Reforming taxes II

The measure used in a new Maine tax study to decide whether a tax is progressive or regressive is called the Suits Index. A tax is considered progressive if the wealthy pay at a higher rate than the poor and regressive if the reverse is true. The Suits Index ranges from 1 to -1, with 0 being neutral. Maine state-level taxes are an acceptably progressive .07; local taxes, a terrible -.25.

Property taxes – which essentially are the local-level tax – are a heavy burden on the poor, a painful way to raise needed revenue and a vestige of the early 19th century when wealth was measured primarily by property. This last helps explain why New England relies on the property tax more than do other regions of the country. That municipalities are forced to use the property to raise more revenue than either sales or income taxes in Maine when most tax experts agree the three should be in balance is merely further insult.

Municipal leaders in larger towns and cities annually try to do something about this by asking the Legislature to approve a local option sales tax as a way to lower or augment the property tax. Lawmakers look upon them in horror. You mean, they say, you want to take charge of your own lives rather than have us do it for you through state revenue sharing? You mean you want to make economic decisions without state approval? Never! And suburban legislators, whose constituents use the services of the larger communities but have no intention of paying for their upkeep, nod in agreement. Another year, another dead local-option sales proposal.

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Lawmakers, of course, don’t actually talk like that to municipal leaders. They’re polite as a rule (except for one lawmaker from Auburn) and find gracious ways of killing a local sales tax, never bothering to observe that 37 states allow them and 10 have approved local income taxes. And they barely notice that while Maine likes to compliment itself for its rugged individualism, it actually has built a highly centralized system of government. The average tax-revenue split between state and local governments nationally is nearly even, at 52 percent for the state governments. Maine’s split, however, sends nearly two-thirds, 63 percent, to the state.

Certainly, there are efficiencies to be gained by having the state address some services that large municipalities carry out in other states. And on issues of spreading around dollars to improve equity, such as in education funding, there is no question about the state’s role. But there is a price for this centralized service, and that price includes occupying the Legislature with what are essentially local questions, defeating any motive for building regional efforts through county governments (as the State Planning Office discovered a couple of years ago) and, most importantly, dampening means and incentives at the local level for innovation, particularly in the area of economic development.

Without a way to raise revenues equitably, make local taxes less regressive and provide a revenue source that allows communities to invest in themselves, Maine will continue to watch its cities wither and become depositories of little more than the services needed for people who would rather not live there. This slow strangulation of Maine’s cities becomes more apparent by the year, but the Legislature barely understands the issue or its costly implications.

It is commonplace to see at the State House local politicians, hats in hand, looking for legislative support for an auditorium or an aquarium. Bangor needs help to develop its waterfront, but why should a representative from South Portland care? Washington County wants to build a heritage center. What’s that to a senator from Androscoggin? Lawmakers have to pay attention to these local projects because they won’t let municipalities raise the revenue to take care of themselves, but it is rare that they pay attention long enough to protect them against competing uses for funding.

Incentives matter to local governments just as they matter to businesses. If a small portion of the sales tax went directly back to the town that generated it, that town would have the incentive to make sure its businesses thrived. If a small percentage of income tax went directly back, the incentive for cities would be to attract the best jobs around. Large cities could become more attractive and affordable places to live, addressing sprawl in southern Maine; small towns, which would also receive a share, would have even more incentive to work together regionally to create efficiencies, helping local taxpayers. All municipalities could improve the regressive form of their current system of taxation.

And state government could get out of the time-consuming business of controlling local development, saving those municipal leaders that long, defeating drive to Augusta.