A natural experiment

from Google Image search - thanks http://www.ppchero.com/easier-with-editor-adwords-campaign-experiments/

Watching policy-making in the shadow of Paul LePage can be like trying to figure out which neutral shade you want to paint your living room when someone has replaced your regular lightbulb with a disco strobe and a smoke machine and is also playing John Phillips Souza marches at full outdoor parade volume. (With extra cymbal.)

Sometimes the governor is just so exciting it can be hard to look beyond him.

Nonetheless, what we’ve seen as a budget proposal out of the Appropriations Committee is a really interesting potential policy development. Since the near-miss of the 2009 legislative effort to trade income tax for increased sales tax (an effort overturned by people’s veto in a 2010 special election), the recommendations of the 2006 Brookings Institution report on Maine’s economic future have been lying in wait for the right combination of conditions for another try.

The first part of the adjustment came from the unilateral reduction in income taxes achieved by unifed Republican government last session. That was the easiest part, because who doesn’t like paying less, right?  Unfortunately, without the second part of that equation – raising taxes from other sources – the result of just cutting taxes is an enormous budget deficit.  And/or creating an even larger local property tax burden to make up for the fact that the governor’s budget disregards existing statutory provisions to fund local governments and local schools at a designated level.

The next stage was the Gang of 11’s effort to shift the tax structure wholesale into the higher sales tax/lower income tax model. This was the most ambitious articulation of the Brookings report proposals and it attracted bipartisan interest, although ultimately not enough to get it past the shopkeepers-and-survivalists union of Republican opinion.

Characteristic of that sentiment, the Governor expressed disapproval of any tax increases, but he did state that his goal for his next term was to get rid of Maine’s income tax. Getting rid of our primary source of revenue without developing other income streams will then allow him to achieve his other main objective, eliminating government. Neat how that works out, don’t you think?

Anyway, what we have now is a moment where rubber is hitting the road. The Appropriations Committee has proposed a budget that funds the deficit through a 0.5% general sales tax increase and a 1% meals and lodging tax increase for two years.

Legislators (and their constituents) have to decide if they’d rather have higher local property taxes (the LePage plan) or higher meals and lodging and sales taxes (the Appropriations Committee plan.)  If the legislature stands firm on their votes for the budget following the governor’s promised veto (a rather enormous “if”, but let’s play out the possibility) then we have set the ground for a trial run of the Brookings recommendations, lite version.

This is a great opportunity for natural experimentation. By implementing this proposal we’ll be able to see what the revenue structure might look like under a more comprehensive revision like that proposed by the Gang of 11. Obviously the Gang of 11 tax proposal was much more sweeping and complex in the tax provisions it affects, but this smaller change will allow us to test the empirical hypotheses that 1) increased sales and meals and lodging taxes will decrease demand (the fear of the retail sector) and that 2) increased sales and meals and lodging taxes will shift taxpaying further onto out-of-state residents (the expectation of the Gang of 11/Brookings Institution.)

Both of these questions are fundamental for letting us know which way to move forward with state tax structure. While theories and applied learning from other states can give us some good arguments, there’s just no data like home-grown data for testing large-scale policy change. Whichever of these propositions turns out to be true – that higher retail taxes are good or bad for us, collectively –  we will have more detailed and grounded information to use to make good decisions in our next state budget go-round.

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One Response to A natural experiment

  1. Pingback: Right on, Prof. Krehbiel! | Emily Shaw

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