As Maine’s state government grapples with a budget deficit, some legislators are calling for the repeal of Governor LePage’s tax cuts for the “rich.” Such a proposal ignores the reality that Maine’s previous top individual income tax rate of 8.5 percent has already pummeled high-income taxpayers, forcing them out of state or into nonproductive tax shelters. Consequently, Maine’s economy suffers from underinvestment, a lack of jobs, and lower state revenue.
The data I examined in this analysis is the most recent 2010 state tax data from the Internal Revenue Service. Whether measured as a percent of all taxpayers or adjusted gross income, Maine has fewer high-income taxpayers earning more than $200,000 or earning more than $1 million when compared to the national average or neighboring New Hampshire (which has no individual income tax). In fact, despite having nearly identical populations, New Hampshire’s millionaires significantly outnumber Maine’s by nearly a 2-to-1 margin (984 vs. 513) and have greater total income by more than a 3-to-1 margin ($4.1 billion vs. $1.3 billion).
More troubling, Maine’s high-income taxpayers have been persistently losing ground. Between 2001 and 2010, the adjusted gross income per taxpayer for Mainers earning over $1 million grew by only 5.1 percent. In contrast, the national average grew by 12.3 percent and in New Hampshire by a whopping 55 percent. Despite starting at nearly identical levels in 2001 ($2.5 million in Maine and $2.7 million in New Hampshire), the average millionaire in New Hampshire has nearly doubled their income by 2010 ($2.6 million vs. $4.1 million).
Additionally, Maine’s high-income taxpayers are much more likely to be business owners through vehicles such as partnerships and S-corporations (78.2 percent of taxpayers earning over $1 million) versus the national average (74.2 percent). Since these are “pass-through” business entities, their taxes are paid through the individual income tax returns of the owners. Therefore, Maine’s high-income taxpayers are more likely to be a hard-working business owner who only appears to be “rich” on paper due to this pass-through business income.
Rather than raising the tax burden on high-income taxpayers, Maine’s policymakers should instead find ways to encourage them back into the state or into productive activities. If Maine’s taxpayers earning more $200,000 looked like the the national average, Maine’s economy would have been up to $4.8 billion larger in 2010 and had higher state individual income tax of up to $410 million (not including higher tax revenue from the sales tax, property tax, etc.). Much of this higher income would have been business income, meaning even greater investment, job creation, and revenue.
Unfortunately, over the past few decades, Maine’s policymakers decided to chase an ever shrinking pie of high-income dollars with ever higher tax rates. This has created a vicious cycle where Maine’s high-income taxpayers are now fewer in number and poorer in income when compared to the national average or with neighboring New Hampshire. Governor LePage’s reduction of the top individual income tax rate to 7.95 percent from 8.5 percent was an important step in reversing this vicious cycle and helping to grow the economic pie for all Mainers.