Maine State of the State: Governor Embraces Bold Tax Reforms for Final Year
Maine Governor Paul LePage delivered his final state of the state address. He did not attempt to shape his legacy by claiming credit for victories and shifting blame for losses—a pattern of final addresses from other governors. Instead, Gov. LePage outlined a bold series of proposals ranging from conforming the state income tax code with the federal code, implementing Medicaid expansion, which voters approved, in a fiscally responsible way, and pursuing substantive property tax reform.
For many states, federal tax reform will result in unexpected state tax revenue increases. The vast majority of individuals are enjoying a federal income tax cut. Although the federal reform eliminated the personal exemption ($4,050 deducted from income), the standard personal deduction nearly doubled to $12,000 for single filers and $24,000 for those who are married and filing jointly. However, in the 13 states (including Maine) that link their personal exemption to the federal personal exemption, many of these same individuals are set to experience an increase in their state income taxes as their income subject to taxation on the state level will now increase.
Given the previous year’s budget battle, Gov. LePage could just quietly accept the additional revenue stemming from this conformity issue. Of course, this amicable, final legislative session would come at taxpayer expense. This is unacceptable to the governor, who declared that he “will not support any conformity measure that results in a net increase in income taxes.” The governor’s bill ensures federal code conformity, but with offsets to ensure the state tax burden does not grow.
In December, Maine voters approved a ballot initiative that expanded Medicaid. Proponents claim expansion is warranted as a way to combat the medical debt problem; at the same time, expansion may be exacerbating the opioid addiction crises as access to these drugs expands. Expansion also creates perverse incentives for state governments, hospitals, and insurance companies. The federal government currently covers 90 percent of the cost; shifting state costs to taxpayers elsewhere across the country diminishes the incentive on the part of state-level administrators, auditors, and “gatekeepers” to reduce fraud and abuse.
Gov. LePage plans to implement Medicaid expansion in as fiscally responsible a way as possible through four guiding principles: “(1) No tax increases on Maine families or businesses. (2) No use of the …Rainy Day Fund. (3) No use of other one-time funding mechanisms—known as budget gimmicks. (4) Full funding for vulnerable Mainers who are still waiting for services, and no reduction of services or funding for our nursing homes or people with disabilities.”
These four principles would prevent Medicaid expansion costs from causing spending growth overall in the next budgeted year to increase. Unfortunately, budget actuaries continue to underestimate costs for Medicaid expansion beneficiaries. Future governors will likely struggle with these costs.
Gov. LePage touched on an issue which tax analysts even dread talking about: the impact of property tax exempt real estate. According to the governor, Maine’s municipalities report $18 billion dollars of exempted property. Homeowners are forced to pay higher property taxes—to the tune of $330 million annually—to compensate for these other property owners exempt from taxation. Much of this land is held in non-profit conservation trusts. In fact, the acreage held in such trusts swelled from under 36,000 acres in 1993 to more than half a million acres in 2017. Combined with land conserved by the state and federal government, nearly 20 percent of all land is “conserved from development.” The governor declared, “The desire to preserve land without benefit to the taxpayers or their input is out of control. We must restore balance. We must ensure that all property owners are required to contribute to the local tax base.”
Reintroducing land to municipal tax rolls would empower them to create their own, local solutions to their unique challenges, reducing the need for state intervention.
Despite economic realism being on his side, Gov. LePage’s call for property tax reform required political courage. The property tax is highly visible; demagogues can easily weaponize the issue in order to block needed change. Maine ranks 42nd place in economic outlook (according to the Rich States, Poor States ALEC-Laffer State Economic Competitiveness Index). The 4th highest personal income tax, 10th highest corporate income tax, and 6th highest property tax burden are largely responsible for this dismal outlook. While repealing the 3 percent income surtax will improve Maine’s outlook, additional reforms are needed.
Gov. LePage intends to conclude his tenure the way he began: tirelessly chasing reform and clearly articulating the rationale behind his stances. As with previous years, the governor’s speech stands out relative to the rest. For that and many of his ideas, we applaud his service as governor.