Measuring Tax Burden
(from Maine Townsman, March 1997)
By Michael L. Starn, Editor

In 1996, Maine state and local governments raised slightly over $3.3 billion in taxes, according to the State Planning Office. If those taxes were shared equally by Maine’s 1,227,928 citizens, then each person would have a tax burden of $2,691.52. But, taxes are not apportioned equally on a per capita basis; and measuring tax burden is a more complex undertaking than simply dividing total taxes collected by a state’s population.

To begin with, state tax systems are not simple. Most every tax has its exemptions, deductions, and depreciation schedules to follow. In addition to the taxation laws and regulations that must be complied with, there are federal and state constitutional protections that limit a state’s authority in designing its tax system.

While state and local tax systems and measuring tax burden may not be simple, it isn’t rocket science either. Data is readily available from a variety of federal and state government agencies that tell how much governments receive in tax revenues and, in general terms, who pays them. Even though Maine’s tax structure may be complicated, the taxes themselves are fairly easy to understand and calculate. A sales tax is a flat percentage of what something costs added onto the purchase; property taxes are determined by applying a mil rate to valuation (fairly simple arithmetic), and income taxes - once you’ve figured out what your taxable income is - can easily be gleaned from the tables published in the individual tax return booklet.

Because tax and economic analysts will use different methodologies and sometimes data from different sources, measuring a state’s tax burden can be confusing at times with statistics varying from one report to the next. For example, one researcher may use the 1990 U.S. Census as the population source while another uses the annually published population projections of the Office of Data, Research and Vital Statistics under the Maine Department of Human Services.

This article attempts to explain Maine’s tax burden as simply as possible. The statistics used in this article may or may not agree with what you’ve heard or read. The article primarily uses information published by the Maine State Planning Office, the federal Department of Commerce’s Bureau of Economic Policy Analysis, and the Citizens for Tax Justice and the Institute on Taxation and Economic Policy.

MAINE’S TAX STRUCTURE

Where do Maine state government and the 492 local governments get their money? The $3.3 billion of state/local tax revenue is comprised of the following: $736 million comes from the sales and gross receipts taxes, $735 million comes from individual and corporate income taxes; over $1.1 billion is raised through property taxes; and "all other" taxes account for about $701 million. Tax revenues from fuel, cigarettes, alcohol, motor vehicles, boats, etc., are in the "other taxes" category.

Looking at state and local tax revenues in terms of their share of the total tax mix, the sales tax is 22.3%; individual and corporate income taxes comprise 22.2%; property taxes are 34.3%; and "all other" make up 21.2%. Of the mix that includes only the "big three" state/local taxes - income, sales and property - property taxes in 1996 were at 43.5% followed by sales at 28.3% and income at 28.2%.

Who pays these taxes? Obviously, most of Maine’s taxes are paid by Maine residents/homeowners. Businesses pay a significant amount of income and property taxes (but their taxes are ultimately passed on to the consumer of their products or services). Non-residents make a sizeable contribution to Maine’s tax revenues, particularly through sales and property taxes.

How much does each group contribute to Maine’s total tax revenues? Much of the answer to this question will be a guesstimate.

What we do know is that individual and corporate income taxes are paid primarily by Maine residents and business people. So, we can assume that Maine residents pay most of the $689 in individual Maine income taxes and the $71 million in corporate income taxes. But, this assumption is a little misleading because a number of Maine businesses are either owned by non-residents or are publicly-owned companies (stocks). Because these companies are often long-time "residents" of a community, many people do not consider them to be "non-resident" businesses.

Surprisingly, non-residents pay a significant amount of Maine’s individual income taxes. The Bureau of Taxation reports that non-residents filed Maine individual income tax returns in 1995 totaling $33.6 million paid in taxes.

