Why are Maine Republicans endorsing an income tax hike?
In 2023, Maine Policy Institute advocated for a bill that would have originally reduced income taxes for all Mainers called LD 1231, “An Act to Bring Fairness in Income Taxes to Maine Families by Adjusting the Tax Brackets.” The bill accomplished tax cuts for all by marginally reducing the rates in all three of Maine’s income tax brackets. It would have lowered the highest income bracket from 7.15% to 7%, the middle tax bracket from 6.75% to 6%, and the lowest bracket from 5.8% to 5%. It is important to note that the original bill benefited everyone, including middle and high-income earners, especially because Maine is still the New England state with the highest marginal income tax for earners under $100,000.
But legislators on the Taxation Committee amended the bill to complicate and shift tax brackets rather than cut rates for everyone. Instead of lowering the rates for all Mainers, they just raised the cutoff for the existing tax brackets and added a new tax bracket that increases income taxes for high earners up to 8.45%, turning a bill that had the goal of reducing taxes into one that does the exact opposite.
The bill also creates a nonsensical 7.55% bracket partway through the 7.15% bracket in an attempt to offset the tax benefits the lower bracket shifts would give any person who earns more than $144,000. While reducing the tax burden on working-class Mainers is a laudable goal, Republicans in the legislature should oppose this change and insist on returning the bill to its original design.
Some more left-leaning arguments say that increasing the tax burden on the rich allows the state to provide more public benefits to the lower and middle classes, but this reasoning only works if you think in a vacuum. Vermont is the only New England state with a higher maximum income tax rate than Maine already, and our southern neighbor New Hampshire has no state income tax. Maine should be working to attract income to our state, and the research shows that high-tax states drive away high-income people. The higher we raise our taxes, the faster we drive away this entire tax bracket. We simply can not tax people who don’t live here anymore or never choose to settle here in the first place.
Recently, a century-long study was published in the American Economic Journal on the impact high taxes have on interstate migration. This study unsurprisingly found, using data from just after World War II and going up to 2010, that states with state income taxes experienced “significant outmigration to states that did not have the income tax.” While Maine has had a recent population increase, growing our income tax will reduce this inflow. We should be working as a state to encourage people to move here, but our legislature is now trying to do the opposite.
While LD 1231’s supporters have asserted that it will increase the progressive nature of Maine’s taxes and focus the tax burden on the upper class more, the group that would benefit the most from the bill would not be those with low incomes. The group that would benefit the most from this tax cut would be individual filers making just short of $144,000, whose taxes would be cut by more than $250. Meanwhile, individual filers who make $40,000 would only save $147 annually.
Reducing the tax burden on lower-income Mainers is something that the legislature should do, but this bill does not efficiently do that. Maine is facing a massive surplus, so it doesn’t need to shift the burden of taxes to a different group to offset a tax cut. Additionally, while reducing taxes is generally good policy, the strangeness of the 7.55% bracket structuring unfairly targets certain higher earners while benefiting others. When someone begins making above $205,000 their marginal tax rate would actually go down, which makes this scheme both a progressive and regressive tax at the same time.
Mainers need lower taxes, but simply lowering tax rates like the bill originally did would help them fare better than the policy mess that is LD 1231. It’s hard to understand why eight Republicans in the House endorsed this bill, and why an additional roll call wasn’t ordered on the enactment vote.
This bill has now passed in both chambers, but there is still hope that Governor Mills won’t raise and complicate our taxes in a period of massive surplus and will veto this bill. It would be a good opportunity for her to actually make good on her no-tax pledge.