The sponsors of LD 1496 (pdf) have deemed themselves the Gang of Eleven. Unfortunately, for Maine’s taxpayers, the Gang of Eleven is an apt name because their tax plan amounts to nothing more than highway robbery. While we don’t have official numbers yet, the plan is estimated to raise approximately $150 to $200 million in new revenue from Maine’s beleaguered taxpayers.

Key features of the tax plan include:

1) Lower the personal income tax rate to a flat 4 percent and eliminate all deductions (home mortgage, charitable, etc.)

2) Increase the sales tax rate to 6 percent and expand the sales tax base to all goods and service–except for education and healthcare.

3) Reduce the top corporate income tax rate to 7.5 percent.

4) Increase excise taxes–cigarette tax to $3.50 per pack and beer and wine taxes will be doubled.

5) Eliminate the estate tax.

6) Create a $50,000 homestead property tax exemption.

Proponents of this tax plan argue that it won’t be a tax increase on Mainers because the plan shifts the tax burden onto tourists and out-of-state property owners a process called “tax exporting”.  This sounds good in theory, but at the end of the day no one knows for sure if that tax burden is truly being shifted out-of-state.

However, even if some tax exporting occurs, it will likely be entirely offset by Mainers cross-border shopping in New Hampshire.  Currently, I have estimated that Maine loses up to $2.2 billion annually in retail sales to New Hampshire (pdf).  Increasing the sales tax rate, expanding the sales tax base, and higher excise taxes will send Mainers in droves over the border–perhaps the plan should be renamed “The New Hampshire Retail Development Act.”

Overall, this points to the fundamental problem of this tax reform plan–there is no such thing as a good, big tax. Simply shifting the problems with the income tax onto the sales tax only creates new problems. The long-term solution is that Maine needs spending reform before tax reform.

Governor LePage’s recent historic tax cuts are the perfect example of how spending reform must precede tax reform. Governor LePage began the process of right-sizing Maine’s state government, such as much needed pension reform, using part of the savings to reduce and reform Maine’s personal income tax through higher exemptions, a flattened tax rate structure, and a lower top tax rate of 7.95 percent, down from 8.5 percent.

What Maine really needs is a law that would prevent any new tax shifting proposal until Maine’s tax burden falls to at least the national average. Such a law would prevent legislators from wasting time on frivolous tax reform packages that simply rearrange the deck chairs on the Titanic (though this plan would be worse by punching new holes in the hull thanks to it being a tax increase). Legislators should only concern themselves with right-sizing a state government that currently exceeds Mainers ability to pay.

Recently the Governor’s Office of Policy and Management (thanks to State Economist Amanda Rector) released new detailed projections of Maine’s population. As I blogged in “Maine’s Demographic Winter by County,” Maine is now only 1 of 2 states where there are more deaths than births. These projections show the long-term consequences of this historic shift.

Overall, Maine’s population is projected to peak in 2020 at 1.332 million people. Beyond 2020 Maine’s population will fall by 0.4 percent to 1.326 million.

More troubling is that the age composition of Maine’s population will dramatically change as well. In 2001, 26.1 percent of Maine’s population consisted of people under the age of 19. By 2030, the percentage of the population under the age of 19 will fall by 19.1 percent to 21.1 percent.

At the same time, the percentage of the population over the age of 65 will soar by a whopping 83.1 percent to 26.4 percent in 2030 from 14.1 percent in 2001. This inversion of the age pyramid will have severe economic ramifications–a shrinking workforce and tax base with increasing demand for healthcare workers and government entitlements.

Additionally, the impact of a shrinking and aging population will not be felt evenly throughout Maine. As shown in the graphic above, counties such as Lincoln (-15.2 percent), Piscataquis (-14 percent), Hancock (-10.3 percent), Somerset (-6.2 percent) and Washington and Aroostook (-5.3 percent) will bear the greatest burdens.

On the other hand, only five counties will enjoy continued population growth: Androscoggin (8.3 percent), Cumberland (3.1 percent), York (2.7 percent), Knox (4.6 percent) and Penobscot (2.4 percent).

