Free ME frees whom exactly?

By Robert W. Glover, University of Maine

The Maine Heritage Policy Center (MHPC) recently released a report that calls for a trifecta of sorts. It proposes the elimination of the state income tax, the corporate income tax, and the state sales tax in the most economically distressed counties in the state of Maine (with an eye towards extending this program to all of Maine). The “Free ME” proposal is offered as a measure that will “free” Maine, lessen “government dependency,” and “turbo-charge” our economy.

Beyond the rhetoric, however, is there anything to suggest that we should actively consider such an extreme measure? The short answer is an emphatic no. I’ll explain why.

The Free ME proposal is framed by the MHPC as a mere extension of the logic behind the state “Pine Tree Development Zones” (PTDZ) program—an initiative that supports reduced taxes in exchange for quality job creation in vital economic sectors. The problem, according to the MPHC report, is that current incentives “do not pack enough economic punch” and so we must extend this program to all individual and corporate income taxes, as well as the sales tax.

However, that’s not really a claim we can make with any certainty. The problem with the PTDZ has been that the state program lacks the accountability and transparency necessary to determine whether these tax-based incentives are actually having an impact. Independent audits of such incentivized tax cuts, including the PTDZ, have found that the programs suffer from woefully inadequate reporting and accountability with regard to stated objectives. Far from the programs “not packing enough punch,” we simply don’t have mechanisms in place by which we can adequately assess their “punch.”

So the preliminary issue is that the premise of the MHPC plan, that incentivized tax cuts are a sound foundation for economic growth that ought to be expanded to their “full potential,” is flawed. We simply can’t say whether these programs have been successful, or whether their expansion is warranted.

But the flaws in logic run much deeper than this. MHPC CEO J. Scott Moody recently took to his blog to tout the benefits of the proposed plan and defend it against its detractors. In that post, Moody was responding to a dismissal of the plan by Garrett Martin of the Maine Center for Economic Policy. Martin had argued that the plan would drastically decrease the level of state revenue available for schools, roads, public safety and other vital public services.

Moody holds up New Hampshire, which has no sales tax or income tax, as a model to which Maine should aspire. He states, “…as you can see, New Hampshire proves that economic prosperity, thanks to lower tax burdens, provides enough money to fund basic government services without creating government dependency.”

Ok. Then how does it fund them? Lo and behold, New Hampshire has the third highest property taxes in the country, generating $3.2 billion dollars collected at both the local and state level. It’s not that New Hampshire doesn’t tax in order to provide those fundamental services. It’s that they tax different things. Instead of taxing high incomes, they tax property (and do so extensively). And, as any resident of New Hampshire can tell you, the state also makes up for its lack of income and sales tax through endless nickel and dime “fees.” It’s a lot like the discount airlines that may charge you a lower fare but make you shell out $25 for a pillow and a blanket.

Viewed in this light, the Free ME proposal begins to look more like a regressive tax shift than a tax cut. And it’s one that would be particularly dangerous to initiate in Maine, where the profile of rural poverty means that many impoverished families may own property, but exist dangerously close to poverty line. Shifting revenue collection to increased property taxes would be hitting those Mainers least able to afford it.

It should be noted that New Hampshire also extensively taxes corporations with a corporate income tax, and additional  “Business Profits” and “Business Enterprise” taxes. New Hampshire does not follow the disastrous path of eliminating the corporate income tax that Moody and the MHPC propose. In fact, it does quite the opposite.

Oliver Wendell Holmes once said, “I like to pay taxes. With them, I buy civilization.” Maybe we can’t all muster the enthusiasm that Holmes had for paying his taxes. However, at the very least, we should carefully scrutinize myopic and misguided proposals that would further enrich and protect corporations while neglecting our people, and damage our fragile state economy rather than strengthen it.

 

 

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