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Research & Commentary: Maine “Millionaire Tax” is a Poor Choice to Fund Education

May 8, 2017

In this Research & Commentary, Matthew Glans examines the debate over a “millionaire tax” in Maine.

In November, in an effort to increase education funding, Maine voters approved a ballot initiative – by a narrow margin of 50.4 percent to 49.5 percent – that creates a 3 percent tax on individuals’ taxable income above $200,000. The new revenue is set to be used to create a state fund that will provide direct support for K–12 public education.

The new state income tax substantially increases what is already a high levy on income. Matthew Gagnon, executive officer of the Maine Heritage Policy Center, puts the new tax in perspective in an article for the Bangor Daily News. According to Gagnon, the new top marginal rate of 10.15 percent would make Maine’s personal income tax rate the second-highest in the country.

Maine’s new income tax far exceeds all other states in the region, which makes the economic climate less competitive for new and relocating businesses and people. Massachusetts has a flat tax rate of 5.1 percent; Rhode Island has a top rate of 5.99 percent; Connecticut has a top rate of 6.99 percent; and New Hampshire has no income tax, but it does have a 5 percent tax on interest and dividends.

Gov. Paul LePage (R), whose long-term goal has been to eliminate Maine’s state income tax, has promised to veto any state budget passed by the legislature that does not work to repeal or mitigate the 3 percent tax. LePage has made several major steps during his time in office to improve Maine’s tax competitiveness. 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.

Personal and corporate income taxes are generally considered to be the most destructive taxes because they disincentivize production, innovation, and risk-taking. High income and business taxes deter economic development by discouraging higher-income-earners and new capital from moving into a state, remaining there, or investing their money. A study by the Americans for Tax Reform Foundation found, “Each positive 1 percentage point tax burden differential between states decreases the ratio of income migration into the high-tax state by 6.78 percent in a given year.

A tax designed to “soak the rich” discourages both new capital and wealthy taxpayers from entering the state. Higher taxes drive wealthy taxpayers out of the state, taking their income, capital, and tax revenues with them. The revenue-generating results of taxes targeting higher income citizens have been mixed – many states that increased taxes on the upper brackets, including Maryland, New York, and New Jersey, have allowed their tax hikes to expire. Relying on a fluctuating tax with a small base like a “millionaire tax” can lead to larger budget deficits than with broader and flatter tax systems.

Maine need only look to Maryland to know what the new tax’s effect will be. In 2009, Maryland created a “millionaire tax” projected to raise an additional $106 million. Instead of providing the expected new revenue, by the next year the number of people in the state reporting incomes of $1 million or more fell by one-third. Maryland took in $100 million less from millionaire earners than the previous year, and the state allowed the tax to expire in 2010.

Simply increasing funding is not the solution to improving education outcomes. Maine has seen a dramatic increase in the size of its education budgets in recent years, despite decreasing enrollment. Gagnon found while student enrollment has declined by more than 60,000 students since the 1970s, per-pupil spending has risen by roughly $4,000 since the early 2000s. Spending has increased by 18 percent over the past decade while outcomes have remained relatively flat.

A state’s tax policy should focus on bringing in enough revenue to cover the costs of a state government’s necessary functions, and it should do so in the least economically destructive way possible. Instead of increasing taxes on higher earners, Maine lawmakers should roll back these tax hikes and focus on making the state a more attractive place for businesses and workers.

Increasing funding for education is not the only path states can take to improve the cost of education and educational outcomes. Maine should embrace educational choice and allow education tax dollars to follow each child. This would give Maine families open and equal access to the high-quality schools that more closely fit their needs – all at a lower cost. The competition created in a choice-oriented system improves spending and education outcomes across the board, which should be the goal of any education policy.

The documents cited below examine “millionaire taxes” and their history of failing to shore up state budgets and failing to increase tax revenues.
 

Maine Question 2: Will Maine Claim the 2nd Highest Individual Income Tax Rate in the Country?
https://taxfoundation.org/maine-question-2-will-maine-claim-2nd-highest-individual-income-tax-rate-country/
Morgan Scarboro of the Tax Foundation examines Maine’s “millionaire-tax” ballot initiative and estimates how the hike would impact the state’s economic-competitiveness ranking. “As states try to foster economic growth through business-friendly tax environments, they should keep in mind that individual income taxes should be considered alongside corporate income tax rates. This tax increase would ultimately make Maine less competitive, giving Maine the highest top marginal individual income tax rate in the Northeastern region of the country,” wrote Scarboro.

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.”

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.

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.”

The Number of Millionaire Tax Returns Fluctuates Every Year; Millionaire Status is Fleeting
http://taxfoundation.org/blog/number-millionaire-tax-returns-fluctuates-every-year
http://taxfoundation.org/blog/millionaire-status-fleeting
Scott Hodge of the Tax Foundation presents two charts that show millionaire status is both temporary and fluid, many taxpayers only achieve the status once in their life, and the number of millionaires fluctuates based on the business cycle. All this makes millionaire taxes an unreliable source of revenue.

Should We Raise Taxes on the Rich?
http://spectator.org/archives/2012/11/14/should-we-raise-taxes-on-the-r
Peter Ferrara, senior fellow for entitlement and budget policy at The Heartland Institute, writes in the American Spectator about “taxing the rich” and explains why such policies make no fiscal sense.

Long-run Macroeconomic Impact of Increasing Tax Rates on High-Income Taxpayers in 2013
http://heartland.org/policy-documents/long-run-macroeconomic-impact-increasing-tax-rates-high-income-taxpayers-2013
This report from Ernst & Young conducted on behalf of the Independent Community Bankers of America, the National Federation of Independent Business, the S Corporation Association, and the United States Chamber of Commerce examines the long-term impact of an increase in top income tax rates.

The U.S. Tax System: Who Really Pays?
http://heartland.org/policy-documents/us-tax-system-who-really-pays
Writing for the Manhattan Institute, Stephen Moore examines popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness, addressing these statements and debunking attendant myths. He provides useful information on how the rich are taxed and how much they contribute.

Rich States, Poor States
https://www.alec.org/publication/rich-states-poor-states-10th-edition/
The tenth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams examines the latest movements in state economic growth. The data ranks the 2017 economic outlook of states using fifteen equally weighted policy variables, including various tax rates, regulatory burdens and labor policies.

Seven Myths About Taxing the Rich
http://heartland.org/policy-documents/seven-myths-about-taxing-rich
Curtis S. Dubay of The Heritage Foundation considers seven commonly cited myths about policies to tax the rich. Dubay argues raising taxes on the rich would increase the progressivity of an already highly progressive tax code. It also would damage economic growth by stifling job creation, further slowing already stagnant wage growth. Although some see raising taxes on the rich as a silver bullet for fiscal woes, it actually badly damages the economy, he writes.
 

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 and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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Article Tags
Taxes
Sub-topic
Taxes: Income Tax
Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.