The projections go all the way down to the town level. The top 5 towns, with starting populations over 1,000 people, that will lose the greatest percentage of population are: Millinocket (-43.2 percent), Eastport (-40.4 percent), Gouldsboro (-39.4 percent), Stonington (-38.9 percent), and Southwest Harbor (-35.6 percent).

The top 5 towns, with starting populations over 1,000 people, that will gain the greatest percentage of population are: Levant (42 percent), Limerick (31.4 percent), Waterboro (31.1 percent), Wales (30.2 percent), and Leeds (29.9 percent).

Based on the town data, the majority of people in Maine (based on 2010 population estimates) will be living under this Demographic Winter–697,665 live in towns facing population decline while 629,697 live in towns facing population growth.

From a policy perspective, it is easy to be complacent about Demographic Winter. After all, 2020 is still seven years away. The problem, however, is that the necessary policy changes to help avert this crisis must be made today–changes such as lower taxes, right-to-work, healthcare reform, and customized learning. The population clock is ticking.

Amazingly, there are some people that continue to deny that changes in taxes impact taxpayer behavior. Put simply, if you increase taxes on something you can expect to have less of it. This is straight from the LAW of supply and demand which is always at work akin to the LAW of gravity.

In particular, the recent tax hikes that went into effect in 2013 predictably caused taxpayers to shift income into 2012. To see the full list of new taxes, please see my recent blog “Happy New Year, Now Pay Your (Higher) Taxes.”

Of course, you don’t need to take my word for it. As shown in the chart above, the Congressional Budget Office (CBO) has accounted for this tax shift of income into 2012, especially capital gains. CBO estimates a whopping 58 percent increase in capital gains realizations–to $606 billion in 2012 from $384 billion in 2011. Correspondingly, capital gains realizations are forecasted to plummet in 2013 by 38 percent.

Here is what the CBO has to say about this tax shift (pdf):

In addition, shifting of income—such as capital gains realizations from stock and other asset sales, wages and salaries, and dividends—mainly from calendar year 2013 into late 2012 in anticipation of those rate changes (and in anticipation of possible rate changes that did not ultimately occur) is expected to increase revenues in fiscal year 2013 and reduce them in 2014, when some of the taxes on that income would have been paid.

According to the most recent 2010 data from the IRS (xls), 38 percent of all capital gains realizations were made by taxpayers earning more than $100,000 in adjusted gross income. As a result, capital gains are taxed at the highest marginal income tax rates which have a large impact on year-to-year swings in total income tax revenue.

Additionally, it’s not just capital gains income that reacts to changes in taxes. The Bureau of Economic Analysis (BEA) recently reported that the acceleration of dividend and salary bonus income into the 4th quarter of 2012 significantly accelerated personal income in many states. Here is what BEA said:

Special or accelerated dividend payments to persons in anticipation of changes in federal individual income tax rates boosted personal dividend income in the fourth quarter. The gain was largest in Washington D.C. where dividend income rose 26 percent and smallest in South Dakota where it grew 12 percent.

Fourth-quarter earnings in the finance industry were also boosted by accelerated bonus payments or other irregular pay in anticipation of tax rate changes. Finance earnings grew 10.5 percent in New York, 7.9 percent in Connecticut, and 6.4 percent in New Jersey, states where the finance industry is particularly prominent. Finance earnings grew 2.7 percent in the other states.

Of course, Maine is not immune to these impacts. Dr. Michael Allen, the Associate Commissioner to Tax Policy at Maine Revenue Services, recently reported to the Maine Consensus Economic Forecasting Commission (Disclosure: I am a member of the CEFC) that he expects Maine’s capital gains realizations to jump 40 to 60 percent in 2012.

Overall, the recent news about Uncle Sam’s shrinking budget deficit should be taken with a grain of salt. This shifting of income into 2012 will continue to create a short-term boost in federal revenue as we approach the April 15th filing deadline (even beyond because high-income taxpayers often use filing extensions).

