Maine Tax Reform Shows Opportunities and Challenges of Reform

On June 8, 2010, voters in Maine will get to vote on whether they approve a tax reform law enacted in 2009. The gist of the 2009 legislation was to lower the top personal income tax rate and broaden and in some cases, raise the sales tax. The personal income tax base was also broadened by eliminating or limiting some deductions. There are summaries of the 2009 law here:

• About.com
• Federation of Tax Administrators

Observations:

• Lawmakers identified several problem areas in their tax law, such as a narrow sales tax base, deductions that favored high bracket taxpayers and a high income tax rate and acted to fix it. +++++
• While some complexity was removed by eliminating some deductions and the AMT, a few new ones were added by applying sales tax to some narrowly defined items. Generally, it would be best to tax the larger group (or exempt it) rather than try to define a subset which is not always easy to do (such as "candy").
• The sales tax was expanded to various entertainment. This is a good idea as there is no reason to exempt this type of consumption and high income individuals spend more on it than do low income individuals.
• Inflation adjustments were included for some dollar amounts - that's a good thing to include in a law from the start so the rule can continue to operate as planned going forward.
• With a reduction in income tax for high income individuals and broadening of the sales tax base, it would be helpful to see what the distributional effect of the tax changes are among different income groups.

It will be interesting to see what voters say on June 8.