The  Wrong  Choice  for  ME   1  

  

2   The  Wrong  Choice  for  ME  

Introduction  
On   November   8th,   2016,   the   Maine   people   will   vote   on   an   initiative   to   impose   an   additional   3%  
surtax  on  household  income  over  $200,000.  Supporters,  like  the  Maine  Education  Association,  claim  
that   the   additional   tax   revenue   will   provide   more   funding   to   local   school   districts   to   reduce  
municipal   taxes   and   improve   educational   outcomes.   Table   1   shows   how   the   measure   would   alter  
Maine’s  individual  income  tax  structure.  

Table  1:  2017  Individual  Tax  Rate  Schedule  with  Proposed  Surtax  

Single/Married   –  
Rate   Head  of  Household   Married  –  Joint  Return  
Separate  Return  

5.8%   Less  than  $21,050   Less  than  $31,550   Less  than  $42,100  

$21,050   but   less   than   $31,550   but   less   than   $42,100   but   less   than  
6.75%  
$50,000   $75,000   $100,000  

$50,000   but   less   than   $75,000   but   less   than   $100,000   but   less   than  
7.15%  
$200,000   $200,000   $200,000  

10.15%   $200,000  or  more   $200,000  or  more   $200,000  or  more  

Source:  Maine  Department  of  Administrative  and  Financial  Services  

In  analyzing  Question  2’s  impact  on  Maine’s  workforce,  economy,  and  schools,  this  report  focuses  
on  two  important  aspects  of  the  proposal:  increasing  taxes  on  high-­‐income  residents  and  increasing  
state  funding  to  local  school  districts.  We  outline  the  likely  effects  of  a  substantial  income  tax  hike  
on  out-­‐migration  from  Maine  to  low-­‐tax  states,  as  well  as  on  small  pass-­‐through  businesses.  We  also  
examine   how   tax   revenues   would   be   allocated   to   school   districts,   and   reveal   that   funds   would  
mainly  flow  to  wealthy  communities.  

Raising  the  Income  Tax  Rate  

The  proposal,  if  enacted,  would  increase  Maine’s  top  marginal  tax  rate  from  7.15  percent  to  10.15  
percent,  a  42  percent  hike.  As  a  result,  Maine  would  have  the  second-­‐highest  top  marginal  income  
tax  rate  in  the  country  (behind  only  California)  and  the  highest  income  tax  rate  in  Maine  history.  It  
is  worth  noting  that  Question  2  would  introduce  the  highest  income  tax  rate  in  the  country  at  the  
$200,000  income  level;  California’s  top  marginal  income  tax  of  13.3  percent  applies  only  to  income  
beyond   $1   million.   Maine’s   top   marginal   income   tax   rate   is   currently   7.15   percent   and,   despite  
recent  tax  reductions,  still  ranks  10th  highest  among  states  levying  an  individual  income  tax.  Overall,  
state  and  local  tax  collections  per  capita  were  $1,153  in  2013—the  16th  highest  in  the  nation.1  

The  Wrong  Choice  for  ME   3  

The  surtax  would  directly  impact  approximately  16,840  tax  filers  in  Maine—roughly  2.64  percent  
of   all   filers.   Maine   already   languishes   near   the   bottom   of   business   competitiveness   and   tax  
friendliness   rankings,   largely   thanks   to   its   high   individual   and   corporate   income   tax   rates.2  
Increasing   taxes   on   Maine’s   most   successful   professionals—including   small   business   owners,  
doctors,  engineers,  and  managers—would  further  erode  Maine’s  economic  and  demographic  future.  

Broad  Economic  Effects  of  Question  2  

Changes  in  tax  rates  have  measurable  effects  on  taxable  activities.    The  weight  of  evidence  shows  
that   changes   in   state-­‐level   taxes   have   significant   effects   on   state   economic   activity.   Tax   rates   are  
critical  for  explaining  the  comparative  performance  of  national  economies.                

The   economy   does   not   remain   in   its   current   state   when   governments   raise   or   lower   taxes.   Taxes  
influence  behavior  and  set  into  action  a  series  of  events  that  change  economic  behavior.    Consider  
the   work-­‐leisure   calculus.     Taxpayers   divide   their   time   between   work   and   non-­‐work,   which   we   call  
“leisure.”   Lower   tax   rates   on   work   make   leisure   less   attractive   and   thus   encourage   taxpayers   to  
work   more.     Higher   tax   rates   make   leisure  
more   attractive   and   thus   induce   taxpayers   to  
work  less.  
By reducing investment in Maine’s
Consider   also   the   saving-­‐consumption  
calculus.   Taxpayers   must   decide   how   to   economy, Question 2 is expected to
allocate   their   after-­‐tax   income   between   cost 4,050 private-sector jobs by 2021.
consumption   and   saving.   That   matters   to   the  
economy  because  capital  spending  is  financed  
from  saving,  and  capital  spending  increases  production  and  raises  the  demand  for  labor.    Lower  tax  
rates   on   the   return   to   saving   induce   taxpayers   to   save   more,   thus   fueling   investment.     Higher   tax  
rates  have  the  opposite  effect.  

Clearly,  taxpayers  respond  to  incentives  and  disincentives  to  work  and  save  brought  about  by  tax  
law   changes.   Lower   tax   rates   usually   reduce   government   revenues,   but   less   so   to   the   extent   that  
they   encourage   work   and   saving.   Higher   tax   rates   usually   increase   revenues,   but   less   than   a  
mechanical  computation  would  show,  because  they  also  discourage  work  and  saving.  