Property taxes ($1.1 billion) are split between residential and business taxpayers. MMA Research Associate Kate Dufour has collected and analyzed data on residential versus business property valuations and roughly estimates a 60% residential to 40% commercial/industrial ratio throughout the state. Since the property tax rate is applied equally to all types of property in Maine, valuation ratio should be equivalent to the amount of property taxes paid.

The residential resident versus non-residents contribution is also hard to determine. MMA’s Dufour recently surveyed about 30-40 Maine communities and found that the ratio of resident to non-resident valuation fluctuated greatly among communities. Some reported over 40% non-resident value; others came in at less than 5% non-resident value.

Tourists are believed to have a big impact on state revenues, especially sales and gas taxes, but a precise measurement of the impact is unavailable.

MEASURING TAX BURDEN

The aggregate numbers showing who pays and how much each group pays in taxes do not measure the burden on Maine’s taxpayers. The typical way of measuring tax burden is to look at taxes paid in relation to a person’s or family’s income. This article looks at two approaches to measuring tax burden - one based on total personal income and the other based on ability-to-pay by income group. Both approaches show taxes paid as a percentage of personal or family income and the results are matched against tax burdens in other states.

Using Personal Income

The $3.3 billion of Maine state and local tax revenue collected in 1996 represents 12.3 percent of Maine’s total personal income in 1996, according to the State Planning Office. SPO estimates Maine’s total personal income for 1996 at $26.8 billion.

A state’s personal income is all income received by, or on behalf of, all residents of that state. Income received from all sources, including wages, salaries and tips, investments, government assistance (like social security), etc., is defined as personal income.

The latest year for which actual data has been collected on all states is 1995. According to information from the federal Bureau of Economic Analysis, Maine’s total personal income in 1995 was $23.2 billion. Maine’s per capita income (total personal income divided by population) was $20,105. The per capita income for the entire nation was $23,208. Maine ranked 36th in the nation in per capita income in 1996.

The amount of taxes that Maine residents pay relative to personal income is higher than the national average for two reasons: (1) Maine ranks well below the national average in per capita income (36th); and (2) Maine ranks above the national median in state and local taxes paid per capita (22nd according to the State Planning Office). When compared to income, Maine ranks 10th in the nation in overall state and local tax burden.

According to the State Planning Office, Maine’s total tax burden (state and local taxes raised as a percentage of the state’s total personal income) increased steadily during the 1980’s and early 1990’s. In 1985, the tax burden was 10.4 percent and by 1994 it had reached 12.7 percent. SPO estimates the burden will fall to 12.3% for 1996 and 1997.

Based on Ability-to-Pay

The tax burden statistics that compare taxes to personal income are in the aggregate and therefore give an overall view of a state’s tax burden. To relate tax burden to one’s ability-to-pay, it is necessary to look at the tax burden of various income groups.

Citizens for Tax Justice and the Institute on Taxation & Economic Policy in Washington, DC, published a book last summer that looks at the amount of taxes paid within various income groups, as a percentage of each group’s average income. The authors compare every state and the District of Columbia.

From their study as published in Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, researchers discovered that in many states the poor and middle-to-low income families were bearing a disproportionate share of the overall state/local tax burden.

Among the researchers findings were:

The average state and local tax on the "best-off" one percent of all families is 7.9% of their income, while the poorest 20% of families had a tax burden of 12.5% and middle income families shared a 9.8% tax burden.

Only eight states require their "best-off" citizens to pay an equal or higher share of their incomes in taxes than middle income families. And, only four states tax their wealthiest at the same or higher effective rates than the poor.

Regressive vs. Progressive Taxes

Certain taxes impose more of a burden on middle and low income than higher income people. For example, suppose two people buy identical cars for $20,000. One of the purchasers has an income of $30,000; the other has an income of $60,000. With a 6% sales tax in Maine ($1200 on the $20,000 car), the $30,000 person is paying 4% of his/her income in sales tax on the car while the $60,000 person is paying 2% of his/her income.

