The University of Maine DigitalCommons@UMaine Economic Development Research Economic Development 2002 Tax Policy and Economic Development in Maine: A Survey of the Issue Matthew .N Murray Follow this and additional works at: https://digitalcommons.library.umaine.edu/ mcspc_ecodev_articles Repository Citation Murray, Matthew N., "Tax Policy and Economic Development in Maine: A Survey of the Issue" (2002). Economic Development Research. 8. https://digitalcommons.library.umaine.edu/mcspc_ecodev_articles/8 This Report is brought to you for free and open access by DigitalCommons@UMaine. It has been accepted for inclusion in Economic Development Research by an authorized administrator of DigitalCommons@UMaine. For more information, please contact [email protected]. A Report prepared by Margaret Chase Smith Center for Public Policy Tax Policy and Economic Development in Maine: A Survey of the Issues Margaret Chase Smith Center FOR PUBLIC POLICY Proudly Serving Maine Tax Policy and Economic Development in Maine: A Survey of the Issues Prepared for the MARGARET CHASE SMITH CENTER FOR PUBLIC POLICY University of Maine by Matthew N. Murray, PhD Professor of Economics and Associate Director, Center for Business and Economic Research, University of Tennessee, Knoxville August 2002 Funding for this project was provided by the U.S. Economic Development Administration and the University of Maine. The author would like to thank all of those individuals who have taken time to share their views on tax policy and economic development in Maine. All views remain those of the author. Table of Contents Executive Summary . 5 PART ONE Introduction . 9 PART TWO Taxes and Economic Development . 11 PART THREE A Framework for the Analysis of Tax Structure . 17 PART FOUR Some Facts and Figures on Government Finances . 29 PART FIVE Overview and Analysis of Major State Taxes . 37 PART SIX Conclusions and Discussion . 63 Appendix . 67 Table of Contents 3 Executive Summary THIS REPORT FOCUSES ON TAX POLICY are interwoven and cannot be easily Tand economic development in Maine. addressed in isolation. Separate reports have been prepared as part of a broader project that includes examina- 2. Public policy should be based on well- tion of economic development trends and established goals for the tax system and workforce development issues. The purpose economic development. Tax policy goals of this report is to provide a foundation for should recognize the accepted tenets of discussion and debate of tax policy options a good tax system, including tax fairness; generally and, in particular, those relating to revenue yield, stability and elasticity; economic development in Maine. The work neutrality and economic development; in this report begins with a brief discussion and low costs of administration and com- of the linkages between tax policy and eco- pliance. In practice these goals can be in nomic development. The discussion then conflict with one another, giving rise to turns to the criteria used to structure tax pol- difficult choices for policymakers. icy (known as the requirements of a good tax Similarly, economic development poli- system), state and local revenue trends, and cies—including economic development specific state and local taxes. Extensive refer- incentives—must be based on specific ences to the research literature are offered to goals and must be amenable to evaluation enable the reader to probe more deeply into to gauge effectiveness. specific areas of policy interest. This report is simply the tip of the iceberg. 3. The state should sustain a relatively strong degree of overall tax system elas- Several general conclusions emerge from ticity to allow for maintenance of a strong this report: rainy day fund and to enable investments that are not possible during periods of 1. Tax policy and economic development weak revenue growth. need to be considered in the broader context of state-provided services and 4. Efforts to promote tax fairness should rely state aid, and the structure of local gov- on the personal income tax, not the sales, ernment finances and service delivery. corporate income or property taxes. The The fiscal system of Maine is not trans- personal income tax allows policy to parent to most taxpayers; finances are focus on the specific circumstances of heavily centralized at the state level; households, unlike other taxes. state aid (particularly aid to education) limits the flexibility of state government 5. Greater revenue balance, such as diversi- and there is essentially no local govern- ty in revenue sources, is needed at both ment tax autonomy. These problems the state and local levels. The state relies Executive Summary 5 too heavily on the personal income tax, mensurate with the suggested flat rate on while local governments have no viable personal income. Consideration should alternative to the property tax. also be given to a business enterprise tax, akin to that in New Hampshire, as a More specific recommendations include: replacement