Since  tax  cuts  raise  after-­‐tax  profits,  they  induce  taxpayers  to  expand  investment  and,  in  so  doing,  
wages  and  jobs.    As  a  result  of  raising  after-­‐tax  wages,  tax  cuts  motivate  taxpayers  to  enter  the  labor  
force   and   work   longer   hours.     This   is   the   result   of   the   reduction   of   disincentives   to   invest   and   work  
that  are  inherent  to  any  tax  code.  Therefore,  it’s  important  not  to  assume  that  tax  revenues  move  in  
proportion  to  tax  rate  increases  or  decreases.  Dynamic  behavioral  changes  must  be  accounted  for,  
particularly   changes   in   the   willingness   of   taxpayers   to   invest   and   work   induced   by   tax   law   changes.  
Indeed,  it  is  essential  to  estimate  these  behavioral  changes  in  order  to  assess  the  desirability,  from  
the  public’s  point  of  view,  of  making  changes  in  tax  law.      

Using   ME-­‐STAMP,   a   comprehensive   economic   model   developed   by   the   Beacon   Hill   Institute   to  
capture   the   principal   effects   of   tax   changes,   it   is   possible   to   calculate   the   degree   to   which   these  
economic   mechanisms   will   affect   the   Maine   economy   in   the   context   of   Question   2.   The   analysis  
assumes  that  the  measure  would  be  implemented  in  2017;  results  are  reported  for  both  2017  and  
2021.   The   model’s   results   as   measured   against   the   ‘baseline   economy’   of   no   tax   change.     Table   2  
displays  the  simulation  results  for  Question  2.        

4   The  Wrong  Choice  for  ME  

The   ME-­‐STAMP   model   shows   that   the   Question   2   tax   hike   would   decrease   private   sector   jobs   by  
3,970  in  the  first  year,  rising  to  4,050  in  2021.  The  tax  increase—through  a  combination  of  higher  
tax   rates   and   a   decline   in   economic   activity—would   reduce   real   disposable   income,   or   price  
adjusted  take-­‐home  pay,  by  $265  million  in  2017  and  $293  million  in  2021.    

Table  2:  The  Fiscal  and  Economic  Effects  of  the  Question  2  
  2017   2021  

Private  sector  jobs   -­‐3,970   -­‐4,050  

Baseline  investment   -­‐$11  million   -­‐$12  million  

Real  disposable  income   -­‐$265  million   -­‐$293  million  

Sales  tax  revenue   -­‐$8  million   -­‐$9  million  

Personal  income  tax  revenue   $132  million   $149  million  

As   described   in   the   section   above,   the   income   tax   change   would   increase   the   tax   burden   on   savings  
and   thus   capital   investments.       As   a   result,   both   local   and   out-­‐of-­‐state   businesses   would   find  
investment   less   attractive   in   Maine.     The   ME-­‐STAMP   model   estimates   that   investment   would  
decrease  by  $11  million  in  2017,  and  $12  million  in  2021.  

The   ME-­‐STAMP   model   shows   that   the   surtax   would   have   moderate   dynamic   revenue   effects.     In  
2017,  the  surtax  would  increase  personal  income  tax  revenues  by  $132  million  in  2017  and  $149  
million  in  2021.    These  estimates  are  below  the  $157  million  calculated  by  the  Office  of  Fiscal  and  
Program  Evaluation  and  promoted  by  the  “Stand  Up  For  Students”  campaign.  Moreover,  sales  and  
other  tax  revenues  would  drop  by  $8  million  and  $3  million  respectively  in  2017  and  $9  million  and  
$4   million   in   2021.     These   losses   would   result   from   the   drop   in   economic   activity   due   to   the   tax  
changes.    The  losses  would  combine  with  the  personal  income  tax  revenue  gains  to  leave  the  state  
with  $121  million  more  in  tax  revenue  in  2017  and  $136  million  in  2021.  

Chasing  High-­‐Income  Professionals  Out  Of  Maine  

As  economists  and  analysts  have  been  warning  for  years,  Maine  must  do  much  more  to  reverse  its  
current  demographic  trends  if  it  is  to  maintain  a  vibrant  and  growing  economy.  With  Baby  Boomers  
continuing   to   retire   over   the   next   several   decades,   Maine’s   young   working   population   will  
experience  severe  pressure  as  tax  policies  change  to  reflect  the  need  to  support  the  elderly  through  
subsidized  health  care  and  housing.  

As   a   result,   Maine   desperately   needs   to   adopt   pro-­‐growth   policies   that   attract   young,   hard-­‐working  
families   from   across   the   country   and   around   the   globe.   Unfortunately,   Maine’s   current   high-­‐tax  
policies  contribute  to  “tax  flight”  into  low-­‐tax  states.  Question  2  would  only  exacerbate  that  trend.  

A   significant   number   of   studies   have   been   conducted   in   the   last   two   decades   to   evaluate   the   impact  
of   tax   changes   on   migratory   patterns.   Almost   universally,   this   research   has   concluded   that  
variations   in   income   tax   rates   are  associated   with   small   but   significant   effects   on   net   out-­‐migration  
from  a  state,  as  well  in  declines  in  in-­‐migration.  Consider  these  examples:  

The  Wrong  Choice  for  ME   5  

 ü An   analysis   in   2011   by   the   New   Jersey   Department   of   the   Treasury   found   “clear,   albeit  
modest  effects  of  cross-­‐state  tax  differences  on  migration”  and  noted:  “The  Northeast  region  
[has]   faced   disproportionately   strong   out-­‐migration   relative   to   its   share   of   the   U.S.  
population  [since  the  1980s],  while  having  the  highest  average  and  top  marginal  tax  rates  of  
the  four  major  geographic  regions.”3  
ü A  2011  paper  by  the  Mercatus  Center  concluded:  “[Our]  data  suggest  a  recipe  for  population  
depletion.   States   lose   households   to   more   tax-­‐friendly   states   by   (1)   lowering   the   “high-­‐
income   threshold   so   as   to   capture   more   households,   (2)   increasing   high-­‐income   tax   rates,  
and  (3)  increasing  property-­‐tax  rates.”4  
ü According   to   Richard   Vedder,   a   Distinguished   Professor   of   Economics   at   Ohio   University,  
“Americans   migrate   out   of   high   tax   states,   on   average,   and   into   lower   tax   ones…The  
marginal   benefit   from   greater   tax-­‐financed   government   spending   is   more   than   offset   by   the  
marginal   costs   that   high   taxation   imposes.   Those   costs   are   both   direct   –   less   money   in   one’s  
paycheck   after   taxes   –   and   indirect   –   lower   economic   growth   associated   with   big  
government.”5  
ü Following   the   passage   of   Proposition   30—a   measure   that   dramatically   increased   top  
marginal   income   tax   rates—in   California,   the   Institute   for   Policy   Research   conducted   a  
survey   to   gauge   the   reaction   of   Californians   in   affluent   communities.   The   pollsters   found  
that  25  percent  of  California’s  wealthiest  residents  were  considering  moving  out  of  state  in  
response  to  the  income  tax  increase.6    