"Sales and excise taxes are the central regressive element of most state and local tax systems," say the authors of Who Pays?

Their reasoning is simple. "Because graduated rates are next to impossible in a sales tax and because spending as a share of income falls as income rises, sales taxes inevitably take a larger share of income from low and middle income families than they take from the rich."

Property taxes are also considered regressive because they are not directly related to a person’s ability-to-pay. Drawing from the sales tax example above, if the $30,000 income person and $60,000 income person both own homes in the same community valued at $80,000, then the $30,000 individual will pay twice the percentage of his/her income as the $60,000 person in property taxes.

Property taxes, while somewhat less regressive than sales and excise taxes, are still a regressive tax, according to Who Pays?. For average families, a home represents the lion’s share of their total wealth; however, at higher income levels homes are only a small percentage of a family’s wealth.

Renters also have a disproportionate share of the property tax burden. The property tax on residential rental property that is passed on to renters in the form of higher rents is a much larger share of total income at low income levels than at high income levels.

The regressivity of the property tax is somewhat mitigated by its application to businesses and also to the degree that it is "exported" to non-residents. Typically, non-residents, who are paying taxes on a second home, are of a higher income group.

State individual and corporate income taxes are the chief progressive element of state and local tax systems, according to Who Pays?. Since the amount of taxes paid is directly related to income, "It is difficult to design an income tax system that is not at least somewhat progressive," note the authors of Who Pays?.

Some state income tax structures are more progressive than others. A graduated tax - where higher income people pay proportionally more than lower income people - is more progressive and tends to mitigate the regressivity of other taxes in the state’s overall tax scheme.

More Progressive/Less Regressive

Making regressive taxes "less regressive" and progressive taxes "more progressive" allows a state to have a diverse, yet fair overall tax structure. In other words, a state with a very progressive income tax combined with a moderately regressive sales and perhaps a mildly regressive property tax would have a balanced, equitable overall tax system.

As noted above, graduated rates make the income tax more progressive. State income taxes that are piggybacked on to the federal income tax, with its graduated rates, are considered progressive. Likewise, states that offer Earned Income Credits for the low income working poor have a more progressive income tax, according to Who Pays?.

Ways in which states lessen the regressivity of their sales tax is to exempt certain items of basic necessity and extend their tax to items/services currently exempt which are likely to be purchased by people with higher incomes. Many states, including Maine, exempt such items as food and shelter. Maine also excludes the first 750 kilowatts of a person’s electric bill from its sales tax.

The tax reform proposal, supported by MMA, would expand the sales tax to various kinds of services currently exempt in order to give property tax relief to Maine residents (see article in this issue). MMA believes that this approach to tax reform will make the highly regressive sales tax somewhat less regressive by expanding its application to those better able to afford it. At the same time, using those additional revenues to ease the property tax burden on Maine residents will make that tax less regressive.

LOWERING MAINE’S TAX BURDEN

Governor Angus King wants to reduce Maine’s overall tax burden. He is proposing to reduce that tax burden through state and local government "revenue targeting". His goal is to reduce Maine overall state/local tax burden from 12.3% of the state’s total personal income to 11% (or less) by 2001. A more generalized goal of the Governor is to get Maine from the top 20% of states in tax burden, based on total personal income, to the middle of the pack.

A bill has been prepared for this legislative session to require "revenue targeting". On March 13, MMA’s Legislative Policy Committee heard a presentation on the bill by SPO Director Evan Richert. Richert cited four things that the Governor’s Tax Revenue Targeting bill tries to achieve.

1) Conscious decisions as to the share of Maine people’s incomes that, based on economic conditions and public needs, should go to state and local taxes in a biennium.

2) A self-imposed discipline to reduce the state’s tax burden from the top 20% of states to the national median over the next four to six years.

3) Fair distribution of responsibility between state and local governments and the taxes they raise.

4) Preservation of the authority of individual municipalities to shape and adopt their budgets to meet local needs.