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Let Slip the Dogs of (Tax) War

To survive Obama, Maine can learn from Canada.

By From the September 2010 issue

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Like everybody else in his right mind, I love Maine, and I fear for her future. In my case, the roots of love run deep. My grandmother came from Old York, just as, the family Bible records, did her grandfather, and his grandfather. My sister still lives in the family house built in 1690.

I confess to being a serial entrepreneur, which is to say that I come from no place in particular. I have started four businesses-one each in Virginia; Washington, D.C.; Florida; and, most recently, British Columbia. On each of those occasions, because I love Maine, I looked for a rationale to start my new venture here. On each of those occasions, I was unable to make the business case.

Why was that? For two reasons, one obvious, the other perhaps less so. The first reason is that Maine has a famously high-tax, high-regulation legal construct. Some of my colleagues describe Maine's attitude as anti-business. I don't see it that way. In my own experience, Maine seems to be agnostic on the question. The established wisdom -- be it from the dominant unions or the academy or the loudest voices in the political conversation -- seems to be that business exists for one reason only: to pay taxes. And that, derivatively, business hires employees so that they can pay taxes, too. If the fissiparous character of business creation is left unexamined -- if no thought is given to its macroeconomic value or its social utility -- then business can make only the weakest of claims on public support. In the world of politics, inevitably, business thus gives way to other, ostensibly more high-minded claims on public support.

The second reason not to launch a venture in Maine is more cultural than financial. All Mainers take pride in our vibrant public-service culture. We have long contributed disproportionately to the political life of the nation. From Margaret Chase Smith and Ed Muskie to George Mitchell and Olympia Snowe, we have produced abundant political talent from a state with only one-third of 1 percent of the nation's population. By contrast, however, a roster of great Maine entrepreneurs might take its place on the shelf of the world's thinnest books, just a tad thicker than such volumes as Great British Chefs and Famous Italian War Heroes. Indeed, what is striking about Maine -- given its well-educated and self-reliant workforce -- is the barren nature of the business culture. What we know from the history of economic development is that sustained prosperity depends on thick networks of product and service designers, marketers, venture funders, managers, and -- most importantly for small business -- angel investors and former entrepreneurs. From Route 128 and Silicon Valley, to Phoenix and Jacksonville, to Bangalore and Guangdong province, economic prosperity requires a culture of job creation, an environment in which business conversation is conducted idiomatically on the basis of shared assumption and common goal. It's often said of Fortune 500 CEOs that "it's lonely at the top." For the Maine entrepreneur, I can assure you, it's lonely at the bottom. He or she has little in the way of a support system and Maine has made no systematic effort to nurture one.

THESE TWO FACTORS -- the high-tax regime and the absence of a business culture -- have in part caused, and in part been aggravated by, Maine's unique demographic problem. That problem, in a word, is that we're old. Maine's median age is almost 41. That makes us the oldest state in the nation. If we were a separate country, it would make us one of the oldest in the world. The median age of France, in the heart of Old Europe, is 39. China's is 34, India's 25, Iraq's 20, Afghanistan's 18. What our aging population means, of course, is that Maine will get to the future first -- a future now being reconfigured in its basic fiscal and monetary dimensions by the Obama administration. If the polls are to be believed, fewer and fewer Americans are optimistic about that future. Nobody seems to want to get there first.

So what can be done about Maine's demographic problem? Let's look first to its cause, and then for a solution. I'm no demographer, but even I can identify at least three major factors at work here. First is immigration. The person moving to Maine today is more likely to be a 58-year-old ex-cop from Worcester than a 16-year-old lettuce picker from Guadalajara. More old white guys than young brown guys. The second factor is emigration. The person moving out of Maine today is more likely to be a 22-year-old recently minted Colby graduate than a 46-year-old civil servant from Bangor. More young whizzes brain-draining away than mid-career employees moving up and out. And finally, there is the birthrate of 1.8 per Maine woman, one of the lowest rates in the world. That's as low as Russia's, which has already seen its population shrink to one-half the size of the U.S. population, well on its way to one-fourth by the middle of this century. With a 1.8 birthrate, which is far below replacement level, Russia's population, within one generation, will be smaller than Mexico's.

These three factors, in my sense of the problem, suggest very different responses. First, for the young college graduates barreling down I-95 in search of their future elsewhere? I think that we can ignore them for now. They're flexible. As soon as we offer a value proposition -- as soon as our young people believe they can realize their dreams right here in Maine -- they'll make a 180-turn at the Vince Lombardi stop on the Jersey Turnpike and be on their way back. If you've spent four years at Colby College, after all, you know exactly the way life should be.