To   be   sure,   income   tax   rates   are   not   the   only   factors   relevant   when   deciding   whether   to   relocate  
across  state  lines.  Climate,  job  opportunities,  standard  of  living,  familial  considerations,  and  other  
types  of  taxes  are  also  important.  Yet,  under  the  surtax  proposal,  popular  migration  destinations  for  
Mainers—like   Florida—would   look  
even  more  appealing.  

As  the  wealthy  relocate  to  more  tax-­‐

friendly   states,   many   of   their   As the wealthy relocate to more tax-friendly
philanthropic   contributions   to   states, many of their philanthropic contributions
Maine’s   communities   would   end.   to Maine’s communities would end.
The   wealthy   contribute  
substantially   to   Maine’s   many  
philanthropic,   charitable,   and  
nonprofit   organizations.   Mainers   earning   more   than   $200,000   per   year   gave   more   than   $154  
million  to  charity  in  2012—more  than  one-­‐third  of  all  charitable  giving  in  the  state.7  The  wealthy  
also   tend   to   give   a   larger   percentage   of   their   income   to   charity   than   lower-­‐income   Mainers.  
According  to  the  Chronicle  of  Philanthropy,  households  earning  more  than  $200,000  per  year  gave  
an   average   of   2.4   percent   of   their   income   to   charity   in   2012,   0.27   percent   more   than   what   the  
average   Mainer   gave.   These   contributions   amount   to   roughly   twice   the   Maine   Department   of  
Labor’s  expenditures  in  2014.8  

Maine’s  high  tax  burden  already  makes  it  difficult  to  attract  doctors,  scientists,  engineers,  and  other  
professionals.  Question  2  would  exacerbate  this  trend,  to  the  detriment  of  our  economy.  According  
to  the  Bureau  of  Labor  Statistics,  24  occupations  in  Maine  earn,  on  average,  more  than  $100,000  per  
year  (see  List  1).9  A  worker  in  one  of  these  professions,  whose  salary  is  combined  with  investment  
income  and  a  spouse’s  wages,  could  easily  exceed  $200,000  in  annual  household  income.  Of  these  
24   occupations,   the   Maine   Department   of   Labor   predicts   that   nine   (or   37.5%)   will   experience   rapid  
employment   growth,   partly   driven   by   growing   demand.10   Faced   with   a   10.15   percent   top   income  
tax  rate,  however,  some  professionals  may  be  deterred  from  working  in  Maine.  

6   The  Wrong  Choice  for  ME  

Table  3:  High-­‐Income,  In-­‐Demand  Occupations  
Occupation   Average  Salary  in  Maine   In  demand?  
Economics  Teachers,  Postsecondary   $100,060        
Financial  Managers   $100,900     Yes  
Physician  Assistants   $102,550     Yes  
Aerospace  Engineers   $103,520        
Compensation  and  Benefits  Managers   $103,820        
Medical  Scientists,  Except  Epidemiologists   $104,020        
Judges,  Magistrate  Judges,  and  Magistrates   $105,360        
Law  Teachers,  Postsecondary   $107,440        
Computer  and  Information  Systems  Managers   $109,140     Yes  
Sales  Managers   $113,020     Yes  
Actuaries   $115,600        
Optometrists   $119,430        
Architectural  and  Engineering  Managers   $124,270     Yes  
Pharmacists   $125,340     Yes  
Personal  Financial  Advisors   $131,260     Yes  
Chief  Executives   $157,560        
Nurse  Anesthetists   $167,430        
Family  and  General  Practitioners   $177,790     Yes  
Pediatricians,  General   $182,710        
Dentists,  General   $185,290        
Internists,  General   $204,820        
Physicians  and  Surgeons,  All  Other   $210,760     Yes  
Surgeons   $262,790        
Obstetricians  and  Gynecologists   $279,390        

Consider,   for   instance,   that   physician   shortages   are   commonplace   in   Maine,   especially   in   rural  
areas.   In   2010,   there   were   only   45.7   primary   care   physicians   (PCPs)   per   100,000   residents   of  
Washington  County,  about  half  the  national  average.  Similar  shortages  exist  in  Oxford,  Sagahadoc,  
and   Somerset   counties.11   Statewide,   Maine   had   nearly   30   percent   fewer   PCPs   than   the   national  
average.  A  recent  study  found  that  Maine  will  need  120  additional  PCPs  by  2030  merely  to  maintain  
the  status  quo,  much  less  begin  to  address  the  unmet  need  for  primary  care.12  The  lack  of  primary  
care   providers   reduces   access   to   important   medical   care.   In   2014,   nearly   11   percent   of   adults   in  
Maine  reported  not  seeing  a  doctor  in  the  past  12  months,13  while  more  than  12  percent  lacked  a  
personal  physician.14  

Question   2   will   deter   primary   care   physicians   and   other   high-­‐income   professionals   from  
considering   Maine   as   a   place   to   live   and   work,   threatening   Maine’s   ability   to   provide   medical  
services  to  its  aging  population  and  further  exacerbating  our  demographic  challenges.  

