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Susan Young is the Bangor Daily News opinion editor.
If you’re going to give someone an economics lesson, it’s a pretty good idea to make sure you understand economics first.
It’s been clear for a long time that former Gov. Paul LePage thinks the $850 stimulus checks that were supported by both Republican and Democratic lawmakers were a bad idea. At a debate Monday night hosted by the Bangor Daily News and WGME, the former governor again criticized the payments that were sent to the majority of Mainers as “a gimmick” and blamed them for making inflation worse. If he’s elected, he said, he’d work to phase out the state’s income tax, which accounts for nearly half of state revenues.
Here’s the thing: It defies logic to suggest that a stimulus check and a tax break would have different impacts on inflation. Both, essentially, put more money into people’s pockets, which can drive up inflation when done on a large scale.
However, since Maine is a small state with a small economy, the state’s fiscal choices will have little impact on inflation, which is driven by national and world events.
Inflation, despite this reality, remains a focus of campaign ads, and gubernatorial debates in Maine.
Last Monday, after comparing Gov. Janet Mills to a drunken sailor when it comes to spending money and again decrying the relief checks, LePage said: “Governor, I don’t know what economics school you went to, but putting money into a hot economy only drives up inflation not lowers it. If you wanted to lower inflation, the best way to do it is to lower the income tax.”
Let’s unpack this, beginning with LePage’s pledge to reduce taxes, a boilerplate promise of nearly every Republican campaign for office.
Pledging to reduce taxes during times of high inflation can be problematic. Just ask Liz Truss, the short-term prime minister of the United Kingdom. Shortly after she assumed the leadership role, her finance minister proposed broad tax cuts without a plan to pay for them.
The British financial markets immediately responded by plummeting; the value of the British pound reached its lowest level against the U.S. dollar in nearly four decades. Truss stuck by the tax cutting plan for a few weeks, before reversing course and abandoning it in mid-October. She resigned just days later, less than two-months after being sworn in.
What led to her downfall? Mainly her pledge to cut taxes, without corresponding spending cuts. Instead, she proposed to raise government spending, particularly on energy.
Politicians often pledge to cut taxes to “put more money into people’s pockets.” But, when inflation is high, that can backfire. With more money in their pockets, people try to spend more, which drives prices even higher, especially in times like these when persistent supply chain problems have left some items in short supply.
“If the primary concern is inflation, cutting taxes is going to make that worse,” Phil Trostel, a professor of economics and public policy at the University of Maine, told the Bangor Daily News editorial board.
But, he cautioned, cutting taxes in Maine, where most of the spending by residents is done in state, would have a miniscule impact on inflation. Ditto for the relief checks, which may have had a negligible impact on inflation.
The stimulus checks that the Legislature voted for and Mills signed into law, as part of a biennial budget, are essentially a negative tax, Trostel explained. They acted like a tax cut because the people who received them had more money to spend – quickly. Unlike income tax cuts, which often predominantly benefit the wealthy, the relief checks, which included income caps, predominantly benefited those who were not wealthy.
The other benefit of the $850 checks is that they were sent to Mainers fairly quickly. Any tax cuts, if there were to come at all, wouldn’t happen for months or years. LePage proposed many times during his eight years in office to end the state’s income tax. It didn’t happen, even when Republicans controlled the Legislature. That’s, in part, because he didn’t also propose a way to make up for the lost revenue; income taxes cover about 40 percent of the state’s revenue. Get rid of that revenue stream and massive cuts in state spending have to be made, or other taxes, like the state sales tax or local property taxes, have to be raised.
Bottom line: Mocking a stimulus payment for worsening inflation while calling for a tax cut to alleviate inflation makes no economic sense.