“Maine’s Taxes: Are You Getting What You’re Paying For?”: A Conference Review

These are the characteristics of a good business, I believe. Maine wants a tax system that attracts business; it has got to think like a business. Unfortunately, tax policy makers rarely think that way. I would first ask what goals I want to achieve in my tax system. Do I want its burdens to be distributed fairly according to whatever vision of distributive justice I might have? Is our tax system competitive? Is it attractive to business, does it help us retain and expand our jobs, is it efficient in the sense that it promotes the efficient allocation of resources in Maine's economy? Is it simple, can you understand it, and can you enforce it? Is it stable, so that policy makers can predict revenue streams enabling them to budget responsibly? Does it produce an adequate amount of revenue, not too much so there is waste, and not too little so that critical needs go unmet? Only after I have defined my priorities would I look at comparative statistics to get some guide as to how I might achieve those goals.

Another person, who thinks that too many public needs are going unmet, finds statistics which show that his state’s tax burden is low and asks “what is the problem?” I will start with some often-quoted statistics and then move toward others which I think would be more helpful in trying to deal with this issue of whether Maine’s tax system is competitive.

When you look at state and local taxes per $1,000 of personal income, Maine is high — seventh highest in the nation. But why just look at taxes? You should look at state and local taxes combined with fees and charges as well as miscellaneous generated revenues per $1,000 of personal income. In this ranking, Maine isn’t quite as high, but it is still high. (See Fig. 1.)

On this statistic, Massachusetts ranks in the fourth quartile among the states. What particularly disturbs those who really believe in this statistic is how high you are (17th) compared to most other New England states. (See Fig. 2.) Well, Vermont is only 19th, Connecticut is 46th, Massachusetts is 41st, and New Hampshire is the lowest, but who can compete with the taxes of New Hampshire? So you have a real problem right? You are way out of line.

Not to worry. How about taxes per capita? After all, according to the former Secretary of Administration and Finance Andrew Natios of Massachusetts, that is what really counts. On this statistic, Maine looks great. It is below the U.S. median, at 31st among the states. Massachusetts is tenth, and is lower than Vermont and Connecticut.

The problem with all of these statistics is that they don’t really address whom we are trying to attract and to retain. I would argue that you should be especially concerned about the skilled worker, because in this economy, if there is one thing in short supply, it is skilled workers. That is going to be a household that probably earns above-average income that you recruit in a fairly large geographic market.

Now the two taxes that people dislike the most are the personal income tax and the property tax. When you look at property taxes plus personal income taxes per $1,000 of personal income, Maine is right up there, at third among the states. But Massachusetts is fourth, Vermont is fifth, and New Hampshire is 18th. Relative to everybody else, New England states are high. That is just the way we raise our taxes. Again though, we have in here property taxes paid by business as well as those paid by households. What if Maine differs in terms of its burden on businesses versus households?

Ultimately, as I have argued for a long time, one has to construct hypothetical households or businesses, because the average statistics just don’t cut it. Then see what the tax burden is on these representative households in different jurisdictions. The government of the District of Columbia periodically does this exercise. What we have in the Table (p. 4) is a comparison of the tax burden on a representative professional family of four with an income of $100,000, two children, a house, and two cars. They live in the largest city of each state.

Portland, Maine is way up there, number four. So I think if you have a competitive problem it is Maine’s heavy reliance on the personal income tax and the property tax. But there are tradeoffs. The income tax in many ways, depending on how it is structured, is a fair tax. So if you are going to reduce your dependence on that, you could suffer in terms of equity or fairness. I am not trying to point to solutions here. I am just trying to point to different analytical methods.

Now what about business taxes? Several years back, Raytheon pushed for a big set of tax incentives in Massachusetts. These are the three different indicators of business tax competitiveness that they used. Pick your indicator, and you can tell any story you want. One of their indicators is property taxes paid by business as a percentage of statewide personal income. Yet, there are no valid data that separate property taxes paid by business from property taxes paid by households.

I have a study, which was done many years ago, based on 1991 data (see Fig. 3). You take representative firms and you have them based in various parts of the country. Suppose they were to expand into Maine or Massachusetts, and assume that their non-tax characteristics were identical. They earn a pretax rate of return of 25 percent and then you say, what would their after-tax rate of return be if they expanded into Maine? Taking into account every tax they paid, every tax regulation, modeling the tax environment in great detail, talking to revenue officials, how are the taxes really applied? So these are after-tax rates of returns resulting from expansions into the various states. I have the New England states, plus a few other states that I looked at.

With a pretax rate of return of 25 percent, you have after-tax rates of return that range from a low of 14.5 percent in Connecticut, to a high of 16 percent in Alabama. But the thing that strikes me is how relatively similar most of the states are. Maybe two-tenths of a point differentiates the return to most businesses. The reason is that state and local business taxes are still a relatively small percentage of total business costs. So when you are trying to improve your business climate with business taxes, you are trying to wag a really big dog by a very small tail.