Impact  on  small  businesses  

Question   2   would   have   a   detrimental   effect   on   Maine’s   business   community   and   private-­‐sector  
employment.   The   majority   of   Maine’s   businesses—including   many   family-­‐owned   farms—are   not  
subject   to   the   corporate   income   tax.   Rather,   profits   flow   through   to   the   owners   and   are   taxed   as  
ordinary   income   under   the   individual   income   tax.   These   businesses   —   often   referred   to   as   “pass-­‐
through  entities”—  include  sole  proprietorships,  partnerships,  and  S  corporations.  They  constitute  
a   growing   percentage   of   the   total   business   sector.15   Pass-­‐through   entities   in   Maine   accounted   for  
nearly   61.7   percent   of   private-­‐sector   employment   in   2012,   the   5th-­‐highest   percentage   in   the  

The  Wrong  Choice  for  ME   7  

country.   As   a   result,   tax   increases   on   high   earners   could   have   a   profound   impact   on   small  
businesses,  employees,  and  our  economy  as  a  whole.  

High-­‐income   individuals   report   most   pass-­‐through   business   income,   which   explains   why   a   large  
majority   of   small   business   owners—as   high   as   69   percent,   according   to   a   2015   survey—don’t  
support   raising   taxes   on   the   highest-­‐earning   individuals.16   According   to   the   latest   IRS   data,   50  
percent  of  pass-­‐through  business  income  in  Maine  was  reported  on  returns  that  earned  more  than  
$200,000.  As  a  result,  half  of  pass-­‐through  business  income  in  Maine  is  currently  taxed  at  the  top  
marginal   rate   of   7.15   percent,   and   would   be   subject   to   the   much   higher   rate   of   10.15   percent   if  
Question   2   passes.   In   addition,   27   percent   of   Mainers   earning   more   than   $200,000   report   having  
income   from   a   sole   proprietorship,   while   41   percent   derive   income   from   a   partnership   or   S-­‐
corporation.   Passing   Question   2   would   amount   to   a   significant   tax   hike   on   the   types   of   small  
businesses   that   generate   the   majority   of   Maine’s   private-­‐sector   jobs;   this   is   a   clear   recipe   for  
declines   in   employment   and   slow   business   growth   as   entrepreneurs   are   deterred   from   opening  
businesses  in  Maine.  

Using   the   most   recent   IRS   statistics,   it   is   possible   to   estimate   the   number   of   small   business  
households  likely  to  be  impacted  by  Question  2.  Including  sole  proprietorships,  S-­‐corporations,  and  
partnerships,   the   measure   would   raise   taxes   on   11,450   pass-­‐through   businesses,   totaling   $1.4  
billion  in  adjusted  gross  income  (about  2.5  percent  of  state  GDP).  

Table  4:  The  Costs  of  Question  2  on  Pass-­‐Through  Businesses  

Income  range   Number   of   Maine   tax   returns   Percent   of   total   pass-­‐through  
deriving   income   from   pass-­‐through   business  AGI  
businesses  

$200,000-­‐$499,000   8,940   22%  

$500,000-­‐$999,999   1,730   12%  

$1,000,000+   780   16%  

Total   11,450   50%  

Source:  Internal  Revenue  Service,  2014  data  

As   the   American   Legislative   Exchange   Council   has   noted,   “those   arguing   for   ‘soaking   the   rich’  
by…increasing   the   burden   on   the   top   [earners]…are   not   just   arguing   about   taxing   ‘millionaires’—
they  want  to  tax  small  businesses.  These  small  businesses  are  major  drivers  of  job  growth  and  wage  
growth.  Increasing  their  tax  burden  means  less  resources  for  expanding  production  facilities,  R&D  
expenses  in  efforts  to  develop  new  products,  hiring  new  workers,  paying  more  generous  salaries  or  
increasing  employee  benefits.”17  

A   study   by   the   National   Bureau   of   Economic   Research   found   that   as   a   sole   proprietor’s   personal  
income  tax  rate  goes  up,  the  rate  of  growth  of  his  business  declines.  The  trend  was  so  strong  that  
the  authors  concluded  that  “a  decrease  in  the  marginal  tax  rate  levied  on  a  sole  proprietor  from  50  
percent  to  33  percent  would  lead  to  an  increase  in  his  receipts  [a  measure  of  business  growth]  by  
about  28  percent.”18  

8   The  Wrong  Choice  for  ME  

According  to  a  recent  report,  Maine’s  business  tax  burden  ranks  4th  in  the  country  at  13.9  percent;  
only  Vermont,  Alaska,  and  North  Dakota  impose  higher  taxes  on  business.19  Indeed,  accounting  for  
both  state  and  federal  taxes,  the  top  marginal  tax  rate  for  sole  proprietorships  in  Maine  was  already  
the  8th  highest   in   the   country  at  48.9  percent  in   2013,   the   last   year  for   which  data   is   available.  For  S  
corporations,   the   top   rate   was   also   the   8th   highest   nationally,   at   45.9   percent.20   While   Maine’s  
rankings   may   have   slightly   improved   thanks   to   recent   income   tax   reductions,   our   standing  
nationally  remains  poor.  Question  2  would  impose  the  highest  marginal  income  tax  rates  on  pass-­‐
through   entities   in   the   United   States.   Below,   Table   5   shows   the   top   marginal   tax   rate   on   different  
pass-­‐through   entities   among   the   New   England   states.   Only   Vermont’s   taxes   are   narrowly   higher  
than  Maine’s.  

Table  5:  Pass-­‐Through  Entity  Taxation  in  New  England  

State   Top   Marginal   Tax   Rate   for   Sole   Top   Marginal   Tax   Rate   for   S  
Proprietorships   Corporations  

Maine   48.9%   45.9%  

New   42.6%   39.6%  

Hampshire  

Vermont   49.1%   46.2%  

Massachusetts   47.0%   44.0%  

Connecticut   47.8%   44.8%  

Rhode  Island   47.4%   44.4%  

By   almost   any   measure,   Maine’s  

business  climate  lags  behind  other   Graph  1:  Number  of  businesses  with  fewer  than  
states.   In   2015,   Forbes   ranked   20  employees  in  Maine  
Maine   48th   in   the   country   for  
32,000  
business-­‐friendliness.21   Since  
2000,   as   Graph   1   illustrates,  
Maine   has   seen   a   net   drop   in   the   31,000  
number   of   small   businesses   in  
operation.  In  2013,  the  latest  year   30,000  
for   which   data   is   available,   Maine  
had   even   fewer   small   firms   than   29,000  
in   2009   and   2010,   when   the  
repercussions   of   the   financial   28,000  
crisis   were   still   rippling   through  
the   economy.   Overall,   Maine’s   27,000  
average   annual   rate   of   small  
business   creation   from   2000   to  
2013  was  -­‐0.3  percent.  While  many  factors  influence  the  rate  of  entrepreneurship  and  the  longevity  
of  enterprises,  income  tax  rates  have  a  clear  negative  impact  on  business  growth.  

