A Tale of Two States

Chart Showing Maine versus New Hampshire Private Sector

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!