So what can we conclude from all this? We talk about the fact that we are in a new global economy. It is mind-boggling in its potential, but it is also unforgiving. It ruthlessly ferrets out inefficiencies bred by antiquated institutions, giving the smug and closed-minded no quarter. Its performance depends not so much on leadership from the top down, but leadership from the bottom up. Now more than ever before, our fortunes depend on how clearly we think and how well we communicate with others. As we deliberate about tax policy, let’s open up our minds and sharpen them. Drop the labels, stow the rhetoric. Let’s talk to each other and not at each other. If we do, I don’t know what our tax system will look like, but I promise you one thing — you will get what you pay for. Thank you.

As Bob was speaking, I wrote down a couple of comments that caught my ear. The first was that taxation is exciting. I don’t think so. At least it isn’t for me in the conduct of my everyday life. The second is, and I think this describes everything that we need to talk about, what does Maine want to be when it grows up? If we want to be a pro-business state, then that drives a certain set of responses. If we want to be a pure vacation state, then that is another set of responses. I think that is a very key question, and I am glad that it was put on the table first.

He also brought up the issue that there has to be a focus on competitiveness. If we truly desire to compete for business, then there are a set of rules, like it or not. Maine & Company goes out throughout the United States trying to attract businesses such as high-tech manufacturing, biotech, high-end telecommunications-based businesses, and software development. Forty-nine other states are going after the same businesses, so if we truly want to compete for those types of businesses, we have to be competitive. We can't look at taxation inside the vacuum of Maine alone, but have to look at it as it relates to our competitors.

Another issue that Bob brought up that I have to agree with tremendously is that the data can say anything. When I look at the data presented to me by site locators across the United States, it is usually easily accessible data that provides general information. But when you dissect it, it often isn’t the correct data to achieve the purpose that the company is trying to achieve. You have to be very careful with the data. One of the things that we try to do at Maine & Company is dissect the data and present it in a more useful and more advantageous way for Maine.

For example, site locators will often stop at unemployment rates. This means that Portland is often out of the running, with unemployment rates around two percent, but there is a heck of a lot more to the story. I think the same holds true for taxation. My analysis of the tax situation is that we are reasonably competitive with our business taxes, particularly in the New England area, as long we continue to apply some of the offsets or business incentive programs that exist. If we fade on those, I think we are going to lose competitiveness in the business tax arena.

I think that in the personal tax arena we are not competitive. Now what bearing does that have on companies? Every company has a different set of variables they are looking for. They all have a list, but they shuffle the list in different orders. If it is a small company, more of a mom-and-pop, personal income tax is important. It makes a difference because they are not going to come here. If it is a large corporation, more often than not, they are going to be hiring Maine citizens. But then the corporate income taxes and the property taxes, along with the personal property and real property taxes, are big issues. So it depends on who your target is and who intends to move to Maine.

I am not really representing any of the public entities, so I will simply talk from the perspective of an individual who set up a small company, which I moved to Maine about ten years ago. These are more anecdotal conclusions than well-researched conclusions, such as Bob has brought up here.

Forum started in 1986 in New York to do mutual-fund servicing, which is viewed as a back-office business, although it is highly technical. A lot of our employees are accountants and mostly university-trained people. This is not the kind of business that you want to run in a high-cost urban location. So we knew we had to leave New York City — although, interestingly, New York City (I will second Bob) has lower taxes than Maine. So it wasn’t a tax issue so much as the ability to get a good quality, stable workforce that wouldn’t have a lot of turnover and so forth.

But the real issue was that I wanted to live here. I had a home in Fryeburg for 25 years, and this is where I wanted to live. That was the dominating thing. When we did a study in 1987, I knew I wanted to be on the East Coast, so we started with Virginia and worked our way up, including inland Vermont. Maine was the worst state from a pure tax perspective. It was the best state from a lifestyle perspective. This is the choice that an entrepreneur makes. So we came here. We opened up in ‘87, and moved the whole company here in ‘89. We have not regretted it whatsoever. We have a good workforce, we have a good business, and we have been able to grow. We spent the first five or six years explaining to the industry why we were in Maine, because it was expected that we would be in New York or Boston or some urban area. As technology has changed, however, most businesses understand that you can locate almost everywhere now and do your business via telecommunications. Explaining Portland or Maine as a location is less of a problem than it used to be.

