Thinking the unthinkable: tax reform in Maine

The papers have been full of the label “comprehensive tax reform” but precious little substantive discussion of what it might be and any assumptions underlying it.

Four assumptions are a good starting place. First, comprehensive tax reform ought to be as simple and clear as our governmental leaders can devise. If ordinary taxpayers can’t understand it, nothing that might pass the legislature will meet with taxpayer assent and the willingness to perform our obligations under its provisions.

Second, whatever is done should be equitable. Similar people and entities under similar circumstances should be treated equally.

Third, tax policy ought to address income streams which can be tapped. In general, taxing non-renewable resources or entities is ultimately self-defeating because sooner or later they will be reduced to zero.

Fourth, user fees for specifically identifiable purposes are only superficially attractive. User fees often ignore the larger public benefit served by the purposes for which the fees are collected. Paying for disposal of discrete amount of waste, for example, seems to make sense until people realize that such fees create incentives not to dispose of such materials legally and properly

If the assumptions articulated above make any sense, then where might they take us respecting comprehensive tax reform?

1. The first thing which jumps out at me is that property taxes of almost any kind, at least for residents of the State (see below), seem like a bad idea. Real property may constitute wealth, but in today’s world, in the main, it doesn’t generate recurrent income.

2. Income, sales or value-added taxes, on the other hand, make huge sense as prime candidates because they speak to major continuing resource flows.

3. But what if one has a clear connection to a locality and the state, for example, property ownership, but doesn’t contribute to the income tax or appreciably to the ongoing commerce in the state? Under such circumstances geographic connection to the community in the form of real property ownership becomes a legitimate focus for tax attention. Residents have their income taxed. Residents participate continuously in the economy and make contribution to the support of public goods and services via the sales or value added tax.

But if an individual’s connection to the state and locale is primarily through having used their disposable income to purchase a piece of property here, they ought to be expected to support, in ways appropriate to them, the larger public goods and services which helped to make their investment a reasonable one And property taxes for nonresidents may not be enough. They do not address one significant impact on our state caused by affluence elsewhere and our attractiveness to people “from away.” The consequences of Maine having become one of the venues of choice for allocation of huge quantities of disposable income has created alterations in the worth of certain kinds of highly desirable real estate on the sea and lake shore throughout Maine making it increasingly difficult for people who traditionally work and have lived in their towns to maintain – or even find – residence possibilities. Serious consideration should be given to the authority of localities to enact property transfer surtaxes over and above certain base values, the proceeds of which can be used by the communities affected to support badly needed work-force housing.

4. Sales or value added taxes should apply to all economic activities equally, without exception. Differential rates are discriminatory, and while they have individual rationales, in the larger scheme of things those differences are difficult to justify. The result is fundamentally arbitrary and confusing. These variations contribute measurably to the complexity and cost of tax collection to business enterprises. Perhaps most important, deep and narrowly defined politicization of tax policy is encouraged by all the variation, for every group or special interest is tempted to seek manipulation of applicability or percentage

5. Assuming either the sales or the value added tax is applied uniformly across all economic activity, income tax policy should then be utilized to recognize and reflect differential burdens and circumstances. For example, lower income people who contribute via the basic expenses of living (food, fuel, health care, etc.) to the public good as a consequence of sales or value-added taxes should have that participation recognized in a zero level, then minimal, and, finally, steeply graduated income tax.

6. If income and sales or value added taxes are to be the principal sources of income for municipalities, counties, and the state, then ways to establish access of different levels of government to these resources while preserving autonomy for allocation decisions will have to be devised. This is a technical matter but it has philosophical dimensions flowing from the principles of allowing and assuring autonomy at each of the levels of government.

7. The substantial and largely undercover barter economy in Maine, of tremendous individual appeal to the users, must come to be understood as privatistic withdrawal of participation in the larger public interest. When I give my labor to you for your sawn boards, what is lost to the public interest is the benefit accruing from my using cash I earned from my labor for you (which is subject to income tax) to purchase the boards from you (which is subject to sales tax). Engaging the moral emotions on such matters is a legitimate exercise of educational programs respecting taxes and the bully pulpit of our political leaders. (The temptation too rapidly to reject this point because of its potentially negative impact on the local sense of community should be examined in the light of its impact on the larger community, but also the local, especially if municipalities gain access to income, sales, or value added tax receipts.)

8. Finally, the last principle of tax policy in Maine ought to be that all subsidies of whatever kind awarded by governmental bodies at whatever level should always be taken out of raised (rather than forgone) income and should be reviewed annually comprehensively and competitively. Subsidy should never be extended via manipulations of the tax code per se, because that encourages the same kind of political machinations as do differential rates and application.

These ideas are offered as conceptual starting points. There are, of course, a host of implementation issues to consider. I encourage readers to consider carefully these ideas, propose alternatives or refinement, and otherwise lend even more substance to the call for comprehensive tax reform in Maine.

Hendrik D. Gideonse lives in Brooklin.