Maine’s worst tax

By Stephen Bowen | Apr 03, 2009

Maine voters have been promised tax relief for years. This November, they will have the chance to cut one of the most onerous and hated taxes in Maine, the vehicle excise tax.

What makes the excise tax so bad?

While nobody particularly likes taxes, there are qualities that make one tax better than another. For example, a “good” tax is usually thought of as being one that is “progressive,” which means that it is connected in some way with a person’s ability to pay. Who can afford what is always debatable, of course, so in practice a progressive tax is one that taxes those who policymakers think can afford it more than those they think cannot.

The income tax, for instance, is the very definition of a progressive tax. The more you earn, the more you pay in taxes. In fact, the income tax has become a bit too progressive. Today, the top 10 percent of income earners earn 42 percent of all income, but they pay 66 percent of all income taxes. The bottom 50 percent of income earners pay less than 4 percent of all income taxes, despite earning 14 percent of all income. Proposals pending in today’s liberal Washington would continue this trend, with the result that, if all goes according to plan, half of all workers will soon pay no income tax whatsoever.

The vehicle excise tax is progressive to the extent that those with more expensive vehicles pay more in taxes, but because the tax has a flat rate that is the same for everyone, it consumes a higher percentage of the income of poor people than it does of those who earn more. The left-leaning Maine Center for Economic Policy identifies the vehicle excise tax as one of the most “regressive” taxes we have.

Another characteristic of a good tax for Maine is one that we can get other people to pay for us. Nonresidents pay about 10 percent of the state sales tax, for instance, and 15 percent of the residential property tax. About 7 percent of the state income tax is collected from people who earn income in Maine but live elsewhere.

The vehicle excise tax, though, is paid exclusively by Maine residents. Not one cent of it is paid by people who live in another state. So not only is the vehicle excise tax one of Maine’s most regressive taxes, the burden of paying it falls entirely on Maine people.

In a state with some of the lowest incomes in the nation, the vehicle excise tax also adds dramatically to the cost of buying a new car. Research from the Maine Heritage Policy Center, the public policy think tank where I work, shows that excise taxes on a car costing $26,400, which was the average cost for a new car in 2008, total nearly $1,900 over the first five years of ownership alone, $633 of which must be paid before the car is even registered for the first time.

It gets worse. The excise tax is calculated using the manufacturer’s suggested retail price for each car, a price nobody pays. Auto manufacturers, desperate to get cars off their lots, have been offering consumers so many incentives to buy that a recent survey by Edmunds.com found that in many instances “it can be cheaper to buy new than used.”

Maine’s vehicle excise tax, though, is based on the sticker price, rather than the lower purchase price, which means that auto buyers are effectively being taxed on money they did not pay. Did you negotiate a good deal and save $5,000 on your new car? You’ll pay excise tax on that $5,000 regardless, costing you an extra $360 over the first five years of car ownership.

If these amounts seem high, they are. Maine has the seventh highest excise tax in the nation. Twenty-two states have no auto excise tax at all.

This November, voters will be presented with a question on the ballot, drafted by the Maine Heritage Policy Center, which would cut the hated vehicle excise tax in half. Under the proposal, excise taxes on the same car used in the example above, with a price of $26,400, would cost less than $850 over the first five years of ownership, saving the consumer more than $1,000 in taxes.

That’s the kind of tax relief Mainers were promised when the Legislature passed LD1 in 2005, which dramatically increased state funding for schools. Between 2004 and 2008 state aid to towns and schools increased by $278 million. If local governments had kept spending growth around the rate of inflation, this increase in state aid would have resulted in $188 million in property tax savings in 2008 alone.

Instead, property tax collections increased $343 million between 2004 and 2008, despite a massive infusion of cash from Augusta. This 22 percent increase in spending not only exceeded the rate of inflation, but outstripped personal income growth as well. So, despite the promises of tax relief, local government spending continues to grow faster than the incomes of Maine people.

Enough already. Enough of the empty promises. If enacted, the excise tax cut on the ballot this fall, combined with the Taxpayer Bill of Rights provision that will appear on the ballot alongside it, will finally deliver real and long overdue tax relief to Maine taxpayers, by taking aim at one of Maine’s worst taxes.
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