Sunday, June 24, 2007

State of Maine Rejects Overhaul of Tax Code

What a relief! The State of Maine rejected moving the personal income tax code to a flat tax. This was handled by the legislature, and did not need a referendum by the people. Fortunately, the GOP in Maine stood their ground on the goal of lower taxes, now only if they could get Baldacci to cut government spending. Why might the average citizen be against this program? The Devil is in the details.

It sounded like a good idea, Maine would move their tax system to a flat income tax. Deductions would pretty much vanish and be replaced by a tax credit that was valued on a sliding scale depending on a household's income. The plan would have saved the average family $338 in taxes. That is less than $1 a day. It would not even cover a cup of coffee. The wonderful mortgage deduction that so many people use as a justification for a home purchase would evaporate. This would be thousands of dollars in deductions gone. Forget deductions for dependents and medical bills.

A major problem with the plan was that it did nothing to cut spending. Once Mainers knew that, they started to see that this was not a tax cut, just a tax shift. A way to sell Mainers on this plan would have been to cut back benefits or spending of some sort. A comment I heard from Mainers who followed this was that, "their gonna get you one way or the other". Any reduction in spending would have helped increase the flexibility in altering the tax code down. Maine has a problem with capping their spending. The legislature just pushes the burden on working people by squeezing pennies out of them with progressive tax system.

Maine has a rainy day fund, and this is for years when the their is a deficit in tax receipts caused by unforseen events. Maine's rainy day fund was capped to not exceed over 6% of annual expenditures. In recent years, the state government has used it to cover budget shortfalls, but this shouldn't be happening in an expanding economy. Maine's spending has grown out of control, and the government has tapped this rainy day fund to cover its problems with spending. If the state had a real desire to help taxpayers, they could cut a check to people who paid taxes last year (not the welfare recipients of Northern and Eastern Maine). With Maine being the oldest state in the union now, this would have meant that the number of people eligible for a refund check would have maybe been 300K. The rainy day fund has been around $180 million in years past, and spread out over 300K taxpayers, would have been $600. This is almost double the crappy tax changes suggested by the legislature.

This tax shift was not enticing enough to earn taxpayer or GOP support. Mainers know bullshit when they see it, enough tourists from Massachusetts expose them to it each summer. The worst of the details in the state tax reform was the neutral effects of reducing the income taxes recovered by increasing the number of items taxed by the sales tax and increasing the sales tax on certain objects. This would have screwed over many Mainers, as it is a poor state, and just about any economist will tell you that consumption (sales) taxes are regressive. By shifting the tax burden more on sales taxes, this would have made Maine's tax system more regressive. This paper shows how the different state handle taxation, and it highlights how states with flat income taxes or none at all are more regressive. Basic needs for daily life are shared by all people, but when you have a higher income they matter less to you. The legislature was just trying to hurt poor Mainers further. They would have picked up the deficit caused by the tax savings from the upper middle and middle class. Sure, tourists would have made up part of that shift in tax burden, but think about elderly Mainers who would have suddenly paid taxes on basic goods they need to live. This sales tax expansion combined with the removal of all deductions were the fatal flaws in the plan that Mainers noticed.

As a libertarian, I believe in freedom of the individual and limited government & taxation. While these taxes would have reduced the total tax bill for the average citizen by a small amount, it would not have reduced overall tax receipts. It would have not reduced the size fo state government programs. While I do not live in Maine, I do look out for my fellow citizens in these United States. My challenge to Mainers, most of whom probably did not know of this tax overhaul plan, is to hold your state government accountable. Become more involved in what happens around you. Vote the clowns out of office, or better yet, run against the clowns in office.

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