Maine Millionaire Tax | Income Tax Increase

As Maine lawmakers turn their attention to passing a budget, a proposed taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase on high earners—bringing Maine’s top income tax rate to 9.15 percent—is generating significant debate. Twenty-three states have reduced their top marginal income tax rates since 2021, while six states have gone in the opposite direction, yielding a widening gulf between high- and low-income-tax states. Maine lawmakers will soon decide whether the state will cast its lot with the high-tax contingent.

The proposed 2 percentage point surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on high earners, recently endorsed by Gov. Janet Mills (D), would increase the top marginal rate from 7.15 percent to 9.15 percent above $1 million (single filers), raising $74 million per year from an estimated 2,631 filers, according to Maine’s revenue agency. The small number of filers raises significant volatility concerns, and the economic consequences of adopting one of the nation’s highest top rates would affect far more than this small slice of Maine taxpayers by reducing the state’s economic competitiveness.

Maine’s 160,000 small businesses employ 55 percent of all Maine workers, and the vast majority of these businesses are pass-through businesses (S corporations, partnerships, and LLCs), meaning that their income is taxed on owners’ individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source returns. IRS data show that 70 percent of Maine filers with more than $1 million in adjusted gross incomeFor individuals, gross income is the total of all income received from any source before taxes or deductions. It includes wages, salaries, tips, interest, dividends, capital gains, rental income, alimony, pensions, and other forms of income.
For businesses, gross income (or gross profit) is the sum of total receipts or sales minus the cost of goods sold (COGS)—the direct costs of producing goods had pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. income on their returns, and that 48 percent of all pass-through business income was earned by filers with more than $1 million in AGI. In other words, a tax on income above $1 million is, to a considerable degree, a tax on small business ownership.

Higher rates would reduce small business profitability and put Maine’s small businesses at a competitive disadvantage against out-of-state rivals. The result would be some combination of reduced investment and growth, business attrition, lower wages, and higher prices.

Economic decisions are made on the margin. When the tax rate on the next dollar of income rises, business owners are likely to hire fewer workers, delay capital investment, and scale back expansion plans. They may also try to raise prices. (Whether they have the ability to raise prices will depend significantly on the conditions under which their competitors are operating.)

Maine’s economic outlook is weak, with the Maine Consensus Economic Forecasting Commission estimating zero employment growth between now and 2031. A tax increase that burdens job creators certainly won’t help.

Maine’s tax, moreover, would apply to many people who aren’t what we ordinarily think of as millionaires. The roughly 2,600 people subject to the tax won’t be the same people from year to year. Many filers will report $1 million or more in income only once or twice, such as when they sell their business or an investment property. For them, this is a surtax on retirement or the return on many years of entrepreneurship and risk-taking, where most of the gains are realized at once rather than spread out over the many years of work that went into earning them.

High top rates have backfired elsewhere. In California, where voters approved increases to top rates in 2012, a combination of out-migration, reduced in-state investment, slower economic growth, and tax avoidance strategies eroded an estimated 61 percent of the anticipated revenue gains and did broader harm to the state’s economy. New Jersey’s Department of the Treasury assessed that the 2004 adoption of a new top rate of 8.97 percent above $500,000 increased out-migration by 20,000 over the next five years. And in New York, the Citizens Budget Commission found that the state’s share of the nation’s millionaires fell from 12.7 percent in 2010 to 8.7 percent in 2022, estimating that the state would have collected an additional $10.7 billion in individual income tax revenue in 2022 had the share remained constant.

The Maine budget proposal is based on LD 1089, titled “An Act to Permanently Fund 55 Percent of the State’s Share of Education by Establishing a Tax on Incomes of More than $1,000,000.” If the reader assumes from that title that an additional tax on millionaires can fund Maine’s 55 percent statutory obligation for education funding, they would be sorely mistaken. The state’s General Purpose Aid budget for next year is $1.56 billion, while the proposed new tax will only raise an estimated $74 million per year. It would cover perhaps 2.6 percent of Maine education spending, not 55 percent, and there’s nothing permanent about it.

Maine’s education budget is rising rapidly. In inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin-adjusted terms, the FY 2018 state share of the education budget was $1.28 billion, or about $7,084 per student. In FY 2027, spending is up while enrollment is down, with a state share of somewhere around $9,159 per student. Even if it didn’t risk broader economic harm, the proposed increase would not be a permanent patch, because education spending will grow faster than income.

High income, moreover, is particularly volatile because it is largely a mix of business and capital gains income rather than wage income. These income sources can dry up during an economic downturn, which makes a targeted tax on high earners a poor source of dedicated funding for recurring obligations.

A base of roughly 2,600 filers is inherently fragile. A bad year in the market can wipe out revenues, and the departure of even a small number of high earners would not only undercut revenues from the tax increase but would also have a ripple effect across the economy.

Both individuals and businesses are increasingly mobile, and with so many other states pursuing tax reform and tax relief, Mainers have more alternatives than ever before. A 9.15 percent top rate affects not only those who are already in Maine but also those who might otherwise come to the state or start or expand a business there. The modest amount Maine could collect from a high-rate income tax isn’t worth the damage to the state’s economic competitiveness.