However, once the tax shift plays out revenue growth will slow. Unless spending is brought under control–especially entitlement spending as I have discussed previously–then Uncle Sam’s budget deficit will begin to grow again.

As for those people that deny taxes impact behavior, you should really go shopping in New Hampshire this weekend and remind all the Mainers shopping with you that “taxes don’t matter.”

Today the U.S. Department of Commerce’s Bureau of Economic Analysis released their 2012 personal income estimates.

Personal income is an important economic measure of a state’s well-being.  Higher levels of personal income mean that a state’s residents are able to buy more goods and services such as homes, cars, education and healthcare.  It is also a very useful way to gauge the ability of a state’s residents to pay taxes.

Fundamentally, personal income comes from two sources: the private sector and the public sector.  The distinction between the two sectors is important because only the private sector creates new income.  The public sector, in contrast, can only redistribute income through taxes and spending.  More specifically, public sector spending consists of personal current transfer receipts (Medicare, Medicaid, Social Security, etc.) and government employee compensation (federal, state and local).

The chart above shows how the private sector, as a percent of personal income (shown as the solid lines), has changed in both Maine in New Hampshire between 1929 (the earliest available data) and 2012. The chart highlights the diverging tale of two states.

Since 1950, Maine has increased taxes and spending dramatically with the introduction of the sales tax in 1951 and the income tax in 1969. New Hampshire, on the other hand, did not.

Increasing taxes on the private sector has two consequences.  First, higher taxes will mean less money in the pockets of individuals and businesses which will reduce their ability to invest for the future.  Second, greater public spending will crowd-out the private sector in competition for scarce labor and capital.

Overall, between 1929 and 2012, Maine’s private sector as a percent of personal income has shrunk by 31 percent to 64.2 percent in 2012 from 92.4 percent in 1929–Maine now has the 10th smallest private sector in the country.

New Hampshire’s private sector has only shrunk by 16.3 percent to 76.1 percent in 2012 from 90.8 percent in 1929–New Hampshire now has the 2nd largest private sector in the country.

As a consequence, Maine residents have paid a steep price with not only higher tax bills but also lower incomes. The dashed lines shows the disparity in real, per household personal income growth between Maine and New Hampshire.

Over this time-period, Maine’s income grew by 247 percent while New Hampshire’s income grew by 293 percent. Due to these growth difference, the average household in New Hampshire enjoys income that is 27 percent higher than the average household in Maine ($117,761 versus $92,870, respectively).

Additionally, a significant part of New Hampshire’s private sector is actually derived from Mainers who cross-border shop at New Hampshire stores. According to my analysis of data from the U.S. Department of Commerce’s Census Bureau, Mainers are spending up to $2.2 billion per year in New Hampshire. This is entirely driven by higher sales and excise taxes in Maine.

This tale of two states has important lessons for Maine policymakers. Most immediately, Governor LePage’s recent tax cuts that lowered the top individual income tax rate to 7.95 percent from 8.5 percent is a vital first step to breathing life back into Maine’s private sector–after all, many of Maine’s small businesses file through the individual income tax code.

Longer term, policymakers need to think about leveling-the-playing-field with New Hampshire as it once was prior to 1951–a time when not only were each states private sector levels near equal, but so were incomes. Following Governor LePages lead, the income tax rate should be pushed all the way to ZERO. Maine taxpayers would not only see a lower tax bill, but also rising incomes!

Fast forward to today and we are confronted with LD 611, “An Act to Adjust Maine’s Minimum Wage Annually Based on Cost-of-Living Changes.” What would LD 611 do? It would increase Maine’s minimum wage by $1.00 and then index the minimum wage to inflation forever after. Where have I seen this before?

Proponents of the minimum wage increase like to stress how this money would go to low-income individuals who would spend this money and stimulate the economy.  Dr. Susan Feiner, Professor of Economics and Professor of Women and Gender Studies at the University of Southern Maine, recently testified in support of LD 611 stating that it would add “$166 million in new income and new spending per year.”

