The legislative panel charged with reducing or eliminating $40 million in tax breaks will roll out its final recommendations Monday.
The panel’s task was included in the bipartisan budget passed by the Legislature, but its work is already shaping up to be partisan. That could create problems for state lawmakers, who must find the $40 million in order to meet the state’s balanced budget requirement. Lawmakers in June agreed to the panel, saying the time had come to evaluate the $1 billion in annual tax exemptions and economic development incentives.
The Legislature has attempted similar reviews in the past with little success. However, this time some believed that the self-inflicted budget gap would provide an incentive for lawmakers to push through recommendations that have been traditionally politically unpopular. Additionally, the budget provision is written in a way that would take the $40 million out of the state fund that provides municipal aid if the Legislature can’t repeal or restructure the tax exemptions to find the savings.
The recommendations will eventually go to the Legislature’s budget-writing committee. If the budget panel can strike a deal, it will submit a bill to be considered by the full Legislature, and ultimately, Gov. Paul LePage.
It won’t be easy.
Last week the panel released two preliminary recommendations, including a repeal of a tax exemption on so-called amusement purchases, such as movie tickets and golf greens fees. Maine has traditionally waived sales taxes on such purchases, an exemption that has cost the state approximately $20 million in annual tax revenue. It also recommended eliminating sales tax exemptions on haircuts and gym memberships.
Although preliminary, the panel’s recommendations were quickly blasted by some Republicans, who used social media forums to label a repeal of amusement exemptions as a “fun tax.” Meanwhile, the spokesman for House Republican leader Kenneth Fredette of Newport sent out a news release claiming that the tax panel was stacked with “liberals.”
However, the brief furor over the amusement tax likely belies the real debate. Signals from Democratic lawmakers and aligned advocacy organizations have focused less on sales tax repeals than scaling back or reforming tax breaks or economic development programs for big businesses. Some of those programs were the focus of a 2006 report by the Legislature’s watchdog agency, the Office of Program Evaluation and 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 the Pew Center on the States, who told lawmakers that competition among states for business during the recession had increased while analysis of incentive programs fell behind. Pew also published a study in which it used tax incentives for the film industry as an example of popular tax incentive programs that have few or no review provisions to determine effectiveness. In 2000, four states had film tax incentives worth a combined $3 million. By 2011, 37 state programs existed totaling $1.3 billion.
Any proposed changes to business tax breaks or programs could encounter stiff resistance. The Maine State Chamber of Commerce is closely monitoring the panel’s work, as are other business groups potentially affected by any changes. Nonetheless, input from businesses will likely be a requirement for any deal that leads to legislation.
It would also pre-empt political blow-back, of which Democrats in particular are wary. In 2009, the Democratic-controlled Legislature enacted a tax reform bill that was hailed by The Wall Street Journal as the “Maine miracle.” However, business groups eventually rallied with Republicans to overturn the deal via referendum, running off a campaign that highlighted the reform law’s repeal of sales tax exemptions, including the amusement tax.
The successful repeal of the tax reform law preceded the 2010 Republican takeover of state government, with many Democratic incumbents falling amid a barrage of mailers and political ads highlighting their support of the 2009 tax reform law. Democrats have been hesitant to wade into that policy territory ever since. Earlier this year Democratic leaders quickly distanced themselves from another ambitious tax reform proposal drafted by Sen. Dick Woodbury, I-Yarmouth, and backed by a bipartisan coalition of 10 other lawmakers.
The Legislature’s Appropriations and Financial Affairs Committee will review the proposed changes during its Dec. 12 meeting.
Steve Mistler can be contacted at 791-6345 or at: