May 15, 2013

Criticisms of tax breaks growing in Maine Legislature

By John Christie and Naomi Schalit Maine Center for Public Interest Reporting

AUGUSTA — Over the past 50 years, Maine legislatures and governors have added millions of dollars in tax breaks for businesses without ever doing the detailed analysis to find out which are effective and which are wasteful.

But now that may be changing.

In recent weeks, a growing list of legislators have called for a review of programs that leading economists have critiqued for not delivering on promises to create jobs.

“We put a lot of stock in these programs, but we never go back to see if they work,” Sen. Emily Cain, D-Orono, told the legislature’s taxation committee last week.

Tax expenditure programs are defined as any loss of state tax revenue due to Maine law “that allows a special exclusion, exemption or deduction or provides a special credit, a preferential rate of tax or a deferral of tax liability.”

Cain has proposed a bill, L.D. 1488, that would require the tax committee to recommend which tax expenditure programs should be kept, repealed or changed and then would require the full legislature to hold an up or down vote of them as part of the budget approval.

Another bill calls for research on whether the $50 million property tax break for business equipment known as BETR, is meeting it goals (L.D. 317); an “independent academic policy analysis” of tax breaks (L.D. 1255); and determining “the best way to achieve the goals of tax expenditures in the most effective and efficient manner possible and to ensure transparency and accountability” (L.D. 1463).

Rep. Peggy Rotundo, D-Lewiston, the sponsor of the latter bill and cosponsor of Cain’s bill, has been a longtime member of the legislature’s appropriation committee, where she said, “We pore over every expenditure, now matter how small it is.”

But the millions in tax expenditures “receive no oversight from the committee … and we owe that to the people of the state of Maine.”

Currently, while lawmakers get the list of programs each budget year, the annual cost of each is never voted on. Instead, programs live on, new ones are created and old ones rarely, if ever, are repealed.

The co-chair of the taxation committee, Rep. Adam Goode, D-Bangor, calls this $504 million annual cost, “a secret budget.”

Tax expenditure programs range from breaks for businesses to loopholes for special interest to exemptions designed to help worthy causes.

For example:

— A sales tax exemption for fuel and power for businesses that costs about $24 million per year

— A sales tax exemption for school meals, representing  lost taxes of $10.8 million

— Businesses in Pine Tree Enterprise Zones get a income tax reduction that costs $3.3 million each year.

— Retired military dentists get a tax deduction on their pension in order to encourage them to set up practice in Maine, a cost of about $50,000 annually.

The annual tax expenditure list compiled by the Maine Revenue Services is 213 pages long and the printed version comes with a red cover that is often waved at tax committee hearings as an example of the complexity of the problem.

The question, “Which one would you kill?” is asked repeatedly during committee hearings where witnesses criticize the programs.

Cain said, “That question is too broad because we don’t have the data. It drives me crazy … because it can’t be answered except with anecdotes.”

Existing studies – both national and specific to Maine – have not provided legislators the level of detail they say they need to determine which programs meets their goals, such as job creation.  If they had that data, they say, they could vote to keep, kill or even expand programs.

At an April 29 tax committee hearing, members heard testimony about a state-by-state report by the nonpartisan Pew Charitable Trusts.

Jeff Chapman, manager of the study,  “Evidence Counts: Evaluation of state tax incentives for jobs and growth,” said, “After interviewing hundreds of policymakers, agency officials, and experts and reading over 600 documents, the overall picture is that lawmakers frequently rely on incomplete, conflicting, or anecdotal information when they make decisions about tax incentives.”

Pew rated the states on how well they are measuring business attraction tax expenditure programs. Thirteen states rated “leading the way”; 12 got “mixed results;” and 26 were “trailing behind,” among them Maine.

In 2009, the Federal Reserve Bank of Boston convened a panel of experts to debate state business incentives.
Peter Enrich of Northeastern University concluded that the scholarship on the issue should lead government to “Just say no” because there is no assurance the programs create jobs.

To date, the most thorough study of Maine’s programs was the 2006  audit by the state Office of Program Evaluation and Government Accountability (OPEGA). It  studied a total of 46 business incentives designed to promote job growth and designated a dozen as “high risk.” Among the problems found were inadequate performance measures, costly duplications and the lack of independent reviews that could cause “mismanagement and fraud to go undetected.”

Those dozen programs alone cost the state $100 million annually.

And an analysis of the Pine Tree Zones by the Maine Center for Public Interest Reporting last year discovered records that reveal the companies that get the tax breaks have never shown that they need them in order to create the jobs – even though the law says they should.

The most high profile attempt to reduce the state’s spending on tax expenditures is embedded in the  " “Act to modernize and simplify the tax code,” the tax reform bill that provoked a day’s worth of testimony at last Friday’s tax committee hearing.

Among the bill’s many parts are provisions to eliminate a range of tax breaks, including getting rid of nearly every sales tax exemption and some highly-favored business incentives such as the Pine Tree Zones and the New Markets tax credit, which costs the state $5 million.

The bill is still at the concept stage and does not have a full fiscal analysis, but the business programs it would phase out have already been documented to cost many millions.

Sen. Richard Woodbury, the independent from Cumberland and an economist, is among the 11 legislators who write the bill. The others are five from each party.

“We are trying to eliminate as many expenditures as can be sensibly done,” he said last Friday, after testifying to the tax committee.

Dana Connors, president of the Maine State Chamber of Commerce, said he likes the comprehensive and bipartisan aspects of the bills, but opposed the bill for its lack of specifics and the short time to deal with it – there is just a month left to the legislative session. He also said he had  “concerns” about the loss of the business tax incentives.

“Our programs in Maine are modest when it comes to attracting economic development and business” when compared to other states, he said.  “I’m concerned if all of that was removed from our books. That would create a problem for us.”

As of Tuesday, none of the bills had been voted on by the full legislature. The tax committee on Monday voted against all the bills but Rotundo’s “best practices” bill,  LD 1463, which has bipartisan co-sponsors.

Goode, the committee’s House chair, said the committee felt Rotundo’s bill came closest to requiring both a detailed analysis and legislative review.

He said a bill is needed that will change the way he fears decisions about tax policies are made now – “either by what makes someone feel good or who has the most people at the public hearing.”

The Maine Center for Public Interest Reporting is a nonprofit, non-partisan news service based in Hallowell. Web: pinetreewatchdog.org. Email: mainecenter@gmail.com.

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