Measuring Tax Burden Not Easy

(from Maine Townsman, December 2006)
By Jeff Austin, MMA Legislative Advocate

As everyone knows, Maine has the 15th highest residential property tax burden in the country. This burden places Maine just above the "middle of the pack" for the United States . . .

Excuse me? What's that you say? Doesn't Maine have the highest property tax burden in the country? Wasn't a significant element of the pro-TABOR and pro-Palesky campaigns the assertion that Maine has the "highest" overall tax burden and the second highest property tax burden?

Maine has relatively high property taxes by pretty much every standard. But, does Maine have the highest? Not exactly.

What is tax burden?

Measuring the relative tax burdens of every state is not as easy as it might seem. There are different sources of data and there are different metrics which can be used.

An analysis of "burden" compares the total income earned in the state with the total taxes paid in the state. In mathematical terms, tax burden equals total taxes paid divided by total personal income.

Who determines tax burden?

There are two sources of data that most tax burden analyses utilize. The Census Bureau provides nationwide data on taxes and the Bureau of Economic Analysis provides state-by-state data on total personal income. Many organizations scramble to compile the relative tax burdens of each state as soon as the Census Bureau's annual tax data becomes available. Perhaps the best known such organization is the Tax Foundation, a conservative-leaning, Washington D.C.-based think tank that promotes lower taxes as a matter of policy.

Are these data sources accurate?

The estimates of the Bureau of Economic Analysis of total state income is pretty straightforward and most people regard them as an apples-to-apples comparison of states from the income (or wealth) perspective. The Census estimate of state and local taxes, on the other hand, has been criticized for a variety of reasons.

In order to determine its estimate, the Census simply aggregates all the taxes paid in each state. For property taxes, the Census seeks to include the property taxes paid on all residential, utility and commercial property as well as the motor vehicle excise tax in each state.

The Census Bureau uses two different sources for its national estimates of taxes. For approximately 30 states, not including Maine, the Census essentially allows those states to report their own estimates to the Census. For the remaining 20 states, including Maine, the Census does not use state-generated figures; instead, the Census calculates its own estimate based on its data collection. For FY 2002, for example, the Census estimated that Maine's total property tax collection at $1.86 billion - a figure that Maine officials say is $262 million more than it actually is.

A March 2006 report by the Maine Office of Fiscal and Program Review (OFPR) says that the Census estimate of property taxes in Maine grossly overstated. The report, " Maine's Tax Burden: History and Projections", claims that the Census overestimates Maine's property taxes by 262 million dollars.

OFPR believes that the reason for the Census' faulty calculation is that the Census double-counts the property taxes for the counties. Whatever the reason, the Census appears to overestimate Maine's property taxes by 14%.

The Tax Foundation recently published a report on tax burden using the Census' 2004 data. In that report, the Census estimated that Maine collected $2.1 billion in property taxes causing Maine to rank second in tax burden. MMA's Kate Dufour reproduced the OFPR analysis and found that for FY 2004, the Census has again overestimated Maine's property taxes by approximately $257 million.

Is there an impact on Maine's relative standing in terms of its ranking in tax burden analyses? Its impossible to know for sure, but since 30 other states are allowed to calculate their own tax amounts, one can fairly assume that Maine is at a disadvantage compared to at least 30 states. If the Tax Foundation were to use Maine's property tax data rather than Census' data, Maine's ranking would fall from second to fifth.

Other problems

The bigger problem with tax burden analyses is the basic aggregate-data approach itself. The tax burden analyses presume that all the taxes collected in Maine are paid by Maine income earners - which is flatly untrue. In other words, while the property taxes on the mansions of wealthy non-residents in Maine increases Maine's total property tax collections, none, or very little, of their income is earned in Maine, therefore not increasing Maine's total income data. Thus, the "taxes to income" tax burden analyses give the mis-impression that Mainers pay Martha Stewart's property tax bill. We don't. To its credit, the Tax Foundation recognizes and identifies this shortcoming (referencing Maine for illustration). However, political proponents of lower taxes do not acknowledge this flaw.

Again, is this structural flaw with aggregate tax burden analyses particularly biased against Maine or is the effect of this flaw even across all states? This would seem fairly easy to answer by rephrasing the question. Does Maine have an above-average number of non-resident property owners? Absolutely. In fact, Maine has the highest number of second homes (both resident and non-resident owned) and one of the highest rates of non-resident property ownership. It is intuitively obvious that more people have second-homes in Vacationland ( Maine) than they do in many low tax burden states such as the Cornhusker state ( Nebraska).

