One of the main arguments for cutting state taxes is that it will lead to faster economic growth.
That was what Arthur Laffer said would happen in Kansas, but the state’s slower than predicted economy has led to huge revenue shortfalls. Now they’re talking about big increases to sales taxes, among other things.
You can see here that the states that put big income tax cuts into effect performed worse than the national economy did over the same period — Maine included. [source]
As Michael Leachman notes:
No state that enacted large personal income tax cuts in the past five years in hopes of spurring growth has seen its economy surge, new data on state gross domestic product (GDP) show. That adds to the already strong evidence that the tax cuts haven’t produced the immediate boost some proponents claimed.
In all five states — Kansas, Maine, North Carolina, Ohio, and Wisconsin — GDP growth has been slower than national GDP growth since the tax cuts took effect.
While most of these states were doing relatively poorly before the tax cuts (only North Carolina grew faster than the nation at large in the year before cutting taxes), none have seen a clear improvement in growth relative to the nation since the cuts took effect.
Maine’s picture is especially clear, with only .6% growth at a time when the U.S. economy grew at a rate of 7.1%.
Of course every state’s economy is affected by any factors. An important factor for Maine’s is its relatively old population.
However, these data do not support claims that tax cuts promote economic growth.
What should Maine do?
Enacting tax cuts in Maine for the upcoming budget should be done in a way that targets middle and low income Maine people, since they are more likely to spend the money and put it back into the Maine economy.
Changes in the Maine tax code should also introduce more brackets. Gov. LePage proposed doing so. This was a good idea, although the governor’s proposal would have been been better without the bubble bracket and without other taxes that disproportionately hit lower income and middle class Mainers. The proposed estate tax cut helps a very tiny portion of Mainers in the top quarter one 1%.
More brackets would make the Maine tax code more progressive. Currently our state tax system is regressive, as seen in the below graph, with the top 1% paying 7.5% of its family income in taxes while the lowest 20% pays 9.4%.
Click here to see the source of this graph for more information about Maine’s tax system.