Maine’s revenue surplus is illusionary, largely because of inflation

By Matthew Gagnon

On Tuesday, the Maine Revenue Forecasting Committee announced that the state was expected to collect an additional $283 million in revenue in the current fiscal year which ends in June 2023, and $489 million in the following biennium. 

The Mills administration predictably pounced on the news, taking the opportunity to claim credit for the surplus, saying it was the result of “good fiscal management of my administration and the Legislature,” though to her credit she did also note the role of “federal support” in the rosy economic projections. 

And in fairness, while the federal largesse that Maine has enjoyed in the last several years is undoubtedly a major aspect of the state’s appearance of fiscal health — remember that money is fungible, and unexpected federal dollars allow for state monies to be recommitted or saved — this additional revenue, and the $1.2 billion surplus we saw last year are actually the result of many factors. 

In this case, that is higher-than-expected income tax revenues, with the state collecting $142 million more than was budgeted since July 1, when the current fiscal year began. This increased revenue collection is, according to forecasters, expected to continue, which is primarily where the “extra money” is coming from. 

There are a few simple (and a few not-so-simple) explanations for why income tax revenue is increasing. The windfall, though, is mostly due to inflation, which increases asset prices and causes wage growth. As prices rise, employees seek raises more aggressively (and shop for higher-wage alternatives to their current jobs) to try to blunt the impact of higher costs, and new hires have bigger salary demands.

In Maine, the upward pressure on wages has been increased by our workforce struggles, which have only grown worse over time. When Janet Mills began her first term in office, the state’s labor force participation rate was 62.8 percent, whereas today it is 58.3 percent, and falling. This means that there are tens of thousands of workers “missing” from the labor force that were once there, and businesses are growing increasingly desperate to fill needed positions. To do so they are responding by trying to increase incentives, which are often causing radical increases in pay. 

This isn’t just an academic thought exercise, or speculation. This is a reality in Maine. The state’s median household income in 2020 was $63,693, and one year later that figure ballooned to $71,139. We don’t yet know what it will be in 2022, but I would suspect income will rise to somewhere between $78,000 and $80,000 per household, given both recent trends and other economic indicators. 

Maine isn’t alone. States all over the country are seeing revenue spikes as more tax collections come in from these additional earnings. On top of the windfall that is coming from higher wages, the growth in income is also driving some people into higher tax brackets, meaning that not only do they have additional taxable income, but they are also paying a higher rate. And on top of all of that, higher asset values mean that there are additional capital gains that come from the sale of those assets.

The temptation in seeing all this is to declare it all a good thing. Higher wages? Great. More state revenue? Fantastic. Admittedly, it can be difficult to see any of those things as bad. 

And yet, with inflation raging across the country, most of those “gains” are mere illusions. As everything costs more, income hikes are oftentimes not keeping up with the extra expense. And on the state government side extra money is exciting, but it is likely hiding fundamentally broken aspects of state government and obscuring needed reform. Worse, it is incentivizing foolishly shortsighted decisions about what to do with all this unexpected revenue. 

Earlier this year when talking about our previous surplus, I asked a hypothetical question to illustrate the nature of this issue: “Congratulations, you’ve just won the lottery,” I said, hoping you would think about what you would do with an unexpected sum of money showing up in your bank account. “Do you save it all? Invest it in the stock market? Pay down some debt? Or do you blow most of it?”

The same question will confront Gov. Janet Mills and lawmakers this session, and they are likely to make the exact same mistake they made last time: spending the money on programs, subsidies, or one-time kickbacks rather than making real, substantial, lasting reforms that would make Maine a more competitive and prosperous state in the long-term. 

And, most tragically of all, when the inevitable recession comes, we’ll have a big spending mess to clean up.

Gagnon of Yarmouth is the chief executive officer of the Maine Policy Institute, a free market policy think tank based in Portland. A Hampden native, he previously served as a senior strategist for the Republican Governors Association in Washington, D.C.