There has never been a more urgent time for tax reform in Maine

By Matthew Gagnon

Tuesday we received word that — once again — state economists are projecting additional, unexpected revenues, giving lawmakers in Augusta even more cash to play with than the already-existing surplus had afforded them this session.

The additional $108 million this year represents the latest in a repetitive pattern that has occurred since the onset of the pandemic. First, an initial state government projection of revenue expectations arrives, outlining what Maine expects to be collected into the state treasury over the next several years. After some time has passed, an updated report is issued that notes higher-than-expected revenues, and higher projections for future years. Then, the governor and state lawmakers, seemingly gleeful at their unending good fortune, decide what they want to dump that money into and congratulate themselves for “investing” in Maine. Finally, we return to the beginning of the cycle and start over.

Gov. Janet Mills and her allies in the Legislature like to credit their “sound” fiscal management for the existence of these windfalls. To hear them tell it, the explosive budget proposals they have made have been “balanced, prudent, and responsible,” and their “investments” are responsible for an ultra-productive economy that is showering them with fiscal rewards.

Not quite.

Nearly every state in the country — well-run, and poorly run alike — has experienced record revenue in the past several years, with most states ending Fiscal Year 2023 in surplus due to those revenues. This has occurred in Democratic-run states like Connecticut and Illinois, which had general fund surpluses of $745.9 million and $726 million last year, respectively. It also occurred in Republican-run states like Mississippi and Ohio, which reported excess revenues of $699.6 million and $994.2 million. It has even happened in divided government states like Kansas and Kentucky, where surpluses of $25.9 million and $1.4 billion occurred.

High tax and low tax states. Big spenders and frugal tightwads. Adept, efficient administrators and inept, even corrupt hacks. Surpluses are everywhere, regardless of who is in charge.

The reason is primarily due to inflation. 

Higher prices for products mean that the same rate of taxation will pull in additional revenue just from the price hike. If an item used to cost $100 four years ago, the state would collect $5.50 in sales tax at the time of purchase. That same item today is likely to be almost 20 percent more expensive, meaning that the tax collected on the sale of the same item would be $6.60. Multiply that change across all commercial activity in the state, and you obviously see significant increases in revenue. 

It goes far beyond that, though. The higher prices mean additional revenue coming into corporate entities that are selling products, which of course increases the corporate tax collections. This was what state economists said was behind this specific surplus announcement, for instance.

As prices continue to rise — and make no mistake, they are still rising, increasing by a higher-than-expected 3.2 percent in February — consumers have a harder time affording their homes, transportation, and food. Naturally, they respond to this by seeking higher pay with their employers. Those employers, staring at a historic worker shortage that has given workers negotiating leverage, have been accommodating these requests, resulting in a significant increase of median household income over the last four years. These higher incomes result in not only higher tax collections overall, but many people moving in higher brackets, increasing the rate of tax their income is subject to. 

The point being, the self-reinforcing impact that inflation is having on citizens and state budgets has been producing record revenue everywhere, which represents a subtle, hidden and escalating tax on Maine people. It is ironic (and frustrating) that state government is effectively rewarded at a time when individuals are feeling increased financial pressure. 

Which is perhaps the best reason why Maine government needs to finally, for once, pass some kind of structural, permanent, and meaningful tax reform, and offset the effects of the “inflation tax.”

State government has not only record revenue, but a statutorily maximized rainy day fund, and has as much flexibility as it will ever have to bring down rates and make Maine more competitive. 

There has never been, and probably never will be a better time to do this. If Mills and the Democrats in Augusta refuse to do this now — as their ideological kin in other states have chosen to do — then it is clear to me that they never will.

Gagnon of Yarmouth is the chief executive officer of the Maine Policy Institute, a free market policy think tank based in Portland. A Hampden native, he previously served as a senior strategist for the Republican Governors Association in Washington, D.C.

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