State of the State: Maine

Governor Paul LePage’s State of the State noted Maine’s progress in lowering income taxes, reducing the budget gap and bolstering the Budget Stabilization Fund. Unfortunately, two recently passed referendums—one dramatically increasing the personal income tax rate and the other hiking the minimum wage—threaten any recent progress. The governor proposed solutions to both.

Targeting Maine’s burdensome tax rate, the governor proposed counteracting “the damage from the 10.15 percent income tax.” This 4th highest rate in the nation represents an enormous 3 percentage point jump thanks to the November 2016 referendum. The governor called for a flat 5.75 percent income tax by 2020 with the ultimate goal of complete elimination. He also proposed lowering corporate income taxes eliminating the estate tax, and broadening the sales tax base. These reforms align with the “10 Golden Rules of Effective Taxation” articulated in the annual ALEC publication Rich States, Poor States. The governor noted that “eliminating the income tax is the biggest pay raise Mainers could get,” but he also bemoaned the lack of “political will to promote prosperity in Augusta.”

Lower personal and corporate income taxes are essential to enhancing Maine’s economic competitiveness. Currently, the Pine Tree State ranks 38th in economic outlook, far worse than New Hampshire’s 23rd place ranking. With the 10th highest corporate income tax and 14th highest personal income tax, it’s no surprise that the vast majority of states enjoy sunnier economic outlooks. Raising taxes will chase away more wealthy individuals and small businesses, potentially lowering revenue collected as a result. Indeed, after personal income tax rates dropped to 7.15 percent, tax revenue actually increased.

The governor hammered the recently passed referendum to increase the minimum wage. As drafted, the governor explained the hike will “wreak havoc” in Maine by harming employees, restaurants and small businesses. To mitigate the damage both to businesses and jobs seekers, the governor proposed a more modest increase. Although well-intentioned, the elevated minimum wage threatens to price many young Mainers right out of the market as more experienced workers are lured to some more typically lower-paying entry level jobs by these artificially inflated wages.  Elderly Mainers on fixed incomes also stand to be negatively impacted as prices on goods and services will rise along with the increase in labor costs.

On the education front, the governor pressed for funding reforms and waste reduction, along with spending a greater proportion of funds on classroom instruction. Presently, only 59 percent of education funding reaches classrooms, significantly less than the national average of 64 percent. As data in the annual ALEC publication Report Card on American Education indicates, simply expending more dollars on public education does not translate to better results. An emphasis on reforms such as expanding education choice and enforcing prudent academic standards often prove more important to ensuring a quality education for schoolchildren.

Under Governor LePage’s leadership, Maine’s economic outlook has improved from 48th in 2011 to 38th in 2016. But the tax hike and minimum wage increase threaten to roll back all of the recent progress. The governor recognizes this economic peril. His economic agenda address the problems created by the twin referendums from this fall. The outcome depends on whether or not state legislators heed his warnings.