The  Wrong  Choice  for  ME   9  

The   five   industries   shown   in  
Graph  2  are  likely  to  be  hardest   Graph  2:  Top  Five  Maine  Industries  Likely  Hit  by  
hit   by   Question   2,   though   it’s   Question  2  
important   to   note   that   not   all   100%  
pass-­‐through   businesses   in   87%   85%   84%  
90%  
these   sectors   generate   77%  
80%   80%  
80%   76%  
sufficient   profits   to   reach   the  
67%   68%  
$200,000  tax  threshold.  Limited   70%  
data   availability   prevents   a   58%  
60%  
more  thorough  analysis.    
50%  

Reducing   taxes   on   small   40%  

businesses   and   entrepreneurs   30%  
spurs  economic  growth  and  job   20%  
creation.   Substantially  
10%  
increasing   taxes   on   these  
entities,  as  Question  2  would,  is   0%  
Construction   Accommodation   Agriculture,   Professional,   Administrative  
likely   to   slow   Maine’s   recovery   and  food  services   forestry,  qishing   scientiqic,  and   and  support  and  
from   the   recession,   reduce   and  hunting   technical  services   waste  
employment   growth,   and   deter   management  and  
Share  of  Total  Maine  Employers  that  are  Pass-­‐Through   remediation  
family   and   home-­‐based   Businesses   services  
businesses   from   relocating   to   Share  of  Total  Paid  Employees  that  Work  at  Pass-­‐Through  
Maine.   Businesses  

 
Effect  on  Public  Education  
In   addition   to   the   effect   Question   2  
would   have   on   economic   growth   and  
migration   patterns   in   Maine,   voters  
should   look   closely   at   the   way   the  
Despite assurances from the initiative’s
measure   would   allocate   funds   to   local   supporters, there is little evidence that Question
school   districts.   Despite   assurances   2 would improve Maine’s public education
from   the   initiative’s   supporters,   there   is   system or provide property tax relief.
little   evidence   that   Question   2   would  
improve   Maine’s   public   education  
system  or  provide  property  tax  relief.  

Funds  Could  Be  Reallocated  at  the  Whim  of  the  Legislature  
While   Question   2’s   objective   is   to   supplement—and   not   replace   or   supplant—existing   state  
contributions  to  local  school  districts,  there  is  no  mechanism  in  statute  to  prevent  legislators  from  
reducing   baseline   education   appropriations   by   an   amount   equal   to   expected   revenues   from   the   tax,  
thereby  keeping  education  funding  flat.    

Despite  the  ballot  initiative’s  language,  which  states  that  the  “supplemental  funds  must  be  used  to  
enable   the   State   to   meet   the   annual   target”   of   public   education   funding,   there   is   also   no   way   to  

10   The  Wrong  Choice  for  ME  

prevent  future  legislators  from  redirecting  the  funds  to  other  programs.  Citizens’  initiatives,  though  
approved  by  popular  vote,  have  no  more  legal  authority  than  statutes  passed  by  the  Legislature.  

In   recent   years,   lawmakers   have   repeatedly   taken   funds   earmarked   for   a   specific   purpose   and   used  
them   to   close   budget   gaps   and   support   other   programs.   For   instance,   while   a   portion   of   the  
revenues  of  the  Oxford  Casino  are  supposed  to  go  to  the  Department  of  Education  to  finance  K-­‐12  
education,   these   funds—totaling   more   than   $10   million   over   2014   and   2015—have   repeatedly  
been   transferred   back   to   the   General   Fund   to   help   balance   the   budget.   Similarly,   in   2013   legislators  
transferred   more   than   $5   million   from   the   Fund   for   a   Healthy   Maine   (established   with   tobacco  
settlement  money  to  combat  smoking  and  promote  public  health)  to  the  General  Fund.  There  is  no  
assurance  that  legislators  will  not  pass  similar  measures  to  re-­‐direct  Question  2  funds  away  from  K-­‐
12  education.  

Tax  Revenue  Would  be  Unreliable  and  Highly  Variable  

A   heavy   reliance   on   revenue  
from   income   taxes   on   the   Graph  3:  Revenue  Volatility  from  Question  2    
wealthy   is   an   ineffective   way  
40%  
to   fund   public   services,  
particularly   local   schools.   30%  
High   earners   are   more   likely   20%  
to   derive   income   from  
businesses,   dividends,   or   10%  
capital   gains—as   a   result,   0%  
their   income   is   2006   2007   2008   2009   2010   2011   2012   2013   2014  2015*  2016*  2017*  
-­‐10%  
extraordinarily   dependent   on  
the   strength   of   the   economy,   -­‐20%  
which   is   notoriously   difficult   -­‐30%  
to  forecast.    
-­‐40%  
During   times   of   robust  
growth,   their   income   often   rises,   only   to   crater   during   economic   downturns.   To   demonstrate   this  
phenomenon,   the   Department   of   Administrative   and   Financial   Services   calculated   how   much  
revenue   would   have   been   collected   annually   from   the   3   percent   tax   if   it   had   been   in   place   since  
2005.  Graph  4  illustrates  the  year-­‐over-­‐year  change  in  hypothetical  tax  collections.    

