Taxes, taxes, and taxes. That seems to be what’s on everyone’s mind lately. From AOC’s provocative dress to Biden’s budget, taxes dominate our social and political debate. For many, it’s a concern of who is “pulling their weight” in society; for other’s it’s theft; for (most) economists, it’s a way for the government to balance the money supply. No matter how you view them or if you like them, there is no getting away from the debate.
Here in Maine, we have been wrestling with ambitious initiatives looking to create new social programs by taxing the state’s (few) high-income earners. While I do inherently agree that if we are going to rely on an income tax we should be looking at creating a system that does not put unneeded stress on those that need income the most, it is important to highlight that this isn’t the only option. In fact, just across the border we are presented with a unique tax structure, many argue works more efficiently then our own.
New Hampshire is famous for its motto, “live free or die.” Taking this to heart, the state imposes no income or sales tax. There is a 5% tax on dividends and interest, though this is arguably a tax on rents, not income. This policy is beneficial for many reasons, and the windfalls are seen in multiple sectors.
For starters, New Hampshire boasts an average income of roughly $76,000 to Maine’s $56,000. There are undoubtedly numerous socio-economic reasons for this divide. However, it cannot be ignored that the absence of a sales/income tax offers the low-income earners a further-reaching dollar than their Maine counterparts. This, in turn, can help to spur domestic demand through spending, encouraging new businesses to move in as the services are expanded, raising property values, and stimulating growth through public and private investment. The same dynamic leads to citizens from other states crossing the border to purchase products tax-free, only to take them back home to consume there, highlighted beautifully by the New Hampshire Liquor store just a stone’s throw from their border with Maine.
Looking at these numbers, it could be argued that New Hampshire is missing out on a significant revenue source, limiting its ability to grow. This, however, is quickly dismissed when you compare budgets. New Hampshire’s is slightly smaller at roughly $6.5Billion to Maine’s $8Billion, translating to $4,400/capita and $6,000/capita, respectively. With only a difference of $1.5Billion, the fact that Maine’s dependency score (based on a ratio of dollars received and sent to the federal government) is more than double of New Hampshire’s highlights how the increased private investment both allows for smaller local government, well also diminishing the footprint it leaves on the federal budget by prompting additional tax growth. Finally, comparing the GDP of the two states highlights how the competitiveness of the tax code can impact the quality of life for its citizens. With almost four times the total square mileage, Maine’s GDP comes in ten billion lower than New Hampshire’s, $67.7Billion and $76.6Billion, respectively.
So if Maine has every advantage and is still falling behind, what can we do to be more like the snappy little state to our West? I’d argue for the same vein of policy as the former Presidential Candidate Andrew Yang, tax the dollars before they hit people’s wallets. In doing so we can impose a smaller burden on our citizens while also creating an easily enforceable tax code as people’s working and social lives continue to diverge with the onset of remote work. To do this, we could impose a VAT tax on manufacturing business or even mimic New Hampshire Business Enterprise Tax system, ensuring that businesses are paying for their fair share of development rather than using capital gains schemes to swindle their way out of taxes.
The argument can also be made to cut taxes as a whole and eliminate spending. This would work perfectly if taxes were the only thing determining when and where businesses set up shop. For starters, and as highlighted in my previous post on social mobility and community development, if there aren’t people, the businesses won’t invest. A healthy workforce is the primary concern of any new or developing company. As well, the ease of access is highlighted in the fiasco that was Amazon HQ2. By eliminating regulations, cutting taxes, and investing in infrastructure, the numerous municipalities all around the America’s highlighted what it is a business is looking for when choosing a new community to invest in. In order to promote these services, Maine will realistically have to spend to fix our roads, improve internet access, create a more mobile populace, protect businesses from climate change, etc. Because of this, we must remove from the table the notion of “small” government and instead focus on what the partnership of public and private is, a balancing act.
Maine has a long way to go to be considered competitive with the rest of New England. The shift to remote work during the COVID lockdowns helped to encourage new citizens to move here. To ensure that we reap the benefits of this in-migration, we must look to the states around us that have benefited for years. By creating a healthier, happier, and more equitable state, we will not only be increasing the GDP but improving the quality of life for those Maine families that had called this rugged little corner of the earth home since before it was Maine. To fail to do so will put us back into the cycle of dwindling young families and slowing business growth; to fail to do so is to fail Maine.
My Maine Musings 