Tax Reform

Tax reform was relegated to the back burner in Augusta in 2008. The Taxation Committee had made some progress the year before, and House Speaker Glenn Cummings indicated in January that the work would continue, with or without the Governor's blessing. "If that has to begin in the Legislature," Cummings promised the Portland Press Herald, "then it will begin in the Legislature." But he did not say when, and he said "begin," not "end." With Cummings now termed out, the work will fall to someone else.

Below is a laundry list of items that deserve consideration in 2009:

Local property tax. Previous ballot initiatives suggest that many Mainers feel excessively burdened by property taxes. LD 1 was passed in 2005 to limit the rate of growth in government budgets. At one time Governor Baldacci was ready to follow along with LD 3, which would freeze the valuations of primary residences. This would help protect older folks on fixed incomes who have trouble keeping up with rising real-estate values. It would also relieve municipalities and the Bureau of Taxation of the huge burden of re-calculating valuations every year.

Severely curtailing the property tax, however, would be self-defeating. Property taxes pay for essential municipal services, and voters in most Maine towns control the burden directly either by referendum or through town meeting. The process of approving a budget is perhaps the only exercise remaining that makes the town a town. It is a chance for citizens to prioritize and evaluate, to share ideas and agree on goals.

Personal property tax. Municipalities should have the option to abolish this tax. Smaller towns in particular have a hard time collecting it: they rely on property owners to report faithfully their taxable inventory and often lack the expertise to assess what is reported. To be fair and consistent, towns must periodically hire appraisers to make the rounds to value and depreciate equipment, an intrusive procedure that hardly ever pays for itself.

Larger towns and cities with substantial business investment will want to keep taxing personal property. Let them. All local assessments will continue to count toward a municipality's State Valuation. Towns who opt out (and some already have) will see their State Valuations reduced accordingly. This will result in a shift in municipal revenue-sharing away from the towns that keep the personal property tax toward the towns that abolish it. Locally the shift will bring more to bear on owners of real estate. To the degree that the local personal property tax is phased out, the State's exposure to the Business Equipment Tax Exemption Program (BETE) will be reduced.

State income tax. Drop the rate by 1% for individual incomes under $100,000 (or joint incomes under $200,000).

Sales tax. To pay for the cut just above, the sales tax can be raised from 5 to 6% and extended to some goods and services that are now exempt.

Use Tax. Get rid of it. Better named the "useless" tax, it generates more resentment than all the others combined. To apply a hypothetical consumption profile to all taxpayers across the board is completely arbitrary; some will pay too much, some too little. Of course, taxpayers have the option of documenting their out-of-state purchases, but who wants to save all those slips? Meanwhile, the state has to spend money in litigation defending this tax on big-ticket items brought into the state by vacationers. Ridiculous.

Fuel tax. No problem here--user pays. This tax best captures the burden to the infrastructure posed by vehicle weight and miles driven. The trick is to make sure that collections are dedicated to the highway fund and not pilfered for something else. Proposals to waive this tax for the summer are just plain irresponsible. Pay-at-the-pump has also been suggested as the fairest way to collect auto-insurance premiums, but that may be a discussion for another time.

Snack tax. I'm for it, as long as collections are dedicated to a related public purpose. Empty calories are just killing us, in more ways than one.

Corporate income tax. Keep depreciation schedules aligned with federal guidelines. If Congress wants to reward business investment by accelerating depreciation write-offs or by allowing businesses to expense rather than depreciate, then Maine should jump on board--eagerly. The Governor's idea to "decouple" Maine's rules, thereby requiring companies to compute and carry forward two different depreciation schedules for the same piece of equipment, is short-sighted.

Fair Tax? This is a national issue, but let's have the discussion anyway. Fair Taxers propose eliminating the federal income tax and replacing it with a national sales tax. Not only would the income tax go away (and the filing headaches that go with it), but so too would payroll taxes, estate taxes, and taxes on corporate profits. Instead, consumers would tack on 30% to everything they purchase.

Now 30% may sound hefty, but it would apply primarily to discretionary spending. Subsistence spending would be covered by a per-person "prebate" provided by the government. Besides, 30% is the minimum that a self-employed person is already paying in combined income (at least a 15% marginal rate) and Social Security and Medicare taxes (the latter adding to 15.3%). For people who do not borrow to spend, the tax swap is a wash. For those who save some of what they earn, the Fair Tax is better.

A consumption tax with prebate is more progressive than our current tax system, which wealthy folks have learned to game. Much of their income is reported as capital gains, which are taxed at 15% and are not subject to the same payroll taxes taken from wage-earners. But why even realize capital gains? The rich can borrow cash, using their assets as collateral, at a rate far lower than 15%. Nice work, if you can get it.

What economists have to say about government intervention can be summed up briefly. If you want less of something, tax it; if you want more of something, subsidize it. It would follow, then, that the Fair Tax would lead to more production and less consumption, an outcome that would begin to repair our personal and collective balance sheets.