The   data   show   significant   volatility;   a   sharp   decline   in   revenue   of   more   than   30%   would   have  
occurred  following  the  2008  recession.  Other  states  that  rely  heavily  on  income  tax  revenues  from  
top   earners   to   fund   public   services—such   as   New   Jersey—have   recently   had   to   wrestle   with   the  
volatility   such   an   approach   introduces   into   their   tax   codes.   Although   supporters   assert   that  
Question  2  would  provide  a  reliable,  long-­‐term  funding  source  for  Maine’s  public  schools,  it  
would  instead  increase  the  volatility  of  state  revenues.  

The  Wrong  Choice  for  ME   11  

  

Funds  Would  be  Allocated  Unequally  among  School  Districts  

Although  Question  2’s  supporters  assert  that  the  initiative  would  benefit  schools  “across  the  state”  
and  promote  “education  equality  in  every  zip  code,”  the  funds  would  heavily  favor  wealthy  school  
districts.   Dozens   of   struggling   communities   would   receive   no   additional   state   funding   under  
Question  2.  

To   understand   how   Question   2  

would   impact   individual   school   Dozens of struggling communities in need of
districts,   it’s   worth   briefly   reviewing   property tax relief would receive no
Maine’s   school   financing   approach.   additional state funding under Question 2.
Every   year,   the   Department   of  
Education   uses   the   Essential  
Programs   and   Services   (EPS)  
formula   to   calculate   how   much   a   school   district   should   be   spending   in   order   to   meet   the  
educational   objectives   laid   out   in   the   Maine   Learning   Results.   A   report   by   the   University   of  
Southern  Maine  explains  the  complex  set  of  variables  EPS  considers  in  calculating  the  appropriate  
level   of   spending:   “Many   elements   are   used   in   determining   the   total   allocation   –   including   the  
number   of   students   in   the   school;   the   status   of   the   students   as   English   language   learners,  
economically   disadvantaged   students   or   students   with   special   needs;   the   level   of   teacher   salaries  
compared   to   other   areas   of   the   state;   the   state-­‐established   ratios   of   students   to   teachers,  
administrators,  educational  specialists  and  others,  to  name  just  a  few.”22  

Once  the  EPS  allocation  for  the  entire  state  has  been  computed,  it  is  funded  through  a  combination  
of   state   and   local   revenues.   The   state   share   is   appropriated   by   the   Legislature,   while   the   local  
required   contribution   is   collected   on   the   basis   of   an   established   property   tax   rate   designed   to  
collect  the  balance  of  revenues  needed  to  fund  the  EPS.  Each  school  district’s  combination  of  state  
and  local  funds  is  a  reflection  of  its  property  wealth  per  pupil;  property  poor  school  districts  receive  
a   higher   percentage   of   state   funding   than   property   rich   districts,   regardless   of   the   level   of  
household   income   within   the   communities.   Each   school   district’s   required   local   contribution   is  
determined  by  applying  the  required  tax  rate  to  the  property  value  of  the  district  to  determine  the  
local  share.  The  state  effectively  makes  up  the  balance  of  funding.    

No   matter   how   property   rich   a   school   district   is,   however,   the   state   provides   a   minimum   level   of  
funding,   called   a   “minimum   state   contribution”   This   minimum   is   computed   at   the   greater   of   five  
percent   of   the   school   district’s   total   allocation   (state   and   local   share),   or   30%   of   its   special  
education  adjustment.  

One   important   aspect   of   Maine’s   EPS   funding   formula   is   that   only   property   taxes   are   used   as   a  
measure   of   a   school   district’s   financial   capacity.   Communities   with   high   property   values   are  
considered   able   to   shoulder   a   greater   share   of   their   school   budgets,   while   towns   with   low   property  
values   receive   more   state   aid.   Unlike   some   states   that   blend   property   tax   data   with   income   and  
sales  tax  records  to  calculate  the  local  share,  Maine  relies  exclusively  on  a  single  measure  which  is  
an  unreliable  way  to  assess  an  area’s  economic  prosperity.  According  to  an  independent  review  of  
Maine’s   EPS   formula,   “A   school   funding   model   that   does   not   take   income   into   account   in  
determining   a   school   district’s   ability   to   fund   educational   services   is   more   likely   to   result   in   low-­‐
income,  high  property  wealth  districts  being  treated  as  if  they  have  a  greater  tax  capacity  then  the  
local   community   believes   it   can   afford.”23   In   other   words,   some   low-­‐income,   property-­‐rich  

12   The  Wrong  Choice  for  ME  

communities   are   required   to   contribute   far   more   to   their   local   schools   than   high-­‐income,   property-­‐
rich  towns.    

This   reality   has   a   profound   impact   on   how   Table   6:   Where   Would   Question   2  
Question   2   funds   would   be   distributed   between   Funds  Go?  
school   districts.   Question   2   would   allow   DOE   to  
slightly   reduce   the   statewide   mill   rate   School  Districts   Additional  State  Aid  
expectation,   which   would   inarguably   benefit   Under  Question  2  
some  towns.  But  many  low-­‐income  municipalities  
with  relatively  high  property  values  would  still  be   Top   25   Highest   $69,606,242.87  
considered   to   have   sufficient   local   resources   to   Receivers  
fund   their   schools,   despite   high   unemployment  
and   median   household   income   well   below   the   Next   25   Highest   $32,705,612.25  
state  average.   Receivers  

Consider  the  tiny  town  of  Upton,  located  in  Oxford   Rest   of   the   State   $27,883,835.16  
County.   According   to   Department   of   Education   (196  Districts)  
data,   in   2016   Upton’s   property   valuation  
exceeded   $27   million.   At   a   mill   rate   of   8.23   (the  
statewide  rate  set  by  DOE  in  2016),  Upton  could  generate  nearly  $225,000  in  local  property  taxes.  
However,   the   EPS   formula   indicated   that   only   $47,339   was   needed   to   fund   Upton’s   education  
system.   As   a   result,   the   state   contributed   virtually   nothing   to   Upton’s   public   schools   in   2016.   But  
despite  its  property  tax  base,  Upton  is  a  community  facing   difficult  economic  conditions.  According  
to   the   latest   Census   data,   the   median   household   income   in   Upton   is   $41,250,   significantly   lower  
than  the  state  average  of  $48,804.  Nearly  one  third  of  Upton’s  residents  live  in  poverty,  compared  to  
under   14   percent   statewide.   Upton—and   dozens   of   poor   rural   towns   across   Maine—needs   lower  
property   taxes,   but   Question   2  
will   provide   no   additional   state  
aid   to   provide   local   tax   relief.   In  
Question 2 would channel millions of dollars to fact,   most   towns   that   don’t   stand  
wealthy communities like Cumberland and to   benefit   from   Question   2—
Yarmouth, while providing no additional funding numbering   approximately   130—
to struggling towns like Upton and Acton. have   median   household   incomes  
below  the  state  average.  

