The Smart Money: Cui Bono?

Posted Wednesday, January 28, 2015 in Analysis

The Smart Money: Cui Bono?

by Gina Hamilton

The budget presented to the Legislature by Paul LePage has some goodies for the usual suspects — the wealthiest among us and corporations — and for a few others, too, including senior citizens and veterans.

Specifically, his budget proposes an income tax decrease for the highest bracket, benefitting the top 1 percent the most, to be balanced by sales tax changes that would tax more services and increase sales tax on most goods. Corporate taxes would also fall.

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LePage also envisions phasing out revenue sharing to the towns, without a clear way for towns to make up the funding. His main notion, taxing nonprofits, has been a nonstarter in the Legislature every time it has been tried. The sales tax increases may also go nowhere, since the Republican majority in the Senate is opposed, and the last time the Democrats passed sales tax reform, it was soundly defeated in a people’s veto before it went into effect.

Income tax is the most progressive tax we have, because it increases as a percentage as income increases. The highest rate we have in Maine is currently 7.95 percent, and it begins at a ridiculously low amount — about $ 22,000 for a single filer. But rather than adding additional brackets that would provide support to relatively low income workers and the middle class, the LePage budget instead drops the bracket entirely over several years to 5.75 percent, whether the worker is making $22,000 or $2 million.

Because income tax is progressive — the highest marginal rate only affects the filer when he or she crosses a particular threshold — income tax is a way to help the working and middle classes even out their tax burden as a percentage of their entire income. Some taxes burden the poor far more than the rich; for instance, payroll taxes, which go to fund Social Security and Medicare, abruptly stop being collected after $116,000 of income. Other taxes are income-blind, such as property tax, sales tax, use fees, excise taxes, tolls, and so on.

By decreasing the amount of income tax paid by the highest earners, the income- blind, or regressive taxes, will have to make up the difference, and those are the taxes that will hurt the poor the most. For example, consider the case of a worker earning $21,000 in Maine and paying the lower income tax of 6.5 percent on his entire income after his exemption. His state income tax is lower; after his personal exemption and standard deduction he pays about $680 in income taxes, about 3.25 percent of his income. Assume he owns a small home and pays property tax on it, or pays property tax through his rent, $3,000 per year. Assume he pays an excise tax on his car of $300 per year. He has a dog and buys a dog license from the town for $10. He pays sales taxes on clothing, fuel taxes on gasoline, tolls to get to work or school, to the tune of $500 per year. His total tax burden to the state is $4,490, or 22 percent of his total income.

Now consider the case of a man earning $81,000, paying the top bracket of 7.95 percent. His income tax burden is higher — about $5,477 per year. He owns a house, too, and it is bigger. He pays $6,000 in property tax, $400 in excise tax for his car, $10 for his dog, and $700 in sales taxes. His total tax burden to the state is $12,587, but the percentage of his income that pays that burden is 15.5 percent.

Even with the lower income tax burden, the poorer person pays a much larger percent of their income in taxation. But the income tax, which is somewhat progressive, attempts to keep things a little fairer than what would happen if there were a flat tax. If both men were paying 5.75 percent in income tax, the percentage the poorer man would pay would decrease to 21 percent, but the percentage the richer man would pay would fall faster — to 13.8 percent of his income.

That’s assuming all things being equal, but they wouldn’t be, because part of the budget is to increase sales taxes, and to leave the municipalities no choice but to increase property taxes, both of which would hit the poorer person harder than the richer person.

In addition, LePage’s plan would strip homeowner’s exemptions from the tax code, and limit Property Tax Fairness plans and the Homestead Exemption to seniors and veterans only. Seniors would be able to shelter $20,000 as part of the Homestead Exemption. Veterans’ pensions would be tax free.

There is nothing wrong with trying to help seniors and vets, by any means, but Maine has the oldest population in the country, and incomes for many of Maine’s working poor are woefully below living wage. The shift in tax burden from the elderly, vets, and the wealthy, to the backs of the working poor and middle class, increases the likelihood that the middle class and working classes will be less able to shoulder the load as the population ages.

In addition, the LePage plan eliminates the estate tax, which is borne by a tiny, wealthy minority, since it only kicks in when property values reach more than $2 million. There may be the very occasional family farms or coastal properties, long held by families, where the value of the property outstripped the family income, but those unique situations could be handled in other ways. Instead, the wealthiest Mainers who did not do any estate planning will be able to pass their estates entirely to their descendants. The hit to the state coffers would be about $12 million annually.

The question of who benefits from LePage’s budget is not hard to answer. We’ll look at some specific numbers next week.

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