So late last night, the Democratically-controlled Legislature took the first step in raising taxes to close Maine’s budget gap. The latest tax increase proposal includes a “temporary” increase in the sales tax by 10 percent (to 5.5 percent from 5 percent), and increasing the meals and lodging tax by 14 percent (to 8 percent from 7 percent).This will supposedly lead to a net tax increase of $178 million over the biennium. However, the projected revenue is based on extremely rosy assumptions since tax increases of this magnitude will slow Maine’s already anemic economy. As shown in Table 1, new data from the Bureau of Economic Analysis (pdf) shows that Maine’s Gross Domestic Product (GDP) only grew by 9.4 percent since the “Great Recession” began in 2007. Maine’s economic growth is well below the national average of 11.7 percent, and Maine has the slowest rate of growth among its immediate neighboring states. Maine ranks only 38th among the fastest growing state economies in the country. Adding insult to injury, these specific tax increases will drive Mainers who are struggling to make ends meet to cross-border shop in sales-tax-free New Hampshire (with lower cigarette taxes). Table 2 shows that Maine’s economy is the most negatively impacted by cross-border shopping of the state’s surrounding New Hampshire. Per person retail and wholesale GDP in Maine is 7.4 percent below the national average ($5,450 vs. $5,884, respectively) while New Hampshire is 17.3 percent above the national average ($6,902 vs. $5,884, respectively).
If Maine had the same level of per person retail and wholesale GDP as New Hampshire, Maine’s economy would have been $1.930 billion larger in 2012. That would have meant more business for Maine’s mom-and-pop retailers, more jobs for the unemployed, less dependency on welfare, and even higher state and local tax receipts. Additionally, the retail and wholesale GDP gap has been growing wider since the “Great Recession.” As shown in Table 3, retail and wholesale GDP in Maine grew by only 4.7 percent between 2007 and 2012–significantly slower than the national average (8.3 percent) and New Hampshire (9.7 percent). If Maine had grown as fast as New Hampshire, Maine’s economy today would have been $349 million larger by 2012. Instead, Maine exported that growth to New Hampshire thanks to an uncompetitive tax code.
Finally, it is interesting to note that the Revenue Forecasting Committee has pointed to the sales tax as the culprit for lackluster revenue growth (pdf)–is this a sign of greater cross-border shopping activity? As shown by this analysis, expect more under-performance in the sales tax moving forward (relative to the projected higher tax revenue due to increase in the sales tax rate)–and continued budget deficits as a result.
Instead of punishing hard-working Mainers with growth-sapping tax increases, the Maine Legislature should instead focus on balancing the budget through spending reform. One such proposal for spending reform would save Maine taxpayers $135 million over the biennium. Hundreds of millions in additional budget savings has been detailed in the Maine Piglet Book (pdf). Politicians need to stop hitting the “easy button” for higher taxes and instead work on putting Maine’s state government on a sustainable and affordable path to prosperity.