On   the   other   hand,   Question   2  

would   channel   millions   of   dollars   to   wealthy   communities,   like   the   town   of   Falmouth   in  
Cumberland  County.  In  2014,  the  median  household  income  in  Falmouth  was  nearly  $100,000  and  
the   poverty   rate   was   barely   over   three   percent.   In   2016,   Falmouth’s   total   property   valuation  
exceeded   $2   billion,   generating   more   than   $17   million   for   local   education.   However,   because   the  
EPS  formula  indicated  that  nearly  $26  million  was  necessary  to  fund  Falmouth’s  schools,  the  state  
contributed   about   $8.6   million   in   2016.   Under   Question   2,   Falmouth   would   receive   an   additional  
$2.5  million.  

The  Wrong  Choice  for  ME   13  

Fourteen   towns   that   stand   to   receive   a   total   of   $22  
million   under   Question   2   (including   Falmouth,   Cape  
Elizabeth,   and   Yarmouth)   have   annual   median  
household  incomes  in  excess  of  $70,000.  Many  of  these  
wealthy   communities   have   chosen   to   exceed   the  
minimum  funding  level  set  by  the  EPS  formula  in  order  
to  provide  their  students  with  extracurricular  activities  
and  additional  classroom  resources.  For  example,  Cape  
Elizabeth   passed   a   $23.2   million   school   budget   for   the  
2015-­‐2016   school   year,   while   the   EPS   formula   only  
required   a   budget   of   $17.3   million.   At   the   same   time,  
Cape   Elizabeth   received   $3.4   million   in   state   aid.   If  
Question   2   passes,   Cape   Elizabeth   would   receive   an  
additional  $2  million.  

It   is   clear   that   Question   2—far   from   expanding  

educational   opportunity   for   poor,   rural   students—
would   exacerbate   the   inequities   that   Maine’s   school  
funding  formula  has  created.  

The   map   at   right   indicates,   using   preliminary   data   from  

DOE,  the  towns  that  are  unlikely  to  benefit  from  Question  2.    

Towns  Expected  to  Receive  NO  Additional  State  Aid  Under  Question  2  
 
Acton   Cyr   Lake  View   Orient   Stoneham  
Allagash   Dallas   Lakeville   Osborn   Stonington  
Arrowsic   Deblois   Lamoine   Otis   Surry  
Bar  Harbor   Deer  Isle   Lincoln   Owls  Head   Swans  Island  
Beaver  Cove   Denmark   Lincolnville   Oxbow   Sweden  
Beddington   Dennistown   Long  Island   Penobscot   The  Forks  
Blue  Hill   Embden   Lovell   Phippsburg   Tremont  
Boothbay   Eustis   Lubec   Pleasant  Ridge   Trenton  
Boothbay  Harbor   Frenchboro   Machiasport   Portage  Lake   Upton  
Bowerbank   Friendship   Magalloway   Rangeley   Vinalhaven  
Bremen   Frye  Island   Matinicus  Isle   Rangeley   Weld  
Bristol   Georgetown   Meddybemps   Raymond   Wells  
Brooklin   Glenwood   Monhegan   Rockport   Wesley  
Brooksville   Gouldsboro   Moro   Rome   West  Bath  
Byron   Grand  Lake  Stream   Moscow   Roque  Bluffs   West  Forks  
Camden   Great  Pond   Mount  Chase   Roxbury   Westmanland  
Caratunk   Greenville   Mount  Desert   Sandy  River   Weston  
Carrabassett  Valley   Greenwood   Nashville   Sebago   Westport  Island  
Carroll   Hanover   New  Limerick   Seboeis   Whiting  
Castine   Harpswell   Newry   Sedgwick   Willimantic  
Chebeague  Isle   Hersey   Nobleboro   Shirley   Winter  Harbor  
Codyville   Isle  Au  Haut   North  Haven   Sorrento   Winterville  
Cooper   Islesboro   Northfield   South  Bristol   York  
Coplin   Jonesport   Northport   Southport  
Cranberry  Isles   Kennebunkport   Ogunquit   Southwest  Harbor  
Crawford   Kingsbury   Old  Orchard  Beach   St.  George  
 

14   The  Wrong  Choice  for  ME  

  

More   Spending   Doesn’t   Necessarily   Lead   to   Better   Educational  

Outcomes  
Beyond  concerns  over  the  initiative’s  uneven  impact  on  communities  and  the  risk  that  funds,  once  
raised,   will   be   used   for   other   purposes,   a   large   amount   of   empirical   research   indicates   that  
additional  spending  on  public  education  in  Maine  is  unlikely  to  affect  student  achievement.    

Before   making   a   decision   on   Question   2   at   the   ballot   box,   voters   should   carefully   consider   research  
that   shows   the   link   between   education   spending   and   student   performance   is   not   definitive   as  
supporters   suggest.   Over   the   last   decade,   researchers   have   found   that   among   other   variables,   the  
relation   between   spending   and   student   performance   is   weak   and   that   other   factors   account   for  
improved  performance.  

