Maine shows folly of ‘tax the rich’ plans

GIVEN the passage of several tax increases in Oklahoma and calls for larger tax increases next year, it’s worth noting how other states have fared when they pursue the higher-tax strategy. Maine provides the latest example.

Last year, voters in Maine approved a ballot measure that increased by 3 percentage points the income tax rate for those earning more than $200,000. This set Maine’s top income tax rate at 10.15 percent, secondhighest in the country.

The tax increase, promoted by teachers unions, was a classic “soak the rich” proposal. The 41 percent rate increase was expected to impact only around 7,000 filers in Maine, and was expected to generate $157 million per year, which would be earmarked for schools.

Yet last month, Maine Revenue Services reported that income tax collections for the year were largely unchanged, despite the dramatic rate increase. An associate commissioner for Maine Revenue Services told Portland’s ABC television affiliate that the collections were “concerning” because “we would have thought with the surtax we would have received more in estimated payment, yet we didn’t.”

Backers nonetheless insisted the tax increase was working, predicting increased collections … later.

Apparently, state lawmakers from both parties didn’t buy that argument. While a budget faceoff led to a short government shutdown in Maine, the conclusion of that standoff ended with a budget agreement. The agreement eliminated the 3-percentage-point “surcharge” and provided increased school funding through other means.

Republicans hold the governorship and the Maine Senate, while Democrats control the House. The margin of control in both chambers is narrow. Yet the budget agreement passed the Maine House 147-2 and the Senate by 35-0. This means many Democrats tacitly recognized that “taxing the rich” is more effective as a slogan than in practice.

Lawmakers in Connecticut are learning the same lesson. There, officials have raised taxes at least five times since 2011, and the state’s top income tax rate has been hiked from 5 percent in 2008 to 6.99 percent today. Yet Connecticut’s income tax collections are declining, and the state is struggling with large budget shortfalls.

In Illinois, lawmakers approved a 67 percent income tax rate increase in 2011 and raised corporate income tax rates 46 percent. They then spent much of the next few years approving offsetting tax breaks for specific companies to keep them from leaving the state. Two companies alone — Navistar International Corp. and Sears Holdings Corp. — received nearly $500 million in tax breaks to keep them in Illinois.

For some reason, politicians have to learn this lesson over and over again: Capital responds to incentives. If a state signals that investment isn’t welcome, then that investment will quickly shift to other states.

This is one reason why many politicians who call for taxing “the rich” quickly vote to tax everyone, as was the case in Kansas this summer when large income tax increases were imposed on people of all income levels.

Oklahoma legislators should take note. The “tax the rich” model of state finance rarely survives exposure to reality.