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The Past, Present, and Future State of the Maine Income Tax

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The state of Maine ranks below the national average in regard to business climate, taxation policies, and even economic growth. But Governor Paul LePage thinks he knows one way to turn things around: the elimination of Maine’s income tax.

A Brief History of the Maine Income Tax

Maine once mirrored neighboring New Hampshire: no income or sales taxes. But in 1913, when a federal constitutional amendment established an income tax, Maine officials decided to follow suit. There was hope that the new tax would relieve residents’ high property taxes, which were one of the state’s few sources of revenue. But voters, who had the final say on amending the Maine Constitution, turned it down in 1920. Another attempt in 1949 also fell short, but the state, then under solid Republican control, approved a sales tax two years later.

The effort to introduce an income tax continued, however, and eventually passed in 1969 by a GOP-controlled State House and signed by Gov. Kenneth Curtis, a Democrat. An effort to repeal it two years later via a voter-initiated referendum question failed by a sweeping 75-25 percent margin.

Maine Lags Behind No-Income-Tax States

States without an income tax have been more prosperous than Maine, which has continued to encourage calls to reform its tax system. Maine’s neighboring state, New Hampshire, has a similar population (about 1.3 million), but the Tax Foundation reports that Maine comes in at the 9th highest income taxing state, with top brackets taxed at 7.95 percent, while New Hampshire, which taxes a flat rate of 5 percent on interest and dividend income only, ranks 32nd.

A 2013 Forbes article noted that “Maine’s growth since the 2000 census has lagged behind New Hampshire’s by more than 2.5 percentage points (4.24 percent vs. New Hampshire’s 6.88 percent).”

These statistics, along with business climate rankings that put New Hampshire at 7th in the nation and Maine at 33rd, have led Gov. LePage to propose the elimination of Maine’s income tax by the end of his second term of office, which will expire in January 2019.

As Forbes noted, LePage is in a hurry to follow in the steps of states like Florida and Texas, which have both seen tremendous job growth. Maine has also lost residents, and with them, adjusted gross income (AGI). According to How Money Walks, from 1992 to 2011, Maine lost $826 million in AGI to the state of Florida, $47 million to Nevada, and $31 million to Tennessee — all states without a personal income tax.

Gov. LePage Fights to Eliminate the Maine Income Tax
Since his re-election last November, LePage has submitted a budget that he thinks is the first step toward his major goal. He would trim the top tax rate to 5.75 percent, increase and broaden the sales tax (from 5.5 to 6.5 percent), and reduce revenue sharing to Maine communities.

With the Legislature split between a Democrat-controlled House and a GOP Senate, his plan has encountered opposition. However, it also has significant support among the voters who put him into office for a surprising second term.

Whether or not this plan will succeed is in question. But Maine’s future prosperity may hang in the balance.