Fewer pay top share of state tax 2% of filers in Maine account for 33% of levy

AUGUSTA – An increasingly small segment of the population, nationally and in Maine, are paying a huge share of the income taxes that pay for most government programs. In 1998, the latest figures available, the top 2 percent of Maine income tax filers paid more than 33 percent of the $928 million collected.

“I think it is likely the trend has continued,” said Tony Neves, executive director of Maine Revenue Services. “If you look at 1995, it was 27 percent and it went to 28 percent in 1996 and 30 percent in 1997. There was a big jump, to 33 percent from 1997 to 1998.”

In 1995, there were 11,289 tax returns in the top 2 percent. They paid $179 million of the $655 million in income taxes collected that year. In 1998, 11,667 tax returns were at the top of the income pile, and they paid $309 million of the total $928 million in income taxes.

The percentages are similar at the national level. In 1998, for example, the top 1 percent of taxpayers across the country – about 1 million individuals and families – paid 35 percent of all federal income taxes.

“I think a lot of people will be surprised at these numbers,” Neves said.

Mike Allen, research director for Maine Revenue Services, said the big jump in Maine tax revenue from 1997 to 1998 was likely the result of a change in federal tax law that reduced the tax on capital gains. The federal government taxes the profit made on the sale of certain items, like stock, at a different rate than other income. Maine taxes that income no differently than your salary.

“So we did not see any loss in revenue at the state level as people took advantage of the lower federal tax to sell assets and reinvest in the stock market,” he said. “In fact, I would say we probably benefited quite a bit from that change.”

Maine likely continued to benefit as the stock market skyrocketed in the late 1990s, said State Economist Laurie LaChance. She said the “bubble” of stock activity was a primary reason for the tremendous growth in state revenues that lead to record state surpluses a year ago.

“That is no longer the case,” she said, “and we took that into account when we re-did the economic forecast last December.”

She said Maine incomes are still expected to continue to grow, but at a slower rate. And with the higher income tax brackets responsible for such a large share of income tax revenues, a small percentage change makes a big dollar change. She said that is because Maine’s income tax is “progressive” in that the more you make, the higher your tax rate.

An analysis of tax data dramatically shows how fast that tax bite grows. The top 10 percent of tax filers in 1998 – 58,332 – paid 58 percent of all income taxes in Maine. In contrast, the 291,655 tax filers in the bottom half of all taxpayers paid just over 4.8 percent of the total state income tax collected that year. The average tax liability for the top 10 percent was $26,496 dollars. The average tax liability for the bottom half was $1,590 dollars.

“I think a lot of people will be surprised that they are in the top 10 percent,” LaChance said, “I know I am.”

In 1998, anyone making more than $68,729 in adjusted gross income whether filing jointly or as an individual, was among the top 58,000 tax filers in the state.

So what would happen to Maine income tax revenues if the top tier of taxpayers moved out of state to avoid the progressive income tax here?

“That would be quite a shock to the state revenues,” LaChance said. “But if people only lived in Maine based on the tax structure, I think a lot of people would not have any reason to move here in the first place.”

While the income tax burden falls on relatively few Mainers, LaChance points out the income tax is only a part of the tax burden on Mainers. Unlike the federal government, which relies mostly on the income tax to pay for government services, state and local governments rely heavily on property and sales taxes. And while high income earners also tend to own more expensive homes and therefore pay higher property taxes, sales taxes are levied evenly on people of all income levels.

“We all pay the same sales tax on a new $15,000 car,” she said.

What some have called the severe progressive nature of Maine income tax brackets – severe in that you can reach the top tax rate quite quickly – will be moderated under a change in tax law passed in the last session of the Legislature. Starting in 2003, tax brackets will be indexed every year to take into account the impact of inflation on incomes. That means Mainers will be paying less in income taxes than they would have.