index. The states which score the worst combine high property tax rates with other taxes on capital stock. As the authors note, “states with the highest effective rates and therefore the worst scores are New Hampshire (5.47 percent), Vermont (5.12 percent), New Jersey (4.98 percent), Maine (4.61 percent), Rhode Island (4.47 percent), and New York (4.41 percent).” 

This may be due in part to the unique nature of governance in the region which relies on municipal-level decision-making to raise revenue for public services like schools. That being said, none of these states—save for New Hampshire—score well on the index overall.

For a state with the 33rd-highest median household income, oldest median age (and getting older), and a stagnant population, Maine can do much more to drive sustainable growth. These historical factors, combined with pandemic and lockdown related stress and a depressed workforce, makes for a perfect storm of economic dependence on a federal government which is digging itself deeper and deeper into debt.

But, hope is not lost. Maine people have an enormous opportunity to change their economic trajectory. With the state projected to take in nearly 10% more in revenue than expected according to the Revenue Forecasting Committee, lawmakers and Governor Mills should put this new revenue toward real tax reform, directly back into Mainers’ pockets year after year. They can choose to make an historic investment in the state’s long-term growth by cutting taxes for every single person who lives and works in Maine.

Let’s do the math. Taxpayers are estimated to deliver more than $820 million more to the state’s coffers than anticipated in both this biennium and the next. That’s about $410 million per fiscal year. For perspective, income taxes make up a much larger portion of state revenue at around $1.8 billion, and corporate taxes make up less than $250 million per year.

In other words, lawmakers could repeal all state corporate taxes with about 60% of this extra revenue, sending a clear signal that Maine is indeed open for business, now and into the future. Or they could instead use the entire surplus to cut all corporate and personal income taxes by 20% across the board.

Lawmakers owe it to their constituents to fight today’s record inflation by any means possible. One way to help those most affected by inflation is to permanently raise the amount at which the state taxes wages. A simple move to raise the lowest bracket from $21,050 to $50,000 earned by a single filer in a year would completely cut income taxes for more than half of filers while costing the state an estimated $150 million per year.

Say lawmakers wanted to incorporate this idea but they also wanted to craft a more competitive tax environment with Massachusetts and its flat 5% income tax. The remaining $250 million of new revenue per year could fund lowering rates to 5% for income earned between $50,000 and $100,000 per year, and 6.5% for the highest bracket beginning at $100,000 earned per year. The current revenue projection shows that this is possible for the next four years, the end of the committee’s projection period, delivering about $400 million back to Maine people (and away from government coffers) every year.

While conservatives and libertarians might like this idea, there are reasons for progressives to embrace it as well. As it does today, Maine would tax higher income earners at higher rates than lower earners, plus it would give every Mainer earning up to $50,000 a 100% income tax cut. 

With an eye toward fiscal sustainability and tax competitiveness, Governor Mills and legislators can easily put together a package that lifts all Mainers and charts a course for a future of growth.