Tax break heaven

The rich get richer, the middle class picks up the tab, and the state goes broke. Here’s why.
By LANCE TAPLEY  |  February 20, 2008
INfeat_taxes_money_022208

"Corporate welfare state A little change in the tax law with big consequences." By Lance Tapley.

"A “good” tax break in the making: Historic rehab." By Lance Tapley.
As the economy sours, state taxes are bringing in less than expected. Over the next two years, a $200-million-and-growing gap looms between what Maine needs to pay for current state services and the money available to pay for them. In response, Governor John Baldacci and lawmakers have sharpened their knives and are set to cut services for poor, sick, elderly, mentally ill, and physically disabled people. Baldacci says he has no choice, Republicans say the programs for the needy are too fat anyway, and some Democrats are talking about a tax increase.

This is an old story. Variations have been in the news periodically since Baldacci took office five years ago, and the story goes back a lot further. But there’s a part of this tale that’s almost never told. Budget shortfalls are not caused just by drops in sales- and income-tax revenues. Deficits also result from what most people call tax breaks. The state’s tax bureau, Maine Revenue Services, uses the bureaucratic term “tax expenditures.” A dictionary definition of a tax break is “a special tax benefit given to promote specific economic or social objectives.” Commonly, tax breaks come in the form of sales-tax exemptions or tax “credits” — that is, deductions from a company’s or individual’s income tax. Tax breaks are drains on the treasury, and they are growing.

Last year, to zero fanfare, Revenue Services published a 265-page book, a gripping page-turner for policy wonks called Maine State Tax Expenditure Report 2008-2009. The book itemizes every tax break in the state tax code on its own page, showing how much revenue it costs the state. The grand-total hit comes to more than $3 billion annually, an amount roughly equal to the state’s General Fund expenditures. If all these tax breaks were eliminated, Maine’s income and sales tax rates could be cut in half without having an impact on services. (To see the report, go to www.maine.gov/revenue/research/homepage.htm).

Some tax breaks have been created to assist poor and working-class people — sales-tax exemptions on food, for example — but about half benefit corporations and wealthy people (see “Who Benefits?”). Given a Legislature dominated by special-interest lobbyists, this is not surprising. But the more taxes the rich and the corporations don’t pay, the more everybody else covers, making a mockery of the long-established principle that people and companies should be assessed taxes based on their ability to pay.

Both Republicans and Democrats fall over each other to dole out tax breaks for business. The corporations and their executives contribute heavily to political campaigns and parties. They also play hardball: give us the money, they say to politicians, or we’ll shut our factory or not build in Maine. Academic studies refute the argument that taxes are a crucial consideration when a business decides where to locate or when to expand a plant. And state government makes little effort to tally the number of jobs actually created or retained thanks to tax breaks. Regardless, when Baldacci signed the tax-break bill discussed in the “Corporate Welfare State” story below, he promised: “This bill will generate jobs, for Maine businesses big and small.” As Michael Allen, the state’s chief tax economist, says, “Generally, we have the viewpoint of the business community” when it comes to evidence that tax breaks create jobs.

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