The time lag for tax burden data analyses is also a consideration. The most up-to-date tax burden analyses use 2004 data, which is two years old. A separate issue, but related, is that the Census analysis of state and local taxes does not consider tax rebates like the $80 million BETR reimbursement and the Circuit Breaker rebate program. Budget accounting changes in recently years by the Maine legislature now treat the funding of these programs as non-tax revenue appropriations and will result in a more favorable picture of Maine's tax burden in future data analyses.

Non-Tax Revenue problem

Tax burden analyses create the impression that high tax burden states spend a lot more on governmental services. This is not necessarily true. In fact, some of the big government spenders are states with low tax burdens, e.g., Wyoming and Alaska.

From the perspective of the average citizen, whether you are paying property taxes in order to fund your local fire department or a fire protection "service fee" doesn't particularly matter. Either way, you are paying for that local service.

From the perspective of these tax burden rankings these alternative revenue sources matter a lot. States which rely heavily on user fees and other non-tax revenues tend to have lower tax burdens and those which fund governmental services mostly from tax sources tend to have the higher tax burdens.

In addition to user fees, many states rely on oil and mineral extraction fees and gambling revenues. Maine does not rely in any meaningful way on these alternative sources of revenue.

The Tax Foundation compiles a list of the states that rely most heavily on taxes and those that rely most heavily on fees (see chart). It should be no surprise that those which rely least on taxes come out looking the best in the tax burden analysis.

The states that received the lowest proportion of their revenue from non-tax charges are all in New England: (starting with the lowest): CT, RI, NH, VT, MA, ME and NJ (tied).

Accordingly, tax burden rankings can be misleading to voters who might think the ranking directly correlates to the level of government spending. The use of these rankings in the political context is deceptive. By excluding the fees and charges and counting only taxes, tax burden analyses are fundamentally biased against the older New England systems of finance and more favorable to Western and Southern States.

Several states have low tax burdens because their governments receive fees for the extraction of minerals or oil. For example, Alaska has a low tax burden because the Tax Foundation does not count the revenues Alaska generates from its fee on oil extraction. West Virginia and Wyoming generate significant fees that fund governmental services from coal mining companies.

The irony is that oil and coal producers simply pass along the costs to the various end-users (the energy consumers). So not only do Alaska, Wyoming and West Virgina look good on the tax burden analysis, but the cost of funding their governmental services is being paid by energy consumers, which include other state and local governments.

Better Mousetrap?

The Tax Foundation, which is probably the leading source for aggregate-based tax burden analysis, has produced a more useful ranking that gives a better picture for the average property taxpayer. It has compiled a list of the relative tax burdens on the median homeowner. Instead of using aggregate totals of income and taxes, it has taken the median property tax bill for owner-occupied housing (excluding second homes) and compared it to the median income for homeowners.

For 2005, the median owner-occupied residential tax bill in Maine was $1,742; the median Maine income for homeowners is $51,692. Comparing the two, Maine's median property tax burden is 3.37%; which ranks Maine 15th; ( New Jersey is first, Louisiana is last).

This method of determining tax burden has shortcomings as well. One is that it does not give the business owner a picture of property taxes on businesses. The second shortcoming of the homeowner-based tax burden analysis is that it excludes renters. However, each of these shortcomings would require extensive work in order to determine the actual burdens on these two categories of taxpayer.


Maine has high taxes and no amount of reworking or repackaging the data can erase that fact.

However, when one hears that Mainers have the highest property tax burden the flaws underlying such "burden analyses" are so large and so fundamental, that the assertion has to be seriously qualified.

Those flaws are that: (1) the U.S. Census inaccurately overestimates Maine's total property tax collections; (2) Maine has a disproportionate number of wealthy non-residents helping carry Maine's property tax burden compared with the rest of the nation (and the income of those non-residents is not included in the analysis); and, (3) tax burden analyses ignore other forms of revenue such as services fees, extraction fees and gambling revenue which New England states utilize less frequently than the rest of the nation.

Maine needs to address its taxing and spending challenges. However, it should do so in a context which fairly presents the issue and honestly compares Maine to the other states in the nation.

State Non-Tax Revenue Rank Tax Burden Rank
Alabama 34.5% 1st 46th
Wyoming 32.5% 2nd 33rd
US Average 22.4% - -
MAINE 13.7% T- 44th 1st
Rhode Island 9.9% 49th 8th
Connecticut 9.7% 50th 9th