Maine’s tax burden is high, ranking fourth after New York, Hawaii and Vermont. The state is, however, attractive to wealthy non-residents who are residents of low-tax states. They have a second home in Maine, spend a little less than six months of the year in the state and avoid most of the taxes that fall on full-time residents. These out-of-state residents reap many of Maine’s benefits but don’t support the state budget as do residents.
Consider out-of-state homeowners in Maine, residing in Florida and Texas, states with no income tax. How do they benefit and shortchange the full-time residents of Maine?
Out-of-state homeowners drive up real estate prices, which make affordable housing out of reach for many residents, forcing some into long commutes and others to simply leave the state, depriving Maine of its human capital and essential workers. These out-of-state homeowners, who may spend just a little less than six months in Maine, with their home staying empty for the balance of the year, pay no Maine income tax and pay no income tax in their resident state of Texas or Florida. These out-of-state homeowners also avoid Maine’s high estate (death) tax. Florida and Texas have no estate tax whereas Maine has a tax rate of between 8 and 12% on estates above $5.6 million.
When you put all this together, we see that wealthy, non-resident Maine homeowners shortchange the state and Mainers. They avoid income and estate taxes that can amount to millions of dollars over their lifetime and at their death. This in turn forces the state of Maine to impose higher taxes on its full-time residents, making the state less attractive for potential newcomers. In other words, if these out-of-state homeowners paid more in Maine taxes, the full-time residents of Maine would pay less and the state would be more attractive to younger newcomers.
Are there any good options open to the state and local jurisdictions to collect more taxes from out-of-state homeowners and lower the tax burden on full time Maine residents?
There is a readymade option for local jurisdictions – homestead exemption. Local municipalities already have a homestead exemption on their books for full-time residents but they are typically tiny relative to the total real estate tax bill. If the state would increase the homestead exemption significantly, municipal governments increase the real estate tax rate to keep aggregate tax collection the unchanged. This would afford full-time resident homeowners a big tax break while increasing the tax on out-of-staters. Such an initiative could be immediately put into force with no effective legal challenge.
Cars with Massachusetts and New Hampshire license plates drive along Atlantic Avenue in Wells in 2020. Should out-of-state owners of seasonal homes in Maine pay more in taxes to the state? Gregory Rec/Staff Photographer
For income tax collection, the state could impose an income tax on those with second homes in Maine, on their annual income in proportion to the number of days of the year they are in their Maine residence. While such a tax could be in justified on a similar basis as a commuter tax, in force in New York and elsewhere, it would in all likelihood be challenged in the courts with the final outcome in question. Non-residents receive services from the jurisdictions where they live. Therefore, they should be asked to pay their fair share of the costs of those services through income taxes.
The heavy tax burden is a dark cloud over Maine’s future. During 2010-2020, Maine’s population grew by 2.6%, well below the U.S. population growth of 7.4%. Maine has the oldest median age of any state. It is time for Maine to act in order to lower taxes for residents, make housing more affordable and in the process attract younger income-tax-paying residents to the state.
— Special to the Press Herald
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