As for the Maine women who've stopped having babies? We will have to forget them for now, too. They are immovable. Young mothers are the most conservative force in any society and they're unlikely to change their ways until we can demonstrate that we've changed our ways -- until, that is, we can offer their kids a shot at a good life.

No, I would suggest that our focus should be on immigration and, more specifically, on the kinds of new residents we might be able to attract. By an accident of geography, Maine has a great advantage in this tender area of public policy. Mainers are not preconditioned -- as is much of the rest of the country-to see immigration as a threat. We have no boat people coming ashore at Cape Elizabeth. We have no migrant workers wading across at Kittery. There are no refugees streaming over the bridge at Calais. Mainers are well positioned to see immigration for what it really is -- a neutral phenomenon which, if perceived clearly, can present rare opportunity.

As it happens, political circumstance has just presented Maine with such an opportunity.

FOR PERSPECTIVE, let me take you back a few years to one of the signal moments in immigration history-the 1997 handover of Hong Kong to the mainland Chinese. One of the perks of owning a television production company, as I did at the time, is that you get to make the crew assignments. Over loud intramural objections, I assigned myself to cover the handover. We set ourselves up in Kowloon's Peninsula Hotel overlooking Victoria Harbour -- at the time, the finest hotel in the world, a magical combination of colonial elegance and Chinese efficiency-and we proceeded to watch history unfold. Our attention was concentrated by a huge digital clock installed on the shoreline -- perhaps 25 feet wide -- that counted down the days, hours, and minutes to the handover. Anxiety ran high. Would the British and the other developed nations come to the defense of Hong Kong, a citadel of Western capitalism? Would the colonial lease be revised, or extended? Or would Hong Kong's fledgling democracy movement be snuffed out? Would private wealth be confiscated? Would the Chinese army, reported to be massed at the border, roll in with tank battalions? Into this vacuum of reliable information rumors rushed, and then mutated. Each day, anxiety ran higher, as that clock we all came to hate continued to tick down.

Ten days before H Day, I had some business in Singapore and I took the morning flight over. We entrepreneurs always ride in the back of the plane, but on this occasion a client had given me a first-class ticket, so I boarded first and sat up front. As the economy passengers moved down the aisle and filled up the plane, I noticed something strange. Hong Kong is notable for its fast-paced pedestrian traffic. Hong Kongers march to their own up-tempo, free-market drummer. But my fellow passengers were shuffling and stumbling down the aisle, as if they had just been released from the tubercular ward of the Royal Hospital. I asked my seatmate to explain and, wordlessly, he reached into his pocket and extracted a fistful of gold coins. My fellow passengers, it seems, were on their way to their new second homes -- many of them located in safe-deposit boxes -- and they were taking with them everything they could carry: rubies, diamonds, works of gold and platinum, coins, and jewelry. Some of the women carried shoulder bags jammed with 30 or 40 pounds' worth of ingots. On the plane back the next afternoon, I saw many of these same people, all of them lighter on their feet and moving once again at Hong Kong-speed. It's fair to say that Singapore was re-capitalized that day by what I couldn't resist describing as "flight capital."

Returning to Hong Kong, and newly sensitized to the high stakes of the historical moment, I began to look more closely at the options open to Hong Kongers seeking to escape their fearful Communist future. What I found, of course, was mostly ad hocery born of panic. Crazy stuff. But here and there was real innovation. The single most focused and aggressive initiative was undertaken by (of all people) the Canadians. Yes, by those mild-mannered, self-effacing, incrementalist Canadians. The Mainers of the family of nations. What Canada did was to frame the handover as a kind of NFL draft day-an occasion to restock its team with world-class economic players. But unlike the New England Patriots, who might be looking on draft day for, say, a tight end in one round and a cover corner in the next, Canada was looking to draft every player in every round. Canada wanted to upgrade its team at every position, all at once. And they took a strikingly unsentimental approach. Canada did not say, as might have been expected, "Give me your tired, your poor, your huddled masses yearning to breathe free." No, it said, quite distinctly, "Give me your successful capitalists, your proven performers, your players with critical skills and liquid assets." Canada had admitted to itself, uncharacteristically, that it wanted to compete in the global economy and that it wanted to win. And so it made an offer that Hong Kong's capitalist all-stars couldn't refuse. Taxes? "We'll cut them to the bone." Red tape? "We'll rip right through it." Family problems? "We'll assign a concierge until you're comfortably settled."

How did that little recruiting trip work out? Well, those of us who watched the winter Olympics several months ago saw a dynamic and prosperous host city, the first Chinese city on the North American continent. For Canadians from coast to coast, Vancouver has become not only an engine of economic growth but a source of glowing national pride.

