In January, Maine Gov. Paul LePage (R) proposed a new tax reform plan that would move the state further toward his goal of eliminating the state income tax. In 2011, LePage successfully oversaw the adoption of a tax reform package that cut the top individual income tax rate from 8.5 percent to 7.95 percent.
The cornerstone of LePage’s tax reform plan is cutting the personal income tax rate from 7.95 percent to 5.75 percent and reducing the corporate tax rate from 8.93 percent to 6.75 percent by 2021. The number of tax brackets would increase from three to four, and personal income tax rates would be reduced across all income levels. Although the plan lowers rates, it also makes the income tax more progressive by exempting the first $48,000 of income for a family of four and creating a “bubble” bracket that, once fully phased in, will tax income of $50,001–$175,000 at 6.5 percent.
The plan flattens the corporate income tax, eliminates tax carve-outs and preferences favoring specific industries and activities, taxes nonprofits, and reduces the top corporate tax rate from 8.93 percent to 6.75 percent by 2021. LePage also proposes repealing the state’s corporate alternative minimum tax (AMT), which currently applies to 5.4 percent of federal alternative minimum taxable income. Maine is one of only eight states with an AMT.
These reforms would make Maine’s business climate more competitive. Many economists consider corporate income taxes to be the most destructive tax, stunting economic growth by taking dollars out of the hands of businesses and stifling production, innovation, and risk-taking, the main factors driving economic growth. LePage’s plan eliminates carve-outs in the tax code by removing special preferences in the corporate income tax code, and it limits property tax exemptions. LePage’s plan also addresses spending by eliminating state-local revenue sharing and strengthening state spending limitations.
Maine currently has a narrow sales tax base that exempts many goods and nearly all services. To offset some of the reductions in state income tax revenue, LePage’s plan would broaden the sales tax base and increase the tax rate by 1 percentage point.
The reform plan would phase out and repeal Maine’s estate tax by increasing the exemption from $2 million to $5.5 million in 2016 and removing the tax completely in 2017. Estate taxes are a form of double taxation that stifle investment and entrepreneurship, reduce economic growth, discourage savings, increase the cost of capital, raise interest rates, and raise relatively little revenue.
According to the Tax Foundation, LePage’s plan would result in a tax cut of $267 million per year by fiscal year 2019. The plan is expected to be fully phased in by the start of calendar year 2021. The Tax Foundation says if the plan is fully implemented, it will improve Maine’s ranking from 33rd to 23rd in the Tax Foundation’s State Business Tax Climate Index.
Lowering income taxes dramatically improves a state’s economy while generating new jobs. Maine should strive for a broad-based, non-distorting tax system with low rates. LePage’s tax reform plan would move Maine in the right direction.
The following articles examine income tax reform from multiple perspectives.
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.”
Tip Sheet: State Income Tax Reform
http://heartland.org/policy-documents/tip-sheet-state-income-tax-reform
This Policy Tip Sheet from The Heartland Institute examines state income taxes, documents economists’ judgment of them as the most destructive tax and a deterrent to economic development, and provides data showing states with no income tax perform better economically and enjoy greater job and population growth than those with higher taxes.
Maine Gears Up for a Serious Tax Reform Conversation
http://heartland.org/policy-documents/maine-gears-serious-tax-reform-conversation
The Tax Foundation critiques Maine Gov. Paul LePage’s tax reform proposal, which is now up for conversation in 2015: “Among other provisions, the plan would lower top individual and corporate income tax rates while broadening tax bases, expand the sales tax base to some services while exempting business inputs, raise the sales tax rate while providing a refund for low-income taxpayers, and repeal the state’s estate tax.”
Governor Paul LePage Calls for Elimination of Maine’s Income Tax
https://www.atr.org/governor-paul-lepage-calls-elimination-maines-income-tax
Paul Blair of Americans for Tax Reform commends Gov. Paul LePage’s tax reform proposal and recommends Maine adopt it and his plan to fully phase out the income tax.
Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The sixth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
Institute Brief—No Income Tax: The Key to Economic Growth
http://heartland.org/policy-documents/institute-brief-no-income-tax-key-economic-growth
The Public Interest Institute documents how states with no income tax are doing compared to those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.”
Personalizing the Corporate Income Tax
http://heartland.org/policy-documents/personalizing-corporate-income-tax
In a Fiscal Fact article, Gerald Prante and Scott Hodge discuss the effect of corporate income taxes on individual households. They write, “Examining income groups, Chamberlain and Prante found that low-income households pay more in corporate income taxes than they pay in personal income taxes. Geographically, households in largely urban congressional districts and metropolitan areas bear a disproportionate share of corporate income taxes today and, thus, would receive a significant boost in living standards if the corporate tax burden were reduced.”
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 identify the least-costly and least-economically damaging ways governments can extract tax revenues in order to improve economic performance.
State Income Taxes and Economic Growth
http://heartland.org/policy-documents/state-income-taxes-and-economic-growth-0
Barry W. Poulson and Jules Gordon Kaplan explore the impact of tax policy on states’ economic growth within the framework of an endogenous growth model. The authors used regression analysis to estimate the impact of taxes on economic growth in the states from 1964 to 2004 and found higher marginal tax rates significantly inhibit economic growth.
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 subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state; or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Nathan Makla, Heartland’s state government relations manager, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