Of course, that is simply impossible. This new $166 million in income would not fall from the sky or grow on Maine’s pine trees, it would come from the businesses that employ these workers. As a consequence, these businesses now have less money to invest in new equipment or hire new workers. In other words, you can steal from Peter to pay Paul, but you won’t introduce any new income or new spending into the economic equation.

More troubling is that hiking Maine’s minimum wage, which is already higher than the federal minimum wage, would further erode Maine’s business climate relative to other states.

Simply comparing nominal minimum wage levels from one state to another is not useful since states vary in their economic condition. A more useful comparison is to create a ratio of the hourly minimum wage to hourly private sector wages and salaries. This ratio is an indication of how badly the minimum wage is distorting the job market within a state by artificially increasing employment costs. Thus, a high ratio is bad.

The table above shows these ratios by state.  Maine’s ratio is calculated by dividing the current hourly minimum wage ($7.50) by the hourly private sector wage ($19.15) yielding a ratio of 39.2 percent–the 7th highest in the country and the second highest in New England. Maine’s stiffest and closest economic competitor, New Hampshire, comes in at 31 percent and only the 40th highest ratio in the country.

If Maine’s minimum wage is increased to $8.50 an hour, Maine’s ratio would jump to 44.4 percent and would be the 3rd highest in the country. Maine would also just miss dethroning Vermont as having the highest ratio in New England.

LD 611 would also bring another bad public policy idea to Maine–indexing the minimum wage to inflation, something only ten other states do at this time. Ironically, a higher minimum wage will be passed forward onto the consumer as higher prices. Higher prices means higher inflation which means a higher minimum wage which means . . . well, I think you get the point.

If the Legislature believes that Maine needs a higher minimum wage, this should be a transparent decision with a public hearing and a vote of the legislators. Laws with a long-lasting negative impact on Maine’s business climate must not be set on blind automatic pilot.

As I blogged recently, Maine is now one of only two states in 2012 with a negative net natural population growth rate meaning there are more deaths in the state than births (West Virginia is the other state).

Today, the U.S. Census Bureau released their 2012 data by county. I have created the chart above to show the counties in Maine based on their net natural population growth. As you can see, the overwhelming majority of counties have more deaths than births including: Hancock (-153), Aroostook (-151), Lincoln (-119), Oxford (-119), Washington (-118), Piscataquis (-65), Franklin (-47), Knox (-42), Kennebec (-35), and Waldo (-6).

Three counties just missed going negative: Somerset (5), Sagadahoc (29), and Penobscot (40).

Only three counties have a somewhat comfortable positive net natural population growth: York (113), Cumberland (249), and Androscoggin (316).

When factoring in net-migration to get total population change, the vast majority (10) of counties also lost population–although not necessarily the same counties with net natural population decline: Aroostook (-520), Oxford (-290), Washington (-225), Penobscot (-184), Franklin (-110), Piscataquis (-79), Lincoln (-74), Kennebec (-59), Knox (-59), and Somerset (-14).

Overall, Maine’s population grew by an anemic 648 people in 2012, which represents a growth rate of 0.049 percent—the 5^th slowest rate in the country. As net natural population growth moves further into negative territory, it will eventually reach a point where even net in-migration will not be able to compensate. At that point, Demographic Winter will be very difficult to reverse.

Maine’s Demographic Winter (pdf) will have severe economic consequences. In economic terms, this means fewer workers will be available to businesses, and there will be fewer customers to buy their goods and services.  This dynamic creates the conditions of an economic depression in which business revenue falls year after year simply because there are fewer and fewer customers.

Eventually, businesses close and lay off their employees, which further compounds the problem and creates a vicious downward economic spiral.

Of course, nothing is free. The reality is that there are significant costs to Maine’s economy that will be incurred if we listen to Obamacare’s siren call. In this blog post I will look at the most obvious cost–the unsustainability of MaineCare.

A few months ago, The Maine Heritage Policy Center released a study titled “Fix the System” (pdf) which detailed how large Maine’s welfare system had become (TANF, Food Stamps, and MaineCare). The study projected that by as early as 2016 there would be more people on welfare (480,347) than those who work a private sector job (473,183).