MY QUESTION IS THIS: can at least some elements of the Canadian experience be adapted to the current situation in Maine? I think they can be. First, consider the existential threat. For the prosperous American in the Age of Obama, the digital clock has begun to tick. The administration is delivering on its implausible campaign promise to shift the government's bills from the society at large to the prosperous Americans at the top -- to the 5 percent of taxpayers earning more than $250,000 per year. Already fixed by law -- as a result of health care reform and the expiration of the Bush tax cuts -- are future increases in marginal tax rates of 24 percent on interest income, 59 percent on capital gains income, and 189 percent on dividend income. The administration has acknowledged -- and CBO projections will demand -- that new and larger taxes will be imposed in due political course, which is to say, after the next election. To the prosperous American, it appears that a class war has just been declared -- and that he has somehow become an enemy of the state.

On the flip side of that existential threat, of course, lies opportunity. An opportunity for the polity with the wit and resolve to realize it.

Consider: those prosperous Americans have been startled by a frontal assault by this administration; they have been shaken from their comfort zones and opened to new possibility. They have begun looking for political shelter, places that will respect their accomplishment and recognize their contribution. They are in a high-anxiety zone and they will be susceptible, at least some of them, to an aggressive recruiting pitch.

And thus, the rare opportunity. Not as dramatic as Hong Kong's, to be sure, but arriving at a moment critical to the Maine economy. What I am suggesting is that Maine reposition itself so as to be hospitable to prosperous newcomers. What I am suggesting is, for those seeking refuge from Mr. Obama's class war, that Maine provide a kind of safe harbor.

What might such a recruiting campaign look like? As a conversation-starter, let me propose the following. Suppose that we invited out-of-staters earning more than $250,000 to move to Maine and, in return, we agreed to exempt them from state income tax? Not for the rest of time, but for long enough to shock the system-10 years, perhaps. I can assure you that such a proposal would be of interest to Maine expatriates. I have myself on several occasions met former Mainers -- in Jacksonville, in Naples, in Scottsdale, and elsewhere -- who left Maine shortly after state income taxes became their largest single discretionary expense. They love Maine, but they're not willing to pay an extra 50 or 100 thousand dollars a year for the privilege of being here in February. I suspect this invitation would be tempting, as well, to Maine's neighbors in punitively high-tax areas such as Boston, Providence, and Hartford.

MAINE ENJOYS, as we all know, a rich tradition of hospitality to the traveling public. We can roll out the red carpet with the best of them. But in the current economic environment, that's not going to be enough. We're going to have to compete aggressively for the scarce resources of talent and capital. While it won't come naturally to most of us, we're going to have to think selfishly, as chauvinistic Mainers. We're going to have to focus on what Maine could receive in return for its tax exemption.

First, as the marketers say, we could qualify the prospect. By establishing an age floor of 50, for instance, we would attract new residents who don't send their kids to public schools or wind up on Medicaid rolls or in other ways ratchet up state spending. Second, we would attract affluent homeowners who would winterize seasonal homes, or buy new ones, thus propping up the high-end real estate market even as they generate new property-tax revenues and, ultimately, new estate-tax revenues. Third, these new residents would bring with them their spending habits: we would attract upscale consumers who, beyond their numbers, would patronize restaurants, gift shops, and other retail outlets, thus boosting town economies and generating new sales-tax revenues. Finally -- and this is by a wide margin the most important factor -- we would attract the successful executives, investors, and entrepreneurs needed to form our own business culture, the scaffolding for a new business structure here in Maine. To extend the Canadian analogy: by opening, say, a two-year window for the new tax exemption, we could put ourselves in position to draft Maine's missing generation of mentors, advisors, and angel investors. We could put ourselves in position, that is, to upgrade our economic team from one end of the roster to the other.

There is one characteristic common to all successful business people. They are recidivists. They can't help themselves. They just keep doing it, again and again. And when they can no longer do it themselves, they advise and inspire and invest in younger protégés. These successful business people -- our former neighbors in Maine and our current neighbors in New England -- are precisely the people we need to power the economic recovery. They have the skills, the contacts, the seed capital, the ability to discern business opportunity and the instinct to seize it. My message is that we should not just be willing-we should be eager-to compete for their allegiance. They can help us. They are up for grabs. There's a deal to be made here. Let's make it. 

This article is adapted from an address to the Maine Heritage Policy Center, where Mr. Freeman is a director. The views expressed here are his alone and do not necessarily represent those of MHPC.

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About the Author
Neal B. Freeman is chairman of the Blackwell Corporation.