for the corporate income tax. Such a policy would expand the busi- 1. Maine’s personal income tax rate struc- ness tax burden to all firms, allow for low ture should be compressed, potentially rates of taxation and provide a more sta- moving to a single flat rate. The current ble flow of revenue. structure includes a rapidly progressive rate structure that can distort economic 4. Efforts should be made to move the sales activity. The rate structure of the person- tax closer to a true consumption tax. To al income tax should mirror that of the the extent possible, business sales tax bur- corporate income tax. dens should be reduced, as the sales tax borne by business exceeds the burden of 2. There appears to be some room to the corporate income tax. Consumer serv- increase selective sales taxes, meaning ices should be added to the base of the the unique rates levied on specific items sales tax to the extent possible. such as alcoholic beverages and tobacco. While these items tend to grow slowly 5. Grocery food should be added to the sales with economy-wide growth, they can still tax base, enhancing revenue yield and be an important complement to the over- stability, increasing tax exporting oppor- all state tax base. Concerns over the tunities, and simplifying administration regressivity of such levies should be and compliance. Relief can be provided at addressed through the income tax. a substantially lower cost through the per- sonal income tax, including refundable 3. Maine has largely mirrored the nation credits for low-income households. with its corporate income tax, adopting a double-weighted sales factor for corporate 6. The state should avoid pressures to income apportionment and enabling lim- reduce the elasticity of the sales tax, espe- ited liability entities. But the evidence cially through tax rate reductions. suggests corporate tax burdens in Maine External forces are at play that are work- have not fallen to the same extent as the ing to lower the performance of the sales pattern for New England and the nation. tax, including the continued growth in Further analysis of this issue is clearly mail order sales, electronic commerce warranted, given the importance of the and the service sector. corporate income tax to economic devel- opment. There is no clear understanding 7. The system of local government finance today of Maine’s corporate tax burden rel- is broken. The historical benefit-property ative to other states, particularly as it per- tax linkage no longer exists. The presence tains to tax burdens for specific sectors of of the Business Equipment Tax the economy and for firms of different Reimbursement (BETR) program, Tax sizes. Consideration should be given to Increment Financing (TIF) districts, cir- elimination of the progressive corporate cuit breakers and homestead exemptions rate structure, moving to a flat rate com- under the property tax, coupled with no 6 Tax Policy and Economic Development in Maine: A Survey of the Issues other local tax instruments of note, com- promises local government’s ability to provide services and its responsibility to be accountable for the same. Consideration should be given to wiping the slate clean and simply lowering prop- erty taxes from their current levels in a revenue-neutral fashion. These issues must be addressed prior to the enabling of additional local taxing authority. 8. Specific options for expanded local taxing authority should be developed. Local options sales taxes and gross receipts taxes are particularly attractive options for con- sideration. Regional tax base sharing, or state aid, should be used to help equalize tax capacity across municipalities. These are some of the more important rec- ommendations that follow from the review of economic development and tax structure in Maine. The full report provides back- ground and a more complete discussion of the issues. Executive Summary 7 PART ONE Introduction LIKE REGIONAL ECONOMIES ACROSS itself leading the nation in combined state Lthe world, the Maine economy continues to and local tax burden, leading to increased undergo rapid transformation and change. pressures for tax reform generally and tax These changes offer the state and its resi- relief targeted to specific taxpayer groups. dents new opportunities as well as new Residents of Maine find themselves asking: challenges. The decline of traditional indus- What went wrong? Some would like to blame tries is encouraging entrepreneurs to look taxes, others might point to location, still oth- in new directions. The emergence of the ers would argue that global competition is World Wide Web enables immediate access the culprit. The reality is that there is no sin- to the global economy and new business gle reason for the dramatic changes taking opportunities. The work ethic of the labor place in the Maine economy, and hence force and quality of life should support new there is no single nor simple solution. business and industry, and help to retain people and families.