Maine lawmakers are currently debating a significant shift in tax policy. A new proposal, recently backed by Governor Janet Mills, seeks to implement a 2 percentage point surtax on earners making over $1 million. This would push Maine’s top marginal income tax rate from 7.15% to 9.15%.
While the move aims to generate revenue, it places Maine in the “high-tax” minority at a time when 23 other states have been lowering their rates to remain competitive.
1. A Hidden Tax on Small Businesses
Though often marketed as a tax on “the wealthy,” the surtax would disproportionately impact Maine’s engine of growth: small businesses.
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Pass-Through Entities: Most Maine businesses (LLCs, S-corps, and partnerships) pay taxes through the owner’s individual return.
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The Data: IRS records show that 70% of Maine residents earning over $1 million report pass-through business income. Furthermore, nearly half of all pass-through income in the state is generated by this specific group.
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The Impact: Raising these rates reduces the capital available for businesses to hire new staff, invest in equipment, or expand operations.
2. Threatening a Fragile Economy
Maine’s economic outlook is already precarious. The Maine Consensus Economic Forecasting Commission predicts zero employment growth through 2031. Implementing a top-tier tax rate could exacerbate this stagnation by:
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Discouraging Investment: Business owners may scale back expansion plans or raise prices to offset the tax.
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Targeting “One-Time” Millionaires: Many who hit the $1 million threshold aren’t “rich” every year. These are often entrepreneurs selling a business or land—effectively a tax on a lifetime of work and retirement savings.
3. Revenue Volatility and Lessons from Other States
Relying on a tiny pool of taxpayers—roughly 2,631 filers—is a risky fiscal strategy. High-income revenue is notoriously volatile, as it relies heavily on capital gains and business profits that fluctuate with the market.
Historical precedents suggest high top rates can backfire:
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California: Estimates suggest tax avoidance and out-migration eroded 61% of expected gains from similar hikes.
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New Jersey: Experienced a surge in out-migration following its 2004 tax increase.
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New York: Its share of the nation’s millionaires dropped from 12.7% to 8.7% over twelve years.
4. The Education Funding Myth
The proposal is framed as a way to “permanently fund” the state’s 55% share of education (LD 1089). However, the math doesn’t quite add up:
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The Gap: Maine’s education budget is roughly $1.56 billion.
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The Revenue: The surtax is only expected to raise $74 million annually.
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The Reality: This tax would cover only about 2.6% of education spending—hardly a “permanent” solution for a budget that is growing faster than taxable income.
| Metric | Current (Est.) | With Proposed Surtax |
| Top Income Tax Rate | 7.15% | 9.15% |
| Projected Annual Revenue | — | $74 Million |
| Est. Impacted Filers | — | 2,631 |
| Education Budget Coverage | — | ~2.6% |
Conclusion
In an era of increasing geographic mobility, Maine risks alienating the very individuals and businesses that drive its economy. With a 9.15% top rate, the state may find itself less attractive to new ventures and more prone to losing its existing tax base. The potential for long-term economic harm likely outweighs the modest, volatile revenue gains promised by the surtax.