Much of the expansion in welfare rolls is due to MaineCare as former State Treasurer Bruce Poliquin recently pointed out–enrollment in MaineCare has increased by 69 percent since 2002.

The Obamacare induced expansion of MaineCare would greatly accelerate that day of reckoning. According to a study by the Kaiser Commission on Medicaid and the Uninsured (pdf), the expansion of Mainecare would add another 55,000 people onto Maine’s welfare rolls. As projected in the chart below, MaineCare’s expansion would–for the first time in history–push welfare rolls on par with the number of people with a private sector job.

This growth in welfare rolls is simply unsustainable in Maine and the rest of the country. Uncle Sam is already facing an entitlement crisis and luring states with “free money” to add to that burden is irresponsible.

Note: To minimize the need for projections, the chart assumes that the MaineCare expansion would occur in 2013. Under Obamacare, funding for Medicaid expansion would begin in 2014.

As Allumbaugh writes in his study, “PL90 is demonstrating who truly benefits when we free our markets to respond to consumer needs, the many individuals and small businesses in Maine who rely on private health insurance—a 56 year old woman with a newly transplanted heart able to afford her anti-rejection medications, a small business lowering their cost rather than accepting a 23 percent rate increase, and another small business able to continue providing health insurance to its employees without having to ask them for a premium contribution.”

While the plural of anecdotes is not data, statistics from the Maine Bureau of Insurance (pdf) suggest the stories of these businesses and individuals reflect a broader trend in Maine’s health insurance market.

As the chart below shows, there has been a significant downward shift since the summer of 2011 – when PL90 became law – in the number of businesses experiencing rate increases greater than 20 percent. The chart also shows a rise in the number of businesses seeing a rate decrease, something unheard of before PL90.

Critics of the law are fond of calling PL90 the “rate hike law.” But one thing worth keeping in mind when talking about health insurance rates is that increases are as inevitable as death and taxes. Increases to adjust for inflation, which is higher in the health care industry than elsewhere, increases for aging populations, for migration patterns, etc. have occurred every year in recent memory—and at much higher rates.

So while it may be technically correct—and rhetorically advantageous—to assert that a majority of businesses post-PL90 are experiencing rate increases, such claims are either disingenuous or ignorant to the nature and history of Maine’s health insurance industry.

Another important consideration is the impact of Obamacare. Any analysis of Maine’s changing health insurance market must consider the tsunami of new federal regulations – 15,000 pages and counting – that are increasing both the complexity and cost of providing health insurance.

Additionally, just because health insurance rates are going up does not mean health insurance costs are going up. Why? Because PL90 has opened the door for new health insurance products across a wide spectrum of prices. As such, businesses can move to another plan with lower prices and/or better options that did not exist before PL90.  Simply examining plan prices does not account for savings for this important “substitution effect.”

But despite the unavoidable upward pressure on insurance rates and the added burden of complying with Obamacare, PL90 is succeeding in its goals. Less than two years into its implementation, insurers are competing more than ever, and as a result Mainers are already seeing smaller premium increases and more health insurance options. This is the genius of the free market at work.

Chart 1 shows projected tax revenues as a percent of Gross Domestic Product (GDP). Uncle Sam is banking on very strong revenue growth, especially from the individual income tax which will grow by 35 percent to 9.8 percent of GDP in 2023 from 7.3 percent in 2012. In dollar terms, individual income tax collections will more than double to $2.548 trillion in 2023 from $1.132 trillion in 2012.

This is a remarkable projected rate of growth given that one of the weaknesses in the CBO forecast is that they show smooth economic sailing over the next decade–no recessions are in sight. Given the recent tax hikes, looming health insurance costs from Obamacare, and growing federal regulations it seems more than likely that the U.S. economy will have another recession within the next decade and sooner rather than later.

Chart 2 shows projected federal spending as a percent of GDP. Discretionary spending (defense, transportation, education, etc.) is the only category that goes down dropping by 34 percent to 5.5 percent of GDP in 2023 from 8.3 percent in 2012. CBO is using current law which means that they are assuming the sequester (which reduces discretionary spending) will take effect.

