Economics
Times Record "Sustain Maine" op-ed series
Maine's Tax and Spending Priorities: A Sustainable Development Perspective
October 25, 2002
David Vail
Christopher St. John
Taxes and government spending are headline news this election season. A $240 million gap must be filled in the state's current budget and a $1 billion shortfall looms in the coming biennium. Signatures are being collected for two competing property tax limitations and an income tax reduction initiative. And the Republican gubernatorial candidate promises to slash taxes 20% in five years.
Despite these immediate pressures, we urge that state and local fiscal systems be viewed from a sustainable development perspective. We start from the UN's widely cited definition: "Sustainable developmentcmeets the needs of the present without compromising the ability of future generations to meet their own needs."
Maine's current tax and spending mix short-changes "needs of the present" in two main ways: first, for low income Mainers who have shared little of the past quarter-century's prosperity; and second, for service center communities that provide services to residents of surrounding towns without access to their tax bases.
Lower income Mainers suffer doubly: economic inequalities have widened and state/local taxes are regressive. The bottom 30% of households pay considerably more of their income in taxes than their higher income neighbors. We support two precisely targeted measures to redress this inequity. One is strengthening the state's property tax circuit breaker so that households below median income pay at most 4% of their income in property tax. Groups like elders on fixed-incomes, low income renters, and middle income lobsterers with heavily taxed shorefront property would benefit.
The second measure reforms an income tax provision, the earned income tax credit (EITC). Under EITC, low wage workers with dependents receive federal tax rebates up to $3,500 and pay no Maine income tax. (The current earnings threshold is $32,500 for a family of four). The federal EITC is a cost-effective tool for lifting working people and their children out of poverty. Making Maine's EITC refundable, say at 30% of the federal level, would go far to redress the combined regressivity of sales, excise, and property taxes.
To ensure the vitality of revenue-strapped service centers, we propose channeling more non-educational revenue sharing to municipalities with exceptionally heavy property tax burdens (mil rates above 15 per $1,000 valuation). And state school funding should focus on enabling every district to offer essential services to all students, with special consideration for higher cost areas and students. These measures, together with a vigorous anti-sprawl strategy, will enhance both communities' near term solvency and long term sustainability.
Maine's great future challenge is not to cut taxes, but to generate adequate revenue for key public investments that sustain economic prosperity and for crucial public services that sustain our dispersed and ageing population. Of course, the state must continue to invest in transportation, communications and technology. But by far our most important — and expensive — investment is in the next generation of productive citizens. Maine's educators, parents, and kids have done a remarkable job to achieve top national ranking in K-12 education. But in the "knowledge economy," a diploma doesn't guarantee quality employment opportunities — just 67% of today's jobs pay a livable wage.
We face an enormous challenge to put many more young people through all types of post-secondary education programs. The 2000 Census shows just 23% of Maine adults with a BA or higher degree, compared to 33% in affluent Massachusetts. Indeed, a sustainable economy offering many more quality jobs also requires more investment in re-skilling adult workers for continuously changing job demands. Sadly, Maine businesses' investment in training is declining.
Of course sustainable economies depend on buoyant private sector investment and entrepreneurship. Business advocacy groups, armed with studies, contend that Maine's economic dynamism is stifled by a high overall tax burden and especially the 8.5% top income tax rate and the property tax on business equipment.
Equally plausible studies question whether Maine's business tax burden, properly measured, is really excessive and cast doubt on taxes' centrality in individual and business decisions. Most importantly, they stress the "public goods" businesses receive in return for taxes, such as a skilled, motivated workforce and a quality transportation network. We are convinced that the benefits from public investments justify the tax burden.
Finally, it is time to begin applying a first principle of sustainable development: tax "goods" less and tax "bads" more. Work and investment are good for Maine's economic health, while vehicle traffic causes three bads -- pollution, congestion, and accidents — that spill over to society at large. A Resources for the Future study suggests that a gas tax of roughly $1.00/gallon would capture these social costs. Currently we pay 40 cents/gal ($.18 federal and $.22 state).
A modest 10cent/gal increase would begin to encourage fuel-efficiency, improve air quality, and reduce accidents, while generating nearly $80 million/year in revenue. In the near term that could fund Maine's backlog of highway projects. But for the longer term, we'd propose a constitutional amendment allocating some fuel taxes to alternative transportation and other infrastructure. A true environmental tax reform would use added fuel taxes to reduce rates on "goods" like work and investment: perhaps and investment tax credit and a bigger personal income tax exemption.
Maine's next governor and legislature will face intense pressure to resolve the budget crisis and respond to squeaky wheel demands for property and business tax relief. We urge them to keep sight of sustainable development principles and needs.
David Vail teaches economics at Bowdoin College and is a member of House Speaker Saxl's Tax Reform Advisory Committee. Christopher St. John is executive director of the Maine Center for Economic Policy.