To be blunt, this proposal is fiscally irresponsible and fails to deliver tax relief to those who need it most. It will have little impact on migration to and from the State and may actually jeopardize our future competitiveness as a place to live, work, and retire.
According to data from Maine Revenue Services, this proposal will cost over $105 million when fully implemented in 2019. It manifests its fiscal irresponsibility in two ways. First, there is no clear plan for how to pay for this tax cut. It assigns the tough decisions about spending cuts or finding revenues from other sources to pay for this tax cut to future Governors and Legislatures.
Second, it puts Maine in a difficult financial position further down the road. As the population grows older, revenues will decrease at higher levels due in part to this proposal. At the same time, demand for services among older residents will increase. This is a recipe for fiscal disorder.
Howard Gleckman, a resident fellow at the Urban Institute and contributor to Forbes Magazine, summed up this problem when he writes:
“Many middle-income seniors spend down their assets on personal care and eventually become eligible for Medicaid. About one-third of Medicaid dollars are spent on long-term care services and the program is a growing burden on state budgets.
“Thus, while states may benefit in the short-run from attracting a few relatively young, healthy, and wealthy pensioners, they may end up paying a substantial price when middle-income seniors become frail, go broke, and require Medicaid long-term care services.”
Regarding who will benefit – 76% of the benefits of this proposal go to the top 20% of taxpayers. If the concern is for older Mainers living on fixed income, there are much better ways to deliver targeted tax relief. First, we must bear in mind that Social Security income is already exempt under Maine law. Second, we must ask ourselves – who are the older Mainers most in need of tax relief? More than likely it is not someone with a pension. It is someone who lacks the retirement security to stop working. As an aside, this proposal is problematic in the differential outcomes for those who hold Roth IRAs which are taxed on the front end versus Traditional IRAs.
If our goal is to enhance financial stability, we are better off providing targeted income tax relief and making it refundable to specific income groups. One flaw in our ability to do this is that the Earned Income Tax Credit is not available to individuals over 65. Maintaining a strong property tax relief program and making it easier for people, particularly older residents, to apply is also an important priority. Compromising our ability to do these things in deference to tax cuts that provide the greatest benefit to Maine’s wealthiest residents makes little sense.
Finally, I’d like to address the migration myth. Nationally, less than one percent of seniors moved from state to state after age 65 for any reason. For the population as a whole more than half of American adults have never lived in any state other than where they were born, and just 3 percent of Americans move across state lines in a given year. Included with my testimony is a summary of these issues from a report produced by Dr. Jeff Thompson, an economist at the Political Economic Research Institute at the University of Massachusetts – Amherst.
Even if you subscribe to the migration myth, the relevant fiscal policy question remains – what is the cost/benefit analysis of giving tax breaks in hopes of attracting wealthier retirees? Do those retirees generate enough revenue to offset the revenue losses that we would need to incur “tip the balance”? Furthermore, what are the opportunity costs associated with the lost revenue? States appear to recognize the limitations of this particular approach. Georgia was on the path to excluding all unearned/non-wage retirement income from taxes and is now considering a proposal to keep the existing exclusion.
Investments in Maine’s youth and infrastructure will do more to increase our long-term competitiveness than curtailing those investments to offer tax breaks for pension holders. Given current budget shortfalls, we must acknowledge the trade-offs of the choices we are making. Now is not the time to mortgage future investments to provide tax relief to a select few.
