HAMPDEN – In part because of the recession, and in part because of statewide tax cuts, Maine has an $800 million budgetary shortfall through 2015. Unlike the federal government, which can borrow to cover the gap, the state of Maine does not have as much flexibility. So, much like a household, the state is forced to make responsible decisions about where funds are allocated. Funds should be directed to where they are really needed.

A large expenditure of the state is the money it sends to municipalities to help them run their police stations, schools and water systems and keep up their streets.

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Well-off Maine towns are using tax increment financing for purposes for which it was not intended. shutterstock.com

The amount of assistance each municipality receives from the state depends on how much revenue a town produces with the number of residents it has; the idea is to send money to towns that can’t produce enough funds to support their population size themselves. The more a town can produce itself, the less it receives from the state.

GAMING THE SYSTEM

The system helps Maine allocate resources based on need; however, it has created an incentive for municipalities to underwrite revenues so that they can receive more funds from the state. One method municipalities use to underwrite revenue is tax increment financing, or TIF.

TIF is a helpful tool for economic developers: It allows municipalities to dedicate the tax revenues of a particular business or group of businesses toward an economic development project in the community.

The tax revenues that are dedicated toward “economic development” are not counted toward the municipality’s total revenue, allowing the municipality to collect more aid from the state.

TIF allows municipalities the financial flexibility necessary to conduct projects that will entice companies to open businesses in the town, like paving local streets, extending modern water systems, creating local fire departments and other renovations. However, because the use of TIF is loosely regulated by the state, and the criterion for using TIF is the vague term “economic development,” the tool is being abused.

Tax increment financing is being used by savvy economic developers for anything from effectively cutting individual businesses taxes (by giving “economic development” funds back to the taxed business), to purchasing land for individual businesses, to profligate expenditures and to generic investment funds that are for future “economic development.”

Not only is TIF being abused for unintended expenditures, it’s being most abused by the municipalities that don’t actually need the help. For a town to have a sophisticated understanding of municipal finance, and the knowledge necessary to use TIF, a town must have what economists would call political, social and intellectual capital:

• Political capital to know about TIF and the political clout that allows one to use it excessively.

• Social capital, so that one knows the right people and the right organizations to make TIF expedient.

• Intellectual capital, so that one knows how to use TIF.

Because it takes education and experience to develop this capital, economic developers, town and city managers, mayors and other municipal employees who have it come at a high price.

Subsequently, the only towns that can afford staff who can use TIFs are the towns that are already well off and don’t need the extra help. The wealthy towns in Maine use TIF the most, while most of the small and impoverished towns in Maine, of which there are many, barely even know TIF exists.

UNEQUAL DISTRIBUTION

The unorganized territories of Maine are at the largest disadvantage. Because unorganized territories aren’t municipