State sales tax exemptions and economic development incentives worth more than $1 billion a year will soon be under the microscope as lawmakers look for $40 million to keep the state budget balanced.

If they don’t find that money in recovered taxes or subsidies next year, then the funds will be pulled from state revenue sharing with Maine towns and cities — raising the prospect of local service cuts or increased property taxes to cover the loss.

But it’s unclear whether that will be sufficient incentive for lawmakers to seriously tackle the touchy subject of tax exemptions and incentives, which have repeatedly defied reform.

The mandate was partially self-inflicted. Lawmakers wanted to avoid the $200 million revenue sharing cut proposed by Gov. Paul LePage earlier this year, settling on a host of alternatives to achieve the same savings. Lawmakers now say that they’re taking the long view, reforming a list of exemptions and incentive programs with little or no documented benefit or review.

“Some of the exemptions are legitimate,” said Rep. Donald G. Marean, R-Hollis, a member of the Taxation Committee who hopes to be named to the 13-member commission that will review the exemptions. “But are some of them absolutely and positively necessary? I don’t think so.”

Every two years, Maine Revenue Services publishes a report estimating the costs associated with sales tax exemptions and incentives. The list runs the gamut: Groceries ($78 million a year), haircuts and gym memberships ($6 million), railroad supplies ($351,500) and sales to eye banks ($100,000).

Economic development incentives are also included: Tax credits for companies investing in research and development ($850,000), Pine Tree Zone incentives for businesses expanding in Maine ($3.3 million) and fuel and electricity exemptions for manufacturers ($25.1 million).

Rep. Peggy Rotundo, D-Lewiston, co-chairwoman of the Legislature’s budget-writing committee, said the state has never evaluated the effectiveness of the programs.

“It’s been very frustrating that this work has never happened,” she said. “I think the difference (from past evaluations) is that we’re charging the commission with finding $40 million, which has never been the case in the past.”

She added: “It’s going to be a challenge for (the commission); however, we have hundreds of millions of dollars in tax expenditures and corporate loopholes. We have to figure which ones are producing jobs and which ones aren’t.”

Maine is not alone in its lax oversight. A 2012 report by The Pew Center on the States found that states spend billions of dollars annually on tax incentives, credits and deductions as economic development tools. However, only 13 states evaluate the effectiveness of the programs. Maine is one of 26 states that perform little or no testing of its incentives, leading Pew to say the state was “trailing behind.”

The Pew report echoed the findings of a 2006 report by the Legislature’s nonpartisan watchdog agency, the Office of Program Evaluation & Government Accountability. It reviewed 46 incentive programs and warned that the state could be investing in programs that “are ineffective or no longer necessary.” This year the Legislature’s Taxation Committee was briefed by a representative from Pew, who told lawmakers that competition among states for business during the recession had increased while analysis of incentive programs fell behind.

The Pew study used tax incentives for the film industry as an example. In 2000, four states had a film tax incentive worth a combined $3 million. By 2011, 37 state programs existed totaling $1.3 billion.

The Legislature this year defeated a bill that would have made Maine the 38th state to provide tax incentives for the film industry.

The commission that begins meeting this year will likely encounter stiff resistance if it proposes repealing or scaling back incentives. Earlier this year, LePage proposed phasing out a business equipment tax reimbursement program in exchange for a newer version. The business community, including major employers and the Maine State Chamber of Commerce, lined up during the public hearing to oppose the proposal, saying it could make some Maine companies noncompetitive.

Lawmakers backed away from the reimbursement phase-out, deciding instead to form a study group, with business interests among its members, that would look for other ways to modify the program.

It’s proven even more difficult to repeal sales tax exemptions. Comprehensive efforts to review and eliminate exemptions have taken place for decades, including in 1980 and 1989.

Sen. Anne Haskell, D-Portland, the assistant Senate majority leader and co-chairwoman of the Taxation Committee, said efforts to repeal or scale back exemptions mobilize even the smallest constituencies.

“You’re certainly going to be hard-pressed to stand in front of the person who’s running the eye bank for donations of corneas and say, ‘You can’t have an exemption’ when they bring in people who have been impacted,” she said.

It becomes harder, Haskell said, when lawmakers have competing ideas about which exemptions are valuable or disposable.

Marean, the Republican lawmaker from Hollis, has firsthand experience. In 2007, he submitted a bill to repeal the sales tax exemption for all-terrain vehicles and snowmobiles purchased by nonresidents. The bill never made it out of committee.

But this year an identical proposal passed, and LePage signed it into law.

The opposition that Marean’s bill encountered was a mere shadow of the resistance that greeted a bipartisan coalition’s proposal for a major tax overhaul. Lawmakers considered the so-called “Gang of Eleven” bill risky, but the real resistance came from interest groups worried about a proposal to repeal nearly all non-health and non-education exemptions.

“It’s politically very hard for people to say I’m not going to give you that tax exemption,” Haskell said. “Once you’ve given it, it’s very hard to take it away.”

Meanwhile, lawmakers keep proposing more exemptions — 66 since 2002, according to a partial review by the Maine State Law and Legislative Reference Library.

While legislators may be more willing to reduce exemptions in a climate of tight state budgets, they’ll also be facing the temptation of turning to an unexpected surplus.

According to the Legislature’s fiscal office, the state finished the last budget year with a $58 million revenue surplus. If state coffers stay in the black, lawmakers may have an easy parachute out of the difficult decisions that await their review of tax exemptions and incentives.

Haskell said the approach will be measured. Rather than outright repeal of exemptions or incentive programs, she said, the commission may instead choose to scale some back, cherry-picking revenue.

Rotundo, the Lewiston Democrat, said lawmakers aren’t approaching the review with “preconceived notions.” However, she mentioned “corporate loopholes” twice during a recent interview.

“It’s not fair to Maine taxpayers to be paying for programs to provide tax subsidies to corporations who are not using these monies to create jobs,” she said.

Marean said it’s a tough task that will require abandoning partisanship.

“I hope that the committee, whoever it is, can leave politics aside and make a good decision and in the best interests of the state,” he said. 

Steve Mistler can be contacted at 791-6345 or at:

smistler@pressherald.com

Twitter: @stevemistler