Given the economic pressures our state has faced over the last several years, it’s a surprise that state sales tax exemptions and economic development incentives haven’t faced more scrutiny sooner.
The most recent budget calls on an appointed task force to put these programs (known as “tax expenditures”) under the microscope. If this panel doesn’t come up with at least $40 million to keep Maine’s budget balanced, the money will come from revenue-sharing — which has already been reduced.
This effort won’t be easy. Interest groups likely already are gearing up to make their case to the 13-person commission that will be named to review the exemptions. And an unexpected $58 million surplus may tempt panel members to downgrade the urgency of their task.
But tax exemptions and credits are stealth appropriations that cost Maine more than $1 billion a year, and like any other appropriations, they demand rigorous and routine examination to ensure that they’re still fair and effective uses of taxpayers’ money.
Sales tax exemptions and economic development incentives commonly are seen as tax cuts, but they’re really spending programs, both liberal and conservative finance experts agree.
They can be written to benefit specific categories of businesses or individuals, while the missing revenue must be paid for by the majority of taxpayers. They reduce the amount of money that could be spent on other public priorities, just as direct state spending programs do. (Whether the state appropriates $1 million for public university research on a given topic or makes available $1 million in business tax credits for that same research, the impact on the budget is the same.)
And then there’s the transparency problem.
A Pew Center on the States study found that Maine does little to evaluate whether our economic development tax incentives actually encourage businesses to locate, hire, expand and invest here.
Unlike state spending on programs like education and transportation, moreover, tax incentives don’t get close review during the budget process – unless a particular incentive is targeted for repeal or downsizing. The same is true for sales tax exemptions.
Recent reports that Maine ended the last fiscal year in the black don’t let the state off the hook from finding $40 million in unneeded incentives and exemptions. We have no guarantee that the state will continue to enjoy surpluses. What’s more, Maine’s revenue-sharing program already has been slashed by $75 million — presenting the possibility of service cuts, property tax hikes or both in many communities. Further cuts to revenue sharing would just aggravate the situation.
By pledging to review incentives and exemptions, policymakers are taking on a difficult but essential task, and Maine can’t afford for the task force to give less than its all. The alternative — continuing to spend public funds on ineffective, inequitable tax breaks — will further erode strapped public services and demand sacrifice of those who have already paid enough.