Guest Column

Taxes, they say, are certain. Our recently completed ritual of settling with the government has made us even more aware of the truth of this statement. And once again taxes are in the forefront because of revenue shortfalls at both the federal and the state level.

In spite of a public consensus that there will be “no new taxes,” the revenue shortfalls will have to be met by more revenues and these additional revenues usually come from taxes, even if there is some other name attached to the legislation.

What should policy makers look for as they review alternatives for “revenue enhancement”? Certainly it should be determined that the proposal will generate sufficient revenues to make the exercise worthwhile. It should also be determined that what is proposed is fair or equitable, and it is to this issue of fairness that I would like to turn my attention.

What is the measure by which we determine whether a tax is fair or not? The most common standard is called the “ability-to-pay principle” which holds that, as a person’s income increases, his or her tax burden should also increase.

Tax equity or fairness is a standard that should be on the minds of policy makers as they consider establishing new taxes or altering existing taxes. Because excise taxes are among the first revenue sources to be considered in meeting revenue shortfalls, they will be the subject of this commentary.

Excise taxes are a consumption-type tax whose tax base is very narrowly defined. Both the federal government and the state governments make extensive use of excise taxes. Examples include taxes on gasoline, alcohol, cigarettes, telephone services, and airline tickets.

Excise taxes are especially important to Maine state government. The percentage of Maine’s tax revenues raised from the excise tax is considerably higher than the national average and, correspondingly, the excise tax burden on Maine families is considerably higher than the U.S. average. Per capita excise tax collections on tobacco products rank Maine the highest in the United States and, for alcohol products, rank Miane No. 6. Because of currently scheduled tax increases, Maine’s dubious distinction of holding the No. 1 tobacco excise tax spot is, regrettably, secure.

But just because excise taxes are important to Maine, one should not conclude that they are good for Maine. The primary objection to excise taxation is that they are regressive. That is, they take an increasingly large proportion of family income as that income declines. The proportion of a Maine family’s $12,000 income going to excise taxes is about three times greater than that of a family with a $60,000 income.

One would be hard-pressed to find any authority that would support regressive taxation. Not only should excise taxes not be increased, but one could make a very sound argument that they should be increased and that progressive taxes should make up lost revenues. Maine’s high rank among all states for excise taxation suggests that the excise tax base is already overburdened and should not be subjected to any further increases.

Furthermore, excise tax revenues do not make up a large part of the governmental revenue stream. Given the size of the real revenue shortfall at the state level, very large increases in excise tax rates would be required to actually balance the budget. Such increases would serve to make the tax structure even more regressive, and would move taxation in a direction that everyone agrees is undesirable.

Finally, there are other taxes that could be used to raise the needed revenues. The personal income tax is the fairest of the taxes. In general, it is progressive and is paid by most of the taxpayers. While the sales tax is generally considered to be slightly regressive, it is considerably less regressive than excise taxes and is also much broader. Sales tax revenues can be increased by either raising the rate or broadening the base. The State of Maine, for example, services are not currently in the sales tax base including them would increase sales tax revenues.

Although taxes are certain, certain kinds of taxes are fairer than others. The fairness of each revenue alternative should be important to all legislators as they attempt to balance the state’s budget by following the path of least resistance.

Robert C. McMahon is an associate professor of economics at the University of Southern Maine.