August 12, 2013

Legislators to rethink tax breaks, exemptions

Incentive programs deemed ineffective or unnecessary could be cut to fill a budget gap that leaves few other options, they say.

By Steve Mistler smistler@pressherald.com
State House Bureau

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.

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