The Most Ambitious Tax-Reform Plan of 2015 comes from Maine Governor Paul LePage
At the heart of the proposed legislation is a cut in income taxes; Mainers would see their state tax obligation fall from 7.95 percent to 5.75 percent. Understanding that tax cuts cannot exist in a vacuum, LePage crafted a plan that would offset the income tax cut by increasing the state sales tax by a percentage point.
LePage knows better than anyone that Maine must remain competitive. He need not look further than neighboring New Hampshire to see how a state with no income tax grows and thrives. New Hampshire consistently siphons working wealth from states with high income taxes (over a span of less than two decades, it gained $3.23 billion from Massachusetts alone); for 2015, the Tax Foundation ranked New Hampshire among the top-ten state business climates while Maine languishes in 33rd place.
The income tax is “becoming an obsolete form of taxation,” LePage told reporters this month, adding that “[Maine is] not only not competitive nationally and internationally, we are not competitive in New England.”
In addition to reducing the state income tax for individuals, the LePage plan would reduce the top corporate tax rate from 8.93 percent to 6.75 percent by 2021. It would also take the well-being of lower-income families into consideration, by completely exempting the first $48,000 of income for a family of four from the state income tax. LePage is also proposing the elimination of the estate tax and the tax on pensions, which may entice wealthy retirees declare Maine residency and summer in Bar Harbor rather than Key West.
LePage understands that income taxes are far more destructive to growth than taxes on consumption, so his idea to swap a lower income tax for a slightly higher sales tax is a good one. (Government estimates based from the LePage plan would give Maine workers $176 million more from their own incomes, while the State would collect $219 million in revenue from consumption taxes.) A recent op-ed in the Maine newspaper Morning Sentinel praises LePage’s plan and condemns the income tax, stating: “It rewards buying but not earning. It lets tourists off the hook. And, it produces a never-ending roller coaster ride for government whenever there’s a dip in the economy.”
That most unpleasant roller-coaster ride can be avoided with the implementation of LePage’s plan; as my coauthors and I found when researching our book An Inquiry into the Nature and Causes of the Wealth of States, up to two-thirds of a state’s revenue volatility (over a 10-year average) is reduced by shifting towards a consumption tax system.
The current plan is a logical one, and the governor’s ideas for the future are even more ambitious. One of LePage’s goals for his new tax package is to demonstrate that Maine could eventually cut its income tax to zero. “I believe Maine would be much better off without an income tax,” the governor told the Maine Real Estate and Development Association earlier this month.
This approach to tax reform makes sound economic sense and withstood the scrutiny of a Maine Sunday Telegram analysis. With a headline reading “LePage Plan Will Reduce Tax Burden for Most Maine Workers,” the newspaper’s analysis forecasted “a significant benefit from the income tax reductions.” What’s more, the Tax Foundation estimates that Maine will jump up ten spots in the tax-climate rankings after full implementation of the LePage plan. Within the next few years, the Governor LePage’s ideas could result in a major net win for the entire state. Maine voters deserve to see the positive job changes for which Governor LePage campaigned.