Using   a   value-­‐added   model,   the  

Beacon   Hill   Institute   (BHI)   found  
Additional spending on public education in
that   additional   spending   in   Maine is unlikely to affect student achievement.
Massachusetts   had   no   measurable  
effect   on   student   performance.    
The  analysis  also  showed  that  neither  spending  per  pupil  nor  class  size  played  a  significant  (or  even  
positive)   role   in   improving   standardized   test   scores.   In   a   more   recent   study,   BHI   applied   an  
alternative   methodology   to   the   techniques   from   the   earlier   research   project   and   found   that  
spending  had  a  mostly  positive,  though  still  very  small,  effect.    For  4th  and  8th  graders  a  10  percent  
increase   in   spending   increased   performance   by   0.6   percent   and   1.02   percent,   respectively.    
Moreover,   in   10th   grade   math,   a   ten   percent   increase   in   spending   caused   a   2.73   percent   decrease   in  
student  performance.              

Noted  education  economist  Eric  Hanushek  reviewed  163  studies  and  found  that  only  27  percent  of  
the   studies   showed   a   positive   and   statistically   significant   relationship   between   expenditure   per  
student   and   student   achievement.     On   the   other   hand,   seven   percent   of   the   studies   show   a   negative  
and   statistically   significant   relationship   between   expenditure   per   student   and   student   achievement  
and   66   percent   found   no   statistically   significant   relationship.   In   2010,   a   study   of   Maine’s   school  
formula  failed  to  find  any  evidence  that  an  increase  in  state  funding  had  led  to  an  improvement  in  
student  achievement.24  

There  are  some  paths  toward  improvement  but  they  do  not  require  additional  sources.  Hanushek  
suggests   that   education   spending   should   be   used   to   implement   the   policies   with   proven   efficacy,  
such  as  replacing  teachers  who  fail  to  raise  test  scores  and  closing  schools  which  persistently  fail  to  
produce   reasonable   student   achievement.   Instead   of   endangering   Maine’s   economic   prosperity  
with   large   tax   hikes   on   small   business   owners,   advocates   for   a   strong   educational   system   should  
focus   on   expanding   charter   schools,   creating   education   savings   accounts,   and   empowering   school  
choice  so  that  Maine  children,  no  matter  where  they  live  or  the  income  of  their  parents,  have  access  
to  a  high  quality  education.    

The  Wrong  Choice  for  ME   15  

1  http://taxfoundation.org/state-­‐tax-­‐climate/maine  
2  http://bangordailynews.com/2012/04/17/business/study-­‐maine-­‐is-­‐fifth-­‐worst-­‐state-­‐for-­‐business-­‐taxes/  
3  http://www.nj.gov/treasury/economics/documents/gsef/OCE-­‐Migration-­‐Study.pdf  
2  http://bangordailynews.com/2012/04/17/business/study-­‐maine-­‐is-­‐fifth-­‐worst-­‐state-­‐for-­‐business-­‐taxes/  
3  http://www.nj.gov/treasury/economics/documents/gsef/OCE-­‐Migration-­‐Study.pdf  
4  http://mercatus.org/sites/default/files/publication/Tax_Rates_and_Migration_Davies_Pulito_WP1131.pdf  
5  http://www.taxpayersnetwork.org/_rainbow/documents/taxation%20and%20migration.pdf  
6  http://www.nusinstitute.org/assets/resources/pageResources/NUSIPR_CA_Tax_Burden.pdf  
7  https://philanthropy.com/interactives/how-­‐america-­‐gives#state/23  
8  Maine  Open  Checkbook  
9  http://www.bls.gov/oes/current/oes_me.htm#00-­‐0000  
10  http://www.maine.gov/labor/cwri/data/oes/hwid.html  
11  http://www.pressherald.com/2014/05/31/in-­‐rural-­‐maine-­‐dearth-­‐of-­‐doctors-­‐is-­‐a-­‐growing-­‐crisis/  
12  http://www.graham-­‐center.org/content/dam/rgc/documents/maps-­‐data-­‐tools/state-­‐

collections/workforce-­‐projections/Maine.pdf  
13  http://kff.org/other/state-­‐indicator/percent-­‐of-­‐adults-­‐reporting-­‐not-­‐seeing-­‐a-­‐doctor-­‐in-­‐the-­‐past-­‐12-­‐

months-­‐because-­‐of-­‐cost-­‐by-­‐raceethnicity/  
14  http://kff.org/other/state-­‐indicator/percent-­‐of-­‐adults-­‐reporting-­‐not-­‐having-­‐a-­‐personal-­‐doctor/  
15  http://www.taxpolicycenter.org/briefing-­‐book/what-­‐are-­‐flow-­‐through-­‐enterprises-­‐and-­‐how-­‐are-­‐they-­‐

taxed  
16  http://www.nsba.biz/wp-­‐content/uploads/2015/04/2015-­‐Taxation-­‐Survey.pdf  
17  https://www.alec.org/article/personal-­‐income-­‐tax-­‐increases-­‐hurts-­‐small-­‐businesses/  
18  http://www.nber.org/chapters/c10856.pdf  
19  http://www.andersoneconomicgroup.com/Portals/0/AEG%20Tax%20Burden%20Study_2016_FINAL.pdf  
20  http://taxfoundation.org/article/individual-­‐tax-­‐rates-­‐impact-­‐business-­‐activity-­‐due-­‐high-­‐number-­‐pass-­‐

throughs#_ftn7  
21  http://www.forbes.com/best-­‐states-­‐for-­‐business/list/2/#tab:overall  
22  https://usm.maine.edu/sites/default/files/cepare/EPSCmmssnRprtF_1_9_2015Web.pdf  
23  http://picusodden.com/wp-­‐content/uploads/2013/09/maine-­‐fiscal-­‐capacity-­‐july-­‐2013.pdf  
24  

https://usm.maine.edu/sites/default/files/Center%20for%20Education%20Policy,%20Applied%20Researc
h,%20and%20Evaluation/ImpactofFundingFormulaStudentAchievement.pdf

16   The  Wrong  Choice  for  ME