Research & Commentary: New ‘High Income’ Tax Would Make Maine Less Competitive

Published July 1, 2016

In an effort to increase education funding, Maine voters will soon consider a ballot initiative that would create a 3 percent tax on individuals’ taxable income above $200,000. The new revenue would be used create a state fund that would provide direct support for K–12 public education. The state is required to hit an annual education funding target of 55 percent for the state’s share of the total cost of funding public education, a target it has failed to achieve; the new tax is designed to achieve this funding target.

The new tax substantially increases what is already a high tax 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. In the piece, Gagnon argues under the new rate of 10.15 percent, Maine’s taxes would be second-highest in the country. Only California, with a tax rate of 13.3 percent, would be higher.

If passed, Maine’s income tax would far exceed all other states in the region, making 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.

A tax designed to “soak the rich” is likely to discourage 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.

Opponents of the new tax argue education spending has grown at an unsustainable rate, with administrative costs crowding out necessary funding for students and fair compensation for teachers.

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.

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.

Instead of increasing taxes on higher earners, Maine lawmakers should focus on making the state a more attractive place for businesses and workers, a goal that would best be accomplished by restraining spending, lowering tax rates, and reducing unnecessary regulations.

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. Educational choice 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 end 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 revenue.
 

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.”

Taxing the Rich Will Bankrupt Your State
https://heartland.org/publications-resources/publications/taxing-the-rich-will-bankrupt-your-state
John Nothdurft of The Heartland Institute explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.

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.

Trend #1: “Millionaires’ Taxes”
http://taxfoundation.org/article/trend-1-millionaires-taxes
Joseph Henchman of the Tax Foundation examines the millionaire tax trend in this Fiscal Fact article. “A number of states have enacted high income taxes on those with large incomes. Although nicknamed ‘millionaires’ taxes,’ they have hit income at much lower levels. The trend seems to have petered out although California and Maryland may see further action,” Henchman writes.

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
https://heartland.org/publications-resources/publications/long-run-macroeconomic-impact-of-increasing-tax-rates-on-high-income-taxpayers-in-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
http://www.alec.org/publications/rich-states-poor-states/
The ninth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.

Seven Myths About Taxing the Rich
https://heartland.org/publications-resources/publications/seven-myths-about-taxing-the-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 subject, visit Budget & Tax News at https://heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.

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