(R-Caswell)
Only five months into Maine’s two-year state budget, big red warning lights are flashing. The tax revenues that were expected to flow in to fund the budget are falling short, setting the stage for a very unpleasant session when the Legislature reconvenes in January. When the state’s Revenue Forecasting Committee met in November, they severely downgraded revenue projections based on a month-to-month analysis of tax collections. As of right now, the state is facing a $95 million budget hole in the General Fund and another $16 million shortfall in the Highway Fund.
Maine’s state budget has surged wildly since 2003, when Governor John Baldacci took office. The budget for 2002-2003, for example, was $5.1 billion. The new budget for 2008-2009 is $6.32 billion. That’s a budget increase of more than $1.22 billion during a time when the state population has remained essentially stable and inflation has been low. The massive increases have come in education and Medicaid, the program that provides free medical and dental care to more than 270,000 Maine residents.
The problem now is that Maine’s tax base isn’t growing enough to keep pace with state spending. As a result, our extreme levels of taxation have choked off economic development and job creation. Making a bad situation even worse, the huge increases in gasoline, diesel and heating oil have been devastating for Maine families, who have curtailed normal consumer purchases in order to heat their homes and drive to work.
The downgraded projections from revenue forecasters paint a gloomy picture. Revenue from sales tax over the biennium is expected to come in $40 million lower than expected, because people are spending so much on non-taxed heating oil and less on taxable products. Corporate income taxes are projected to drop by more than $14 million, and cigarette and tobacco taxes have been pegged $12 million lower. You might say Maine’s revenues are going up in smoke.
During this past legislative session the governor and legislative Democrats proposed raising the cigarette tax by another $1 a pack, to $3. The budget writers knew that they needed more money to expand entitlements, so they turned to their old stand-by — the cigarette tax. Unfortunately for the majority party, the cigarette tax hike was defeated during budget negotiations.
There were many reasons to oppose yet another cigarette tax increase. No one wants to encourage smoking, but it is legal and adults have the right to smoke or not. Smokers should not be singled out for a tax increase whenever lawmakers want a few extra dollars – in this case, $66 million. Another reason to oppose the measure, one that sheds light on our current revenue predicament, is that cigarette tax revenue is famously unstable.
Maine has one of the nation’s highest cigarette taxes, at $2 a pack. Despite the increased prices, it is estimated that 21 percent of adults in Maine smoke. With $2 a pack going straight to the state, this tax seems like a surefire way to raise revenues.
You may hear politicians speaking in favor of a tobacco tax because it will decrease the number of people smoking. This is true. High tobacco taxes often correlate with some people quitting, but that number is a small percentage of total smokers. Tobacco is addictive, and state budget writers assume that the vast majority of smokers will relent in the face of a tax increase and fork over the extra money. However, when taxes get too high, some people get creative.
In the field of economics there is “a law of diminishing returns.” History has taught us that when taxes are too high, people seek to avoid the tax collector altogether. This evidently is happening in Maine right now with the cigarette tax.
Some smokers, especially in southern Maine, are crossing the border into New Hampshire to make their purchases. The tax in New Hampshire is only half of ours at just over a $1 a pack. While Mainers are down there they fill up their gas tanks and make other purchases, too. Not only is Maine losing the cigarette tax, it is losing the sales tax on a whole range of items, from flat-screen TVs and video games to clothing.
Convenience store owners in Maine situated near the border complain that their business has dropped off sharply in the past few years. Mainers living too far from New Hampshire to make the trip economical will shop on the Internet for operators who will ship cigarettes tax-free. Online distributors are supposed to charge the sales tax, but many of them don’t. We also know anecdotally that some residents band together to send a “runner” to New Hampshire to purchase cartons by the trunk load.
The cigarette tax has been running under budget by between $800,000 and $1 million every month since the beginning of 2007. While this shortfall has been constant, the original money that was projected is still being spent. The status quo of spending in Augusta will have to change quickly or Maine’s fiscal health will surely suffer smoke damage.
State Rep. Bernard Ayotte (R-Caswell), a first-term legislator, voted against the new state budget.
