Are Maine’s Tax Cuts “Working”?

YESTERDAY, Mario Moretto wrote a piece in the BDN regarding the state’s $49 million surplus for fiscal year 2014.  He writes (my emphasis):

When the books closed June 30 on the 2014 fiscal year, the state had more than $49 million in surplus.

A significant chunk of that extra cash came from individual and corporate income taxes bringing in $38.6 million more than expected in the recently concluded fiscal year. Another $9.8 million in surplus was created in state savings, when various agencies were able to spend less than expected.

Not too long ago, there was a bit of discussion regarding the “record” revenues.  Now, Maine has run budget surpluses the past two fiscal years.  Couple those two facts with the highlighted text above, and some might conclude that the tax cuts, and the underlying economic theory, the Laffer Curve, are justified.

Simply, the LC suggests that by cutting tax rates you expand the tax base through increased economic activity and employment.  If Maine’s tax cuts were “working” as the LC would predict, then we should see revenue increases spurred on by increased economic activity and employment growth.

From 2012 to 2013, real GDP growth ticked up slightly from 0.6% to 0.9%.  Moreover, nonfarm payroll employment grew by 0.6% in 2013, and has picked up thus far in 2014, with July nonfarm payrolls up 1.2% from a year prior (the highest monthly growth rate since May 2012)  Also, sales and use taxes increased by 9.6%.  Although, this suggests that the tax cuts may have had the intended economic stimulus, other data suggests that the tax cuts had, at best, a neglible impact on the state’s economy.

As indicated in the two charts below, adjusting for inflation, Maine’s tax revenues for FY 2014 are down 1.7% from a year ago, and down 10.3% from FY 2007.  Since 2007, FY 2014 brought in the second lowest revenues (2010 being the lowest).  Much of the decline in total revenues was brought on by a decline in personal income tax revenues.  While sales and use tax revenues increased (suggesting that cuts to personal income taxes increased disposable incomes and thus boosted consumer spending), personal income tax revenues fell 9.7% from a year ago (down 9.6% from 2007).  In terms of dollars (rather than percentage), the decline in revenues from personal income was not offset by the increase in revenues from sales and use (in inflation adjusted dollars, personal income revenues declined $150,323,195, while sales and use revenues increased $96,596,846, leaving roughly a $53,000,000 gap)*.

(click images to enlarge)

Maine Taxes 2007 - 2014

 

Maine Taxes 2007 - 2014-2

Additionally, the economy was growing in 2010, pointing to the reality that the state’s economy was rebounding from the recession prior to the enactment of the tax cuts.  Also, the growth from 2012 to 2013 is negligible, and not necessarily evidence the cuts implemented in 2013 boosted economic activity in terms of consumption**, and the change in nonfarm payrolls remained constant in 2013 relative to 2012.  2014 has experienced an increased rate in job growth in Maine, but a 7 month window is a limited data sample.

In other words, it’s difficult to see a clear ‘boost’ resulting from the tax cuts.  Of course, the cuts have only been in place for 20 months, so the above data cannot be interepreted as dispositive in support of, or opposition to, the notion that the tax cuts have thus far worked.

*Adding changes in other consumption taxes (i.e., cigarettes) would not close the gap.

**Of course, the sales tax was increased in October, which may have had some negative impact on consumption in the last quarter of 2013.

 

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John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.