Tax overhaul

The welcome news that the state is forecasting an additional $185 million in revenues for next year gives Maine an opportunity to think about not only what it wants to do with the money but how its tax system raises that money.

Of the three major sources of tax revenue — income, sales and property taxes — the last is the most overburdened. It accounts for more than 40 percent of the total burden and since 1988 has risen an average of 9 percent a year.

The reason behind this dramatic increase is simple: the state has failed to fulfill its promise to fund education. It has shortchanged its school-funding formula, leaving a huge unfunded and undeclared mandate for local property taxpayers. Funding schools properly would give property owners significant tax relief. That is reason enough for lawmakers, when they begin to think about returning money to taxpayers, to start with the property tax.

But they should not end there. Maine was reminded in its last recession of how highly sensitive its sales tax is to changing economic fortunes. As several lawemakers and economists recently have observed, a growth of 2 percent or 3 percent in Maine’s economy can enlarge sales tax revenues by 10 percent. A similar economic decline drops sales-tax revenue by an equal amount. This amplified effect is caused by the narrowness of the sales tax: Maine, according to state Sen. Peter Mills, has 77 numbered paragraphs of past and current tax-law exemptions.

For the sake of progressivity, the sales tax is skewed toward nonessentials: Maine taxes CD players but not food. The trouble comes during a recession, when people can put off buying the CD player. They still buy food, of course, although taxing this essential would be considered regressive because the tax would hit the poor disproportionately hard. But what happens, Sen. Mills asks, if the sales tax were broadened to include some areas previously considered regressive and then lowered to 3 percent or 4 percent across the board?

The state rarely has the opportunity to consider its tax system in the absence of crisis. It has the chance now to begin making changes that will give taxpayers a break and protect the state when the next economic downturn hits.