Way to economic reform may open soon

Op-ed column by Ron Bancroft
Portland Press Herald: Tuesday, November 6th, 2007

A series of events over the past few weeks have reminded us of the economic work still to be done.

GrowSmart, the group that sponsored the Brookings Report on the Maine economy, held a summit on implementing the report; MaineBiz and MPBN co-hosted a symposium entitled "Pessimism in Maine's Business Community"; and the Portland Chamber hosted a forum on tax reform.

The heartening news from these gatherings is that leadership from the public and private sector is finally focusing on specific proposals that could improve Maine's economy.

Maine's economy continues to be anemic, compared to other New England states and the nation. The latest economic update from the Boston Fed noted that Maine's economy grew at 2 percent in 2006.

In New England, only Vermont's economy lagged ours, growing at 1.7 percent. The United States growth rate was more than 3 percent.

CHARTING THE PATH

There is a way forward. Brookings did the state a great service in developing a comprehensive, well-founded plan for improving the economy.

Maine's situation is difficult. However, the Brookings' recommendations offer real opportunity. I don't think it is an overstatement to say the Brookings Plan is the last, best hope to reverse our current troubling economic situation.

The GrowSmart summit provided a good opportunity to take stock of where we stand with implementing the Brookings Plan. The big omission in implementation is the lack of action on Brookings' recommendation to reduce Maine's tax burden, principally through a fundamental review of state spending by an independent Blue Ribbon panel.

The recommendations of this panel would be subject to one up- or-down vote at the Legislature. This approach, dubbed "BRAC" after the similar approach taken in federal base closure initiatives, is the most effective way to identify significant savings. Brookings suggests $100 million is a reasonable target for this effort.

Which leads to the Portland Chamber's forum. The panel consisted of Glenn Cummings, speaker of the House; Josh Tardy, House minority leader; Jim Cohen, Portland city councilor; and Kevin Hancock, CEO of Hancock Lumber.

Somewhat surprisingly, all agreed on critical aspects of current tax issues:

First, that cost reduction needs to precede tax reform.

Second, that the Brookings approach to cost reduction should be implemented -- with Speaker Cummings agreeing with caveats on scope (include both local and state spending) and composition (make sure the members are nonpartisan).

If the Gov. Baldacci agrees, there is a real chance that key issues in tax reform can also be resolved, namely the lowering of the income tax and the broadening of the sales tax.

Lowering the income tax is an important part of stemming the flow of high-income taxpayers from the state. Speaker Cummings recounted a recent discussion with an investment management executive who berated the Legislature for not moving on the state's high income-tax rate.

As a result of that rate, this executive said he routinely witnessed high-net-worth individuals leaving Maine, at least as their official residence.

The result of this exodus is to further burden the working middle class, who have less flexibility in determining where to establish legal residence.

Broadening the sales tax makes sense because the narrow base of the current tax leads to precipitous revenue swings, making Maine susceptible to deficits at times of economic downturn.

TYING THE THREADS

There is just a chance that both of these threads of tax reduction and tax reform could come together in the next Legislative session.

Step one is getting approval of the BRAC approach to cost reduction. If this happens, the business community then must be willing to reverse its position on the broadening of the sales tax, and Democrats must embrace a significant reduction in income tax rates.

Moreover, there would need to be bipartisan agreement on limits to future spending, most likely by a required two-thirds vote on any spending that exceeds the rate of the overall growth of state income.

Putting all this together would be huge. It is an important moment for Maine. Will we be able to overcome partisanship and build the trust needed for such a series of seismic shifts?

Let's put the first building block in place, the BRAC commission. After that, all things are possible.

Ron Bancroft is an independent strategy consultant based in Portland. He can be contacted at:

ron@bancroftandcompany.com

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