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Wednesday, February 8, 2012

Analyzing Special Tax Rules + Observations from the Governor of Maine

A tax exemption means that a tax doesn't apply to what otherwise would be in the tax base. On January 6, 2012, Governor LaPage of Maine vetoed two bills that would have provided various exemptions or tax credits to selected Maine taxpayers. I think his reasons are insightful.  His key points follow (click here for his press release with a link to the veto message for each bill):
  • LD 205, providing a sales tax exemption for "incorporated nonprofit performing arts organizations." Governor LePage: "Performing arts organizations are important to the cultural fabric of Maine. However, simply because something is worthwhile and good does not mean it should enjoy tax-free status. Exemptions from the sales tax should be saved for the necessities of life – food, shelter, medicine – as well as for important initiatives meant to foster growth and create good paying jobs in Maine industries, increasing our overall tax base. Performing arts organizations, while important, do not rise to meet this threshold."
  • LD 338, providing an "Income Tax Credit for Logging Companies That Hire Maine Residents." Per Governor LaPage: "This bill would place farmers and forestry on different footings, which works against the policy of creating uniformity and equity in our 21st century natural resource-based industries. Further, this bill will likely do little to achieve its proposed objective – encouraging timber companies to hire Maine residents. The amended version allows full access to the $1000 fuel tax credit as long as someone from Maine is employed by the company. Quite frankly, there are better ways to give our loggers tax relief and allow them to create jobs in our working forests."
Governor LaPage makes some excellent points that must be considered in adding any special rules to any tax system.  Using and broadening upon his observations, here is a list of questions that should be asked before a deduction, exemption or credit is added to a tax system (or renewed):
  • Is the intended benefit needed? Will it help support and advance the jurisdiction's economic, societal and environmental goals? What data is being used to support the proposal?
  • Does the benefit need to be administered via the tax law? Might a direct grant and application process work better? Is there already an existing system set up for administering the benefit or subsidy?
  • What inequities will it cause and what will be the impact to the economy, society and the environment? Does it make sense for other taxpayers to pay for the subsidy that other taxpayers or industries will receive?
  • How will the benefit be distributed among different income groups? Will it make the tax system more regressive (that is, have a greater impact on low income taxpayers than on high income taxpayers)?
  • If the exemption or special rule is being suggested because it relates to a "necessity of life," has data on how different income groups spend for the "necessity" been examined? Such data may show that higher income taxpayers spend proportionately more than lower income and thus, would gain significantly more from the exemption than would lower income taxpayers. An alternative may be to tax the necessity and then provide a refundable credit to low income taxpayers (a good example is application of sales tax to food).
  • Would it be better to lower tax rates rather than add a special rule that results in lower taxes for some taxpayers but with added complexity and likely making the system less equitable and less efficient?
  • If the above analysis still leads lawmakers to favor the special rule, what accountability measures can be added to ensure that the provision attains the desired goal? Also, the special rule should be temporary so its effectiveness can be studied. Data should be required to be collected so that the effectiveness can be determined as the expiration date approaches.
What do you think? What would you add or modify from my list? What do you think of Governor LaPage's comments?

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