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March 21, 2011 Public Engagement

Off balance | Right-sizing Maine's public sector work force is key to relieving the tax burden

By J. Scott Moody

Maine’s tax burden is too high and hurts our ability to attract new jobs and create new income. Gov. Paul LePage’s recent budget proposal is a promising start to reducing Maine’s tax burden through $203 million in tax cuts. The plan lowers the top income tax rate from 8.5% to 7.95%, provides for “bonus depreciation and section 179 expensing” for small businesses, and raises the estate tax exclusion to $2 million, among other reductions.

However, Gov. LePage has a steep mountain to climb. Using standard tax burden calculations, Maine’s state and local taxes as a percent of personal income was 12.6% in fiscal year 2008 — the sixth highest in the country. This methodology is flawed, however, because personal income includes both private and public sector sources. Yet, the distinction between the two sectors is important because only the private sector creates new income. The public sector can only redistribute income through taxes and spending. Maine’s private sector, as measured by business income and non-government compensation, as a percent of personal income was a dismal 63.6% in 2009 — the 10th smallest private sector in the country.

Therefore, a more appropriate measure of Maine’s tax burden is as a percent of private sector personal income. Under this measure, Maine’s tax burden soars to 18.2% — the sixth highest in the country. Keep in mind, the fundamental source of all taxes is the private sector.

More disturbingly, the tax burden has been climbing as a share of private sector personal income. In fact, the all-time high of 18.5% was reached in 2006. That was up 9.3%, or 1.6 percentage points, from only five years earlier, when the tax burden was 16.9%. While the tax burden is down a tad since 2006, clearly this long-term trend is unsustainable.

Additionally, taxes matter a great deal to the overall economic well-being of a state. The results are clear when comparing the top 10 and bottom 10 states with the highest/lowest tax burdens in the country, as measured conventionally, between FY 1997 and FY 2007 for several key measures. Overall, the results show that low-tax states enjoy a sizable economic advantage over high-tax states. In fact, for low-tax states, population growth was 308% higher, personal income growth was 26% higher and private employment was 89% higher.

But don’t just take my word for it. Recent economic studies at the international, national and state levels show that the best route economically is to reduce spending. For example, UC Berkeley economist David Romer and Christina Romer, former chair of the Council of Economic Advisors to President Obama, examined the economic effects of U.S. fiscal policy since 1947. They find that:

“The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increase on investment.”

LePage stops short

Given the severe negative economic consequences of higher taxes, as noted by empirical evidence and prominent economists, the best course of action is to reduce Maine’s tax burden as Gov. LePage proposes to do. Yet, the governor could still do much more. For instance, a recent study of mine found that Maine’s state government is over-staffed by 3,880 positions relative to the national average. Right-sizing the state work force would save nearly $200 million per year. Gov. LePage’s recent budget proposal eliminates only 81 of those positions, of which just 12 will involve actual layoffs.

Clearly there is room to do a lot more. In fact, Gov. Lynch in New Hampshire has proposed in his own budget to eliminate 1,100 positions, of which 255 will involve layoffs. And keep in mind that New Hampshire, as of 2009, already has 2,700 fewer state employees than Maine.

Additionally, each eliminated position in the state government work force would save taxpayers at least $167,890 (today’s dollars) in future pension liabilities. This would reduce the $14.8 billion owed in state and local pensions by $651 million. Every dollar saved helps, since the annual pension payment is already set to grow by 44% in the next biennium alone, to $356 million in FY 2013 from $248 million in FY 2011.

Right-sizing Maine’s state work force is a necessary step to insuring that Maine’s tax burden does not exceed taxpayers’ ability to pay. And the simple truth is that it is unfair to ask Mainers struggling to pay their mortgage, put food on the table and heating oil in the tank to pay more in taxes when they already pay some of the highest tax burdens in the country.

 

J. Scott Moody, chief economist at The Maine Heritage Policy Center, can be reached at jsmoody@mainepolicy.org. Read more Public Engagement here.

 

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