In contrast, mandatory spending (social security, medicaid, medicare, etc.) grows by 8 percent to 14.1 percent of GDP in 2023 from 13.1 percent in 2012. Note that by 2023, mandatory spending will be 157 percent larger than discretionary spending up from being 58 percent larger in 2012.

On a percentage basis, the fastest growing spending category is projected to be interest payments which will increase by 131 percent to 3.3 percent of GDP in 2023 from 1.4 percent in 2012.  As I explained in my previous blog post, “Uncle Sam’s Interest Payment Time Bomb,” CBO’s forecast could be a major understatement if interest rates rise faster or higher than expected.

Chart 3 summarizes the projected impact of higher revenue and lower discretionary spending on the federal budget deficit. When measured as a percent of GDP or in dollars, the deficit is projected to shrink through 2015 before growing again.

Overall, these charts reveal the true underlying culprit driving Uncle Sam’s credit card spending binge over the next decade–mandatory, or entitlement, spending. The good news is that if reforms are enacted by 2015, the projected drop in the deficit could be pushed all the way to zero in just a few more years. The bad news is that President Obama has already ruled out any changes to entitlements.

Despite recent improvements in the deficit, CBO’s long-term projections paint a bleak picture in terms of permanently reducing the budget deficit. Entitlements and interest payments are already projected to eat the budget growing to 76 percent of the budget in 2023 from 64 percent in 2012. Controlling their growth will only become harder and harder with each passing day as America continues to age and the amount of debt grows higher.

Some may call for higher taxes, but CBO’s projections show that they have already gotten their wish with tax collections growing significantly faster than GDP. Additional tax hikes would only heighten the risks for an economic recession which would reduce revenues, boost entitlement spending and further increase the deficit.

Entitlement reform is the only way to untie Uncle Sam’s Gordian budget knot.

While Maine’s policymakers can’t do anything about the weather, they could–and should–lower the individual income tax to make Maine more competitive (against Florida as well as neighboring New Hampshire for reasons I laid out in a previous blog post).

On the other hand, Minnesota’s Governor, Mark Dayton, has recently proposed doing the exact opposite which is to tax snowbirds even more.  The Wall Street Journal reports on this snowbird tax:

Details are sketchy, but the idea is to tax these nonresidents on their income from stocks, bonds, capital gains and dividends if they spend at least 60 days in Minnesota a year. Income earned in the state is already taxed regardless of residence status, but many retirees or vacationers own a home in the state and live there only for the summer.

The new tax would hit income not earned in Minnesota by those who don’t currently spend the requisite six months and a day in the state to qualify as a taxable resident. So, for example, if you returned to the land of 10,000 taxes only for July and August, you’d suddenly have to pay the taxman in St. Paul on dividend checks sent to your main residence in St. Pete.

The state Revenue Department won’t say how many snowbirders the new tax would hit, but it predicts the tax would raise $30 million over two years. That’s barely an asterisk in Mr. Dayton’s new two-year budget of $37.9 billion, especially since it may drive more residents to leave the state permanently.

I don’t think it is a good idea to hike taxes on people who already own a home in another state. Instead of staying in Minnesota for 5 months and 29 days, they will now stay only 59 days, at best. In the worst case, they will give up on Minnesota altogether and sell their homes–that should do wonders for the real estate market in Minnesota.

At the end of day, the $30 million revenue estimate is pie-in-the-sky. If such a tax were really enacted I’m sure it would succeed in driving snowbirds to extinction, but only in Minnesota.

Minnesota would lose out on all of the taxes being paid by snowbirds when they visit including the sales tax, various excise taxes (gas, meals, cigarettes, alcohol, etc.) and business taxes.  Overall, the full dynamic tax impact would clearly be a negative for Minnesota.

Over the years, Mainers have been subjected to other bad tax ideas from other states–such as the failed tax reform legislation a few years ago. Hopefully, the snowbird tax is one bad tax idea that will stay away.