An interesting example that Maine can look at is the case of Ireland. Thirty years ago the Irish economy was poor, and half the Irish people were overseas looking for better jobs. Ireland used a targeted tax approach to improve their economy, and it was successful beyond their wildest dreams. Ireland has one million jobs. They are now trying to hire another 200,000 people from overseas to return and fill the jobs, because this focused tax effort created such a powerful economy that they have been able to reduce the total Irish tax burden to twelve percent. So you can use taxes as a way to change your economy, but it can have other effects as well. For example, a lot of new people might want to move to Maine, and some Maine people don’t want that. I think we have plenty of room and I would encourage it. I think that we are underpopulated, and that we can use more people and use more jobs. I would suggest to the legislative side that they look at some of those Irish efforts.

I guess another thing that I would point out is that, in this technology age, there are a lot of technology companies. To give ours as an example, we have 250 employees in Maine. Fifty of them are in technical services or technology services. Many companies are doing a lot of technology development right now, and you should not assume that manufacturing and service companies are not technology companies just because they are not solely technology companies.

The last thing is that the Internet is providing a means of delivery and distribution of products and services, and everyone is discussing its taxation. The analogy is buying your clothing in New Hampshire and driving back across the border, and not paying sales tax on the purchase. Well, the same thing is true with the Internet. I hope Maine doesn’t try to tax the Internet. Not because of the way Forum is using it, but because any company selling through the Internet, if it is taxed at its operating location, will not locate in that state. That simply means jobs.

Currently it doesn’t matter. We have two-percent unemployment. Almost anybody who wants a job can find one. So taxes right now as a policy tool are less important than they were ten years ago when Forum came to Maine. But I don’t think the economy can stay good forever. In my lifetime it has had its ups and downs. At some point we will be more concerned about growth, so I think that Internet taxation is an issue which should be publicly addressed and resolved quite clearly, so that companies know whether they can locate here.

I share with Bob Tannenwald a tremendous enthusiasm for tax policy. I think it is really neat stuff. It is where power gets distributed, and who gets it and who doesn’t. I am going to try to note things that I think are important. If there are “take home” things from today, then I would like to convert all of you into being advocates of a fair and sensible tax policy for Maine.

I think in general the business community has had ambivalent feelings about Augusta, and perhaps it is understandable that business people would rather be home in South Portland or wherever they do business than going and appearing before legislative committees. Sitting on those uncomfortable metal chairs cannot be the best way to spend an afternoon. But in my opinion the business community has gone to Augusta in recent years with a very narrow view of what Augusta should be looking at, and advancing things that do not always consider the larger picture of what Maine needs to be accomplishing.

The problem with any suggestion that we reduce the burden of taxes on business is the need for government revenues to come from somewhere. Now, of course, there are probably some people in this audience who think we can cut the cost of government, that we are spending far too much. Of course, the data does not support that although, as Bob has pointed out, everybody looks at their own piece of data. But I am going to say again that per capita spending in Maine is right exactly at the national average. It is right in rank with other New England states. It should not be a surprise to us that, if we want state government services equal to the states against which we are competing, we are going to need to spend a higher proportion of “our income” to get those average government services. This is because “our income” is less than that in other states.

Now the question is, are we satisfied with average government services? Before you say yes, I would like to ask you to go visit the Youth Center. See if you think we are doing okay at the Maine Youth Center. Go visit AMHI. Are we doing okay by our citizens with disabilities? Go visit the schools in Lubec, or the schools in Mexico, or the schools in Island Falls. Think about the workers that we are trying to train, and then decide if this good enough.

A lot of competing proposals are in Augusta right now. We are awash in money. But there are also plenty of proposals to spend that money. Jackson Labs, IDEXX, and the consortium that includes USM was in front of the appropriations committee yesterday for somewhere between 15 and 30 million dollars for research funds. If you invest it with us, we will make good jobs and provide health insurance. It will be a good investment. Don’t spend it on health care for folks; don’t spend it on public health. Just invest it with us. We will make good money for you. This is one business proposal that, frankly, I don’t think is a good idea. This is not because it is by itself a bad idea, but in comparison with the other needs, it is not the best way to spend our dollars.

I will pick a bone of contention that I imagine will get some people riled. I don’t think BETR (the Business Equipment Tax Reimbursement) is necessarily the very best expenditure of tax dollars to provide tax relief to International Paper, General Dynamics, and National Semiconductor. They are great companies; and they employ lots of great people. But when we have scarce dollars to spend, is that the best way that we can spend our scarce dollars? Personally, I don’t think so.

There is a proposal pending now to remove the snack tax. This has really got the Legislature in a box. Where are the people of Maine crying out for an end to the snack tax? Well, actually it was the American Grocery Manufacturers Association and Pepsico who spent about $40,000 to get it on the ballot. They only paid $0.50 a signature. It wasn’t too hard, but they did spend their good money. What is the legislature to do? If they don’t enact it they will send it to the people, and the people will be asked one question: “Do you want to reduce your taxes?” How are people going to vote? Of course they are going to vote for it. The legislature could enact it. But then we are out $19 million or $20 million of tax relief. Is that really the best way that we can spend tax relief?

