Policy Documents

Research & Commentary: Maine Tax Reform

May 15, 2013

Lawmakers in Maine have proposed a comprehensive tax reform plan that would cut the state’s personal and corporate income tax rates, increase sales taxes, change how property taxes are determined, increase “sin” taxes, and eliminate the estate tax. The bipartisan group of legislators sponsoring the bill, known collectively as the “Gang of Eleven,” claim their proposal would create a net revenue increase of $160 million.

The bill, An Act to Modernize and Simplify the Tax Code, would replace the state’s current three-bracket income tax with a flat tax of 4 percent and a 0 percent rate on very low incomes. Nearly all income tax exemptions would be eliminated. Two refundable income tax credits would be created to alleviate the impact of high property and sales taxes on low-income Mainers. The proposal also would eliminate the state’s estate tax. That would help promote savings and investment.

The state’s corporate income tax rate would be reduced from 8.93 percent to 7.5 percent. Many economists consider corporate income taxes to be the most destructive tax because they take dollars out of the hands of businesses and stifle production, innovation, and risk-taking, the main factors driving economic growth.

The plan would broadly expand the sales tax base, applying the tax to nearly all purchases by eliminating exemptions such as legal and real estate services and necessity items such as groceries. Health care and education purchases would remain exempt. The sales tax on general merchandise would increase one percentage point, from 5 percent to 6 percent.

The tobacco tax would almost double, from $2.00 a pack to $3.50, and the beer and wine excise tax would double. These “sin taxes” are notoriously unreliable and shrinking sources of revenue. Cigarette taxes are highly regressive, with 95.8 percent of tobacco expenditures being made by consumers earning less than $150,000 a year.

Although several of these reforms are positive, the proposal as a whole represents a significant tax hike that would increase the size of government. According to Americans for Tax Reform the Maine tax reform package amounts to a $700 million tax hike.

Maine’s tax rates are already higher than those of its immediate neighbor New Hampshire, and increasing them any further risks additional damage to Maine’s economic competitiveness while failing to solve the state’s budget problems.

The following documents provide additional information on the Maine tax proposal and tax reform in general.


Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

Scott Moody on Tax Reform Options in Maine 
http://taxfoundation.org/podcast/scott-moody-tax-reform-options-maine
Maine Heritage Policy Center CEO and former Tax Foundation Senior Economist J. Scott Moody discusses the  tax reform plan unveiled by a group of 11 Pine Tree State legislators. The so-called “Gang of Eleven” plan, chiefly written by state Sen. Richard Woodbury (I-Yarmouth), would cut some tax rates but raise others, resulting in a net tax increase in the state. Moody is critical of the plan and advises focusing on spending discipline until a revenue-neutral (or revenue-negative) reform plan becomes an option. 

Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
http://heartland.org/policy-documents/research-commentary-top-ten-reasons-not-raise-tobacco-taxes
Heartland Institute Government Relations Director John Nothdurft contends targeted tax increases serve only to push sound fiscal policies and real budget reforms to the public policy back burner. Legislators concerned with the public health effects of tobacco should encourage the use of readily available smoking cessation products and services, instead of supporting bad tax policy.

Taxpayer Group to Maine Legislature: Reject The Gang of Eleven’s Massive Tax Hike
http://atr.org/taxpayer-group-maine-legislature-reject-gang-a7593#ixzz2TCt3Z9tB
Instead of focusing on the reduction of state spending, the Gang of Eleven’s tax “reform” package significantly increases the Maine sales tax base and rate, Americans for Tax Reform observes: The tax reductions in the bill “are outweighed by hundreds of millions of dollars of tax hikes. This bill is a $700 million tax increase. Tax increases are not tax reform.”

Sin Taxes: Size, Growth, and Creation of the Sindustry
http://heartland.org/policy-documents/sin-taxes-size-growth-and-creation-sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, the taxation of selected goods as a source of general budget revenue contradicts the standard Pigouvian social welfare argument. Second, the economic burden of sin taxes falls disproportionately on low-income households. Third, the expanding number of goods being taxed in this way results in unproductive preventive and defensive lobbying by the affected industries. 

Sweeping Maine Tax Reform Proposal Announced
http://www.jdsupra.com/legalnews/sweeping-maine-tax-reform-proposal-annou-85501/
This article from JD Supra Law News examines the Gang of Eleven’s proposed overhaul of Maine’s tax system, including major changes to the individual and corporate income tax, property tax, sales tax, and estate tax. The stated goal of the overhaul is to export more of the state’s tax burden to nonresidents, thereby reducing the tax burden on Mainers and attracting individuals and businesses to the state. If enacted, the overhaul would have significant changes for Maine businesses, the article states.

“Gang of Eleven” Lays Out Comprehensive Tax Reform
http://www.memun.org/public/MMA/svc/SFR/Publications/LB/2013/5-03-13.pdf
The Maine Municipal Organization describes the Taxation Committee’s task of cobbling together a three-dimensional tax restructuring proposal out of the many one-dimensional tax structure bills submitted during the 2013 session.

Research & Commentary: Estate Taxes
http://heartland.org/policy-documents/research-commentary-estate-taxes
Matthew Glans of The Heartland Institute examines estate taxes, their effects on the economy and investment, and current proposals for reform. Glans argues estate taxes are a form of double taxation that stifles investment and entrepreneurship, reduces economic growth, discourages savings, increases the cost of capital, raises interest rates, and brings relatively little revenue. Lowering the estate tax or eliminating it completely would create jobs and promote savings and investment while removing government penalties on individuals who saved for the next generation.

Research & Commentary: The Best and Worst Ways to Eliminate a Budget Deficit
http://heartland.org/policy-documents/research-commentary-best-and-worst-ways-eliminate-budget-deficit
John Nothdurft identifies some of the most and least effective and economically advisable ways states use to trim their budget deficits. 

Tax Efficiency: Not All Taxes Are Created Equal
http://heartland.org/policy-documents/tax-efficiency-not-all-taxes-are-created-equal
Jason Clements, Niels Veldhuis, and Milagros Palacios examine how governments can extract tax revenues in the least costly and economically damaging manner in order to improve economic performance.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News Web site at http://news.heartland.org/fiscal, The Heartland Institute’s Web site at www.heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or mglans@heartland.org.