Mainers deserve tax reform, not more one-time Mills gimmicks
Since the summer of 2021, Maine Policy Institute has been calling for lawmakers to use high projected revenues to pay for systemic tax reform, instead of putting the money toward gimmicks like one-time relief checks. Once again this debate is renewed with another proposal from Gov. Janet Mills to use excess projected revenue for another round of direct checks to Mainers.
Back then, politicians decried that they couldn’t cut taxes because we couldn’t be sure if the money would be there in the future—despite all signs pointing to persistent inflation.
Looking back, it was obvious that inflation would continue, and that in doing so, it would drive higher revenue forecasts. Some may say that hindsight is 20/20, but the signs were there. An explosive amount of federal deficit-spending over 2020 massively increased the money supply without commensurate production. Economics 101 dictates that massive inflation would follow. The Congressional Budget Office (CBO) reported in September 2021 that every 1% increase in inflation brings a 1.1% increase in income taxes.
Nowadays, it is abundantly clear that the State of Maine is taking in more than it needs, and has been for over a year. Last December, the Revenue Forecasting Committee (RFC) predicted about 10% more revenue could arrive in state coffers over both this biennium and the next. This trajectory has sustained. In November, the Consensus Economic Forecasting Commission (CEFC), on whose report the RFC bases its projections, noted that General Fund revenues were actually 11% higher-than-expected in Fiscal Year 2022, which ended in June, and are on pace to be 9.2% higher in Fiscal Year 2023. Much of the excess is projected to come from income and corporate tax receipts.
Income taxes make up about half of all General Fund Revenues, funding about 16% of all state government operations. Today, for a single filer, Maine currently collects 5.8% on income earned up to $22,200, 6.75% on income between $22,200 and $52,600, and 7.15% on income above $52,600, after deductions.
Getting rid of the income tax entirely, while it would seriously upgrade Maine in terms of regional competitiveness, would require significant cuts to state spending. A smaller, more targeted proposal would cost much less to implement.
Mills’ current “winter relief” package should go toward tax reform, just like last year’s surplus spending should have. Exempt from tax all income earned for a single filer up to $50,000 per year. If lawmakers heeded this call, they could have saved the average household about $300 per year in direct income tax payments. While this may seem small, the ancillary benefits to the local economy would have greatly magnified those savings by delivering greater purchasing power for Mainers, an important economic metric by which the state significantly lags its neighbor New Hampshire.
This type of middle-class relief would bring about $145 million less to the General Fund per year. Current estimates say the state will end this fiscal year with $288 million excess revenue, and will bring in $488 million excess revenue over the 2024-25 biennium. This would be a modest reform.
If lawmakers and Gov. Mills moved swiftly to exempt all individual income earned up to $50,000 per year from taxes, middle-class households and small business owners could plan for better futures. They could plan on how to relocate to Maine, start a business, or find better housing. Nobody plans their life on a one-time check from the state.
Short-term thinking has consequences. Homemakers and businesspeople understand this. Why don’t politicians?