Bob used the figures from the District of Columbia that showed relative tax burdens for families of different sizes. And my only quarrel with that comparison is that it compared a family living in Portland. Now the tax rate in Portland is 28 mills. Most high-income families moving to Maine don't settle in Portland. They settle in Cape Elizabeth where the mill rate is 19, or Yarmouth where it is 17, or Cumberland where it is, I think, 15. So is the comparison of Portland’s mill rate really that appropriate?

Any choice we make about tax relief has got to be made within the context of how we spend our dollars. Are we getting what we need? Are we training the workers that we need? No. Half of what the state government spends is on education, both for higher education and sending money back to localities for the K-12 system, which reduces the property-tax burden. I think there are some better ways that we can use our resources than reducing the tax burdens on business. If you look at the proportion of taxes, Maine’s tax system has a reputation of being very progressive. Well actually, when you put all of the taxes together, it is a flat tax. This means that people at the bottom of the income scale pay just about the same proportion of their income — although it is a much smaller income — as people at the top end of the scale. If I were providing relief, of course, I would want to target the people who are having the most trouble getting by. Those are the people to whom I want to provide tax relief. Not to the highest earners, who are doing very well.

The year 2000 is actually a good one to talk about taxes, because it is the 30th anniversary of the last truly significant change in Maine’s tax policy, which was the implementation of the state income tax. Over that period, Maine’s taxes have changed. But the basic structure of a state income tax, a state sales tax, and a predominantly local property tax has remained unchanged. We have shifted things around at the margin. However, we have made some important shifts. Those shifts have generally moved the tax burden from the property tax to the sales and income taxes. This started with the assumption by the state of local-education costs in the 1970s, moving through the ‘80s with the adoption of the circuit breaker program for the property tax, and in the ‘90s we have added a homestead exemption and the BETR program. To be sure, we have not moved the property tax nearly enough by some judgments. But that has been the single largest trend in the last thirty years.

The second major trend in the last thirty years for Maine tax policy has been to increase the number of tax incentives available to businesses. We have TIFS, E-TIFS, S-TIFS, and a variety of other incentives which are relatively small by national standards. In the creation of tax incentives, we have followed rather than led.

What are the tax issues that will be coming down the road? Joe, Kit, and John have all talked about the current tax system, and if you look at that system as a collection of individual pieces, each piece has its own problems that need to be addressed. For example, Maine does have a very progressive income tax. But it is also an income tax that applies its top marginal rate at a much lower real level of income than when it was instituted thirty years ago. This means that the top marginal rate applies to an awful lot of people who by today’s standards don’t really make a lot of money. This is also one of the reasons why state government revenues in periods of recession have been somewhat unstable.

Another set of issues concerns the sales tax. Over the last few years, the sales tax debate in Maine has been about whether to change the rate from 6% to 5.5% and then to 5%. That is okay, but other issues about sales taxes are looming just on the horizon. One concerns the Internet. The federal government continues to have its tax policy driven by an alliance between the anarchic left and the libertarian right, which has blocked any attempt to adopt a realistic policy on Internet sales. As John correctly points out, you cannot tax Internet sales jurisdiction by jurisdiction. You really have to develop some sort of national system for dealing with it. That means that sooner or later state and local governments dependent on the sales tax are going to have to be looking for other sources of revenue. Given the way the economy has evolved, this means we probably are going to be revisiting the issue of a sales tax on services. I am not advocating such a tax. I am simply pointing out that the issue is going to be unavoidable within the next ten years in Maine and everywhere else.

As Bob correctly points out, if we use state and local taxes as a percentage of personal income we get a very different reading of where Maine is compared with state and local taxes per capita. If we are going to change Maine’s high ranking of taxes as a percent of personal income, we must recognize that there are two pieces of data in that statistic: taxes and income. Do we attempt to raise incomes, or do we attempt to lower taxes, or is lowering taxes the way to get higher incomes? Bob correctly points out that the analogy here is not poultry, but canine: a large dog and small tail.

So what is the tax problem that we want to solve? Is it tax by tax? Looked at from the structure of each tax, one could make a very good argument that the income tax needs attention. The property tax needs your attention; and the sales tax needs attention. Looked at from the point of view of the tax system, you can come to different conclusions. The system overall may not be as bad as we think it is, because we have kept it in place for a very long time with relatively minor changes. Or is it a tax and spending problem? Here another issue is going to be that the federal government will continue to dump more and more responsibility for public services on the states. The so-called federal surplus exists largely though the fiction of dramatically restricting federal spending and shifting the burden to state and local governments.

So what is the tax problem we are trying to solve? Let’s start by answering that question as a way to begin the dialogue that Bob talked about.

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