A 10-year-old program that uses tax incentives to lure companies to Maine and create jobs here is costing the state more money than the program provides in benefits, according to a new report.
The Pine Tree Development Zone program, created in 2004 under Gov. John Baldacci, offers tax breaks to companies that promise to make significant investments and create jobs. The Maine Department of Economic and Community Development, which oversees the program, has certified 400 companies for incentives over the past 10 years and claims it has created about 10,000 jobs.
However, no publicly available data exist to verify the program’s effectiveness, and the department’s commissioner, George Gervais, would not provide details that could substantiate the state’s claims or reveal the value of the tax incentives that have been offered.
During an interview with the Portland Press Herald/Maine Sunday Telegram, Gervais repeatedly refused to answer some questions about the program – saying, “I don’t work for the Portland Press Herald” – and referred financial questions to Maine Revenue Services, Maine’s tax agency.
Maine Revenue Services, however, did not respond to requests for information about the value of the tax incentives. When the newspaper filed a request for that information under the Freedom of Access Act on April 9, the revenue department replied April 16 by saying it acknowledged the request and said it would notify the newspaper “within a reasonable time” a date at which documents could be reviewed. It had not done so by deadline. Some documents may be confidential under state law, it said.
‘VERY COSTLY TO THE STATE’
A report prepared for the state by Investment Consulting Associates, or ICA, of Massachusetts and released publicly in February, however, found that the Pine Tree Development Zone program’s costs exceed its benefits. Specifically, it said the PTDZ delivered total direct benefits to the state of $358 million in 2012, in terms of people employed and salaries and total sales in the state. The program, however, had $457 million in total direct costs related to lost taxes, administrative costs, overhead and other expenses.
“While the Pine Tree Development Zone (PTDZ) program received significant praise from public and private sector interviews, preliminary cost benefit analysis shows the program is very costly to the state of Maine,” the report said.
Gervais said he could not quantify any financial aspects of the PTDZ program, but insisted it was working well. Pointing his finger at the ICA report, Gervais said: “The Pine Tree Development Zones represent a positive rate of return for the state of Maine. The data’s here.”
The report, called a “Comprehensive Evaluation of Maine’s Economic Development Incentive Programs,” evaluated the state’s 60 incentive programs used to induce corporate investment. The report found that the programs combined spent about $159,000 for each job created from 2010 to 2013 and had a weak return on total corporate incentive investments.
The report was conducted under a legislative requirement to examine on a biennial basis the effectiveness of economic development programs. ICA said it examined previous reports, interviewed administrators of the programs and private sector companies that have received assistance from the state and reviewed surveys of program usages, hiring salary rates, capital investments and annual reports for the programs.
Despite the high cost of corporate incentive programs, Gov. Paul LePage recently tried to build on such programs by proposing the creation of “Open for Business Zones” to attract major employers in this legislative session. That effort was voted down by legislators.
One of the recommendations of the ICA report was that legislative changes should be made to provide full access to and evaluation of program data as needed. LePage’s office did not return requests for comment on the PTDZ program.
THE COMPETITIVE CARROT
The PTDZ program is the key tool in the state’s current arsenal of incentives. Gervais said the PTDZ program was successful and necessary in encouraging companies to move to or expand in Maine.
“Without tools like this, it doesn’t happen,” Gervais said. “We believe to compete with the other states, we need some tools-slash-tax advantages.”
Economists and academics who study corporate incentives, however, disagree that inducements significantly affect business decisions.
“States have been involved in incentive competition for 50 years. Dozens of studies have been done with somewhat varying results. There is very little reason to think these programs will have much impact,” said Peter Enrich, a professor of law at Northeastern University’s School of Law, who specializes in state and local tax policy and state and local government law.
“Normally, there is very little evidence that business decisions are made based on incentives. Businesses decide where they’re going and then get the states to compete on the final bonus details. People are inclined to think that businesses are going to move because of an incentive and it’s not true,” Enrich said.
A 2011 report by the Brookings Institution said that 95 percent of all job gains annually in a typical state come from within as existing business expansions and new business launchings – not from companies relocating from another state.
Maine is far from alone in providing incentives to encourage businesses to locate within its borders.
A 2012 analysis by The New York Times found that local and state governments provide more than $80 billion to companies a year through cash grants, corporate income tax credits, sales tax exemptions, property tax abatements, low-cost loans or free services such as worker training.
Maine spends more than $500 million a year on such incentive programs, according to the Times analysis. That is roughly $379 per capita, or 17 cents per dollar of the state budget, the newspaper found. Texas awards the most incentives of any state at more than $19 billion a year.
Other Maine corporate benefit programs have high rates of return, such as the development loan program by the Maine Technology Institute and the Finance Authority of Maine loan insurance and economic recovery loan programs, the ICA report found.
According to the ICA report, the total value of corporate incentives was divided by the total number of newly created jobs, which provides a “rate per created job” or information on what governments “paid” for one new job.
Maine awarded total incentives worth $159,000 per created job for the period from 2010 through 2013, the report found. That is far less than Idaho, which spent $1.3 million per created job, but well above New Mexico’s $6,675 per job, according to the report.
Maine’s return on investment was low at $2.10. That compared with Virginia, which has a high return of $32.70, and California’s even weaker return of $1.60, according to the ICA report.
“Any of these incentive programs to businesses have been called a race to the bottom. Every state has them. You’re in competition with every state. If you’re going to compete with other states, you need these programs,” said Jack Cashman, former commissioner for the DECD under Baldacci.
“There’s all kinds of anecdotal materials and evidence to support the (PTDZ) program. Is it the most effective program or could there be improvements? Sure. I haven’t seen a better program put forward,” Cashman said. “It’s always debatable. Those programs are easy to criticize. But in my view, the Pine Tree Development Zone program was quite effective.”
‘MOST COSTLY, LEAST EFFECTIVE’
Other nearby states have incentive programs similar to the PTDZ, such as Massachusetts’ Economic Development Incentive Program, Connecticut’s Enterprize Zone Program and New Hampshire’s Economic Revitalization Zone Tax Credits.
Charles Colgan, an economist and professor at the Muskie School of Public Service at the University of Southern Maine, agreed that the PTDZ program was costly and ineffective, though he disagreed with the ICA report’s methodology in coming to this conclusion.
“It is certainly the most costly and least effective incentive program throughout the state,” Colgan said. “The program was designed to help struggling parts of the state, but it has been spread by the Legislature to include almost the entire state.”
When the program was launched, the incentives were restricted to companies in sectors with the potential to create lots of jobs – such as manufacturing – and willing to make investments in the most economically weak parts of the state. Once a company was certified, it had several years to implement the investments. But as the program evolved, companies from a wider range of sectors and geographic areas became eligible.
The ICA report estimated “indirect” costs and benefits that paint a brighter picture of the PTDZ program: indirect benefits totaled $5.3 billion and indirect costs totaled $3.6 billion. The indirect figures represent a “multiplier benefit” that accounts for corporate profits being reinvested or partially paid to Maine residents, who spend more of their disposable income on local products and services and create a ripple effect of more local demand. On the expense side, for example, the report extrapolated the cost of fewer jobs in the state, as well as lower personal income taxes and sales taxes.
“The report confirms what we’ve thought all along – this is an expensive and ineffective effort to create jobs and promote economic development,” said Joel Johnson, an economist with the Maine Center for Economic Policy, a left-leaning think tank. “We need more transparency from the businesses that are taking advantage of them. We need information on a business-by-business basis. We need more rigorous data.”
Johnson said politicians often are afraid to be the ones blamed for cutting a program or an incentive that could potentially sway a company away from Maine, so lawmakers continue to support these programs.
“In reality, it’s hard to see that these incentives will make or break a location decision,” Johnson said.
Jessica Hall may be reached at 791-6316 or at: