The high tax burden in Maine

Editor’s note: This is the fourth of five commentaries addressing tax investment and reform raised in the study “No Place to Hide: Confronting Maine’s Economic Future.”

In each of the last six years, Maine has earned a distinction that will not make state residents proud: the highest state and local tax burden of any state in the United States. According to the Tax Foundation (a widely respected nonpartisan educational organization founded in 1937), the amount of state and local taxes collected as a percentage of income is higher in Maine than any other state in the nation. In fact, for the past 30 years, Maine has consistently had a higher state and local tax burden than the United States average, as is illustrated in the chart below.

Furthermore, since 1995, Maine’s disparity from the national average has grown to the point where Maine’s current 13.6 percent tax burden is 33 percent higher than the national average of 10.2 percent.

The problem is exacerbated when one compares Maine to its closest U.S. neighbors: New Hampshire and Massachusetts. New Hampshire is the only state that borders Maine but the difference in tax burden is striking. Despite the comparatively higher property tax burden in New Hampshire (second compared to seventh for Maine in property tax collections per person), the overall tax burden in New Hampshire is very low at 7.6 percent because there is no sales tax or earned income tax for workers. The tax burden in Maine is over 75 percent higher than in New Hampshire, while New Hampshire ranks as having the third lowest tax burden in the country (only Tennessee and Alaska rank lower).

Massachusetts, once derided as Taxachusetts, has significantly reduced its tax burden over the last 25 years from more than 12 percent to its current level of 9.5 percent, giving it a ranking of 39th overall. Significant tax reductions over the last 12 years accompanied by strong income growth have moved Massachusetts from one of the highest tax burdens to one that is less than the national average.

In terms of perception, the high tax burden in Maine does not promote a business-friendly image. Substantively, this high tax burden places Maine at a significant economic disadvantage when trying to retain and attract the types of businesses that are important to the long term economic growth of the state. These types of businesses generally export goods and services outside of the state and are in industries such as manufacturing, financial services and customer services through call centers. Because these businesses generate most of their revenue from outside of Maine, they need to have other specific reasons to stay or locate in Maine.

In conjunction with attracting and retaining these businesses, Maine must also slow down the out-migration of young workers entering their primary earnings years. During the 1990s, Maine saw a net out-migration of almost 30,000 people under the age of 35 who are the workers that the businesses need in the export industries. The businesses must be here to ensure future economic opportunities for these workers in order to keep them in Maine.

Maine must compete with New Hampshire and Massachusetts (along with the rest of the United States and the world) to retain and attract the export businesses. This will give young workers the job prospects needed to remain in Maine. If Maine is able to reduce its burden to a level closer to the national average, businesses will have one less hurdle to overcome in order to stay and prosper in Maine.

Jonathan A. Speros is senior manager and leader of the Northeast Credits and Incentives Practice for PricewaterhouseCoopers LLP. He and his firm were commissioned by the Institute for a Strong Maine Economy to contribute to the research paper recently published, “No Place to Hide: Confronting Maine’s Economic Future.”