When Maine residents file their federal income tax returns next year, many of them will do so for free, thanks to a new IRS program that was piloted in 12 states for the 2023 tax year and is now being expanded nationwide.
Not all states will participate, but Maine Revenue Services recently announced its intention to join, consistent with the state’s policy of allowing free filing of income tax returns since 2001.
It has always been an outrage that low-income earners, many of whom are entitled to substantial refunds, have to pay private tax preparation firms to get the money they are legally entitled to.
This reality is the result of many individual decisions, decades apart, that reflect the changing nature of the income tax system—the source of revenue for the federal government and many states, including Maine, where income tax revenues have long exceeded sales tax revenues.
When the modern federal income tax was introduced in 1913 following the passage of the 16th Amendment to the Constitution, it was borne primarily by the wealthy and often referred to as the “luxury tax.” The brand new Internal Revenue Service was helpful, helping taxpayers understand and pay something they had never faced before.
In the 1920s, when Republicans dominated Congress, resentment over the progressive tax grew among the upper classes, and lawmakers eliminated this taxpayer support, partly as a cost-cutting measure.
Yet the tax return was simple enough that most people could file it themselves, even after the enormous need for government revenue to finance World War II had raised the tax to the point where it covered both middle-class and rich incomes, reaching top rates of up to 90 percent.
By the 1970s, consensus around the tax began to wane, and Reagan’s tax cuts in 1981 led to huge peacetime budget deficits for the first time. Congress responded to growing calls for action in a variety of ways.
One of the decisions was to introduce a “workfare” program instead of direct welfare payments: the EITC (Earned Income Tax Credit). This is the main reason why today, while practically everyone has to file a tax return, only a far smaller number of people actually owe money to the government.
Most states also require filings. Maine has converted the Circuit Breaker property tax rebate program into a tax credit and also added a Sales Tax Fairness credit.
Meanwhile, Republicans supported legislation that made the income tax even more unpopular, or at least more confusing, through a series of measures.
While the 1986 “tax reform” simplified the bewildering array of tax shelters and incentives – many of which had already been created by Reagan’s previous tax laws – it also introduced changes that distorted the economic decision-making process. For example, a series of gradually increasing progressive tax rates were reduced to just two levels, 15% and 28%.
Of course, this gave new impetus to the already thriving tax avoidance industry, and the paying middle class tried to avoid being taxed almost twice on every additional dollar of their income.
Nowhere has the incentives to avoid taxes and reduce the burden on taxpayers been seriously challenged. As hotel heiress Leona Helmsley said at the time: “We don’t pay taxes, only the little people pay taxes,” even though she was serving 21 months of a 16-year prison sentence for tax evasion.
It has only gotten worse. The Trump tax cuts of 2019 introduced new distortions and brought further tax cuts for large corporations and wealthy individuals.
For a long time, the middle class and the general population had an incentive to donate to charity because it allowed them to reduce their tax burden. Now there is a further “simplification”: a significantly higher flat-rate deduction, which means that only the rich receive tax benefits for donations to charity.
This led to an immediate drop in giving, but it has since recovered. The tradition of giving back, especially at the local level, may be stronger than the federal tax code, however perverse its incentives.
In recent decades, there have been very few politicians willing to stand up for fair taxation and oppose the latest models that benefit one group or another, and most of them have been those who could afford lobbyists.
The state of Maine is also not immune to a weakening of the progressivity of its income tax, although in one poll after another extraordinary majorities believe that the rich do not pay enough.
By eliminating the top and bottom tax brackets, state tax brackets were eliminated, making the tax closer to a flat tax than is commonly believed.
Nevertheless, we should celebrate small successes wherever they happen, and the free tax return is certainly one of them.
A former presidential candidate promised that if elected, he would make income tax so simple that people could file their tax return on a postcard. He lost.
Nevertheless, we can dream.
Douglas Rooks has been an editor, columnist and reporter in Maine since 1984. He is the author of four books, most recently a biography of U.S. Supreme Court Justice Melville Fuller. Comments are welcome at [email protected]
