In 2011, Republicans in the Maine Legislature passed the largest tax cut in Maine history. The next eight years saw huge surpluses in state revenue and the most prosperous period in the history of our state’s economy.
Raising tax rates would not only reduce the amount of money moving around in Maine’s economy but would also depress economic activity and erode state revenues. Sayan Puangkham/Shutterstock.com
In late 2017, Republicans in Congress passed a tax rate cut and in 2019, the first full year that it was in effect, the amount of revenue the U.S. Treasury took in reached an all-time high. Revenue growth that year of 5 percent was nearly triple that of the three prior years. In the first three months of 2020, federal revenues grew an additional 8 percent even though the impact of the COVID-19 pandemic began in mid-March.
In both cases, cutting tax rates led to greater economic activity and greater, not reduced government revenues. Both cases resulted in all-time record revenues. This is not economic theory. It is historical fact.
Unfortunately, in neither of these cases did lawmakers reduce or even slow government spending in order to strengthen and grow the economic benefits even further. That, however, is a column for another time. For now, and for the sake of this discussion, let’s assume that bringing more revenue into government coffers is the desired result.
With these cuts in tax rates the principle was simple: If there is more money in the economy, people spend it. Then, those they spend it with also spend it, and so on. Each time that money changes hands, the government takes its share in sales, income and other taxes.
That same principle is at work in Maine right now despite the enormous negative economic downturn caused by the pandemic. As of the latest report, revenue to the state treasury is a quarter billion dollars (11.6 percent) higher than expected for the current budget year. Amazingly, revenues for the month of February were nearly double the amount expected in the budget.
In its latest report, the state’s Revenue Forecasting Committee now predicts surpluses of 3.6 percent to 4.1 percent in each of the next four years. The reason for this unusual strength in revenue is really not so surprising or unfamiliar. There is an abundance of cash in the pockets of Mainers and they are spending it.
This revenue growth in a poor economic climate was explained by Maine’s Consensus Economic Forecasting Commission in its April report, which credits a “larger federal stimulus in 2021 than previously assumed.” In contrast, “the slower growth in 2022 reflects the unwinding of federal stimulus.”
In one program or another, the U.S. government sent Maine more than $6 billion in the past year. This was a direct shift of cash from government accounts to the pockets of citizens, and Mainers spent it. As a result, state coffers are again flush with cash from the tax revenue created by that spending.
Whether by a reduction in tax rates, or an enormous influx in cash from the federal treasury, revenues to Maine state government have grown when there is more money moving around in the market.
With this clearly demonstrated fact laying before us in plain numerical evidence, it would seem that we might all agree that the worst thing we can do to ruin this growth in revenue to the state budget is to reduce the amount of money in the market by raising tax rates. The simplest of logic reveals that doing this would not only reduce the amount of money moving around in our economy, but it would also depress economic activity and drive state revenues downward.
This is especially important since the federal stimulus money was one-time cash that we will not see again. Without a new and different stimulus to encourage spending, Maine will see a falling off of both economic activity and revenues to state government.
What is clearly needed is another method of shifting money from government accounts to people’s pockets, and in Maine that means a cut in tax rates. If history and simple economics are any indication, Maine’s economy would again grow, while state government would benefit from greater revenues long term.
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