Maine's Strange Tax Debate

Maine will decide a very strange tax debate on Tuesday. The debate isn't strange because of the issues involved. It's strange because of who is on which side.

Maine lawmakers approved a tax reform package last year that would do three basic things: lower the income tax (though some deductions are reduced), broaden the sales tax (to include currently untaxed services such as car repairs and dry cleaning) and raise the meals and lodging tax. Maine's tax agency forecasts that overall taxes would decline by $55 million.

On Tuesday, Maine will weigh in on a "people's veto" of the tax overhaul. Unless a ballot measure passes to reject the changes, they'll go into effect.

The standard Republican and conservative view is that the sales tax is the least-bad tax. Republicans prefer sales taxes over income taxes because sales taxes square with their notions of fairness. Everyone has to pay the sales tax at the same rate. Republicans also tend to think that taxes on wealth (income taxes) do more harm to the economy than taxes on consumption (sales taxes). That's why some conservatives favor the "Fair Tax" -- which is just a national sales tax to replace income taxes.

Democrats and liberals tend to have a different notion of fairness. They argue that the wealthy, the people who can afford to the pay the most, should pay higher tax rates. So, Democrats like progressive income taxes better than sales taxes.

As you've figured out by now, the weird thing going on in Maine is that most Democrats favor the tax overhaul (and therefore are arguing for a "no" vote on Tuesday), while most Republicans in Maine oppose it (and want a "yes" vote). The inversion isn't complete. Some business groups like the reforms, as does the Wall Street Journal's conservative editorial board. Still, overall Democrats are fighting for income tax cuts and an overall tax cut while Republicans are opposing them. What's going on here?

I'm not entirely sure, but here's my best guess. Some key Democrats, including Maine House Majority Leader John Piotti and Gov. John Baldacci, happened to like these changes as a matter of policy. There are non-ideological reasons why someone would support these shifts. Most economists think that a broader sales tax makes sense. Even someone who isn't instinctively opposed to income taxes might conclude that Maine's current top rate of 8.5% is too high and is stifling economic growth.

Well, when leading Democrats support something most other Democrats will support it too. When leading Democrats support something, most Republicans will oppose it. Most people -- whether they're regular voters or rank-and-file legislators -- are taking cues from their leaders.

Perhaps that's a bit too cynical. The tax reform plan is complex, partially because it turns a lot of tax deductions into tax credits. The simple explanations of the plan may obscure what it actually does. In making the case against overturning the overhaul, the conservative Maine Heritage Policy Center argues (among other things) that it actually increases taxes. In making the case for keeping the reforms, the liberal Maine Center for Economic Policy argues that the changes will make the tax code more progressive.

Still, I can't shake the sense that the battle lines on this measure would be quite a bit different if the people proposing the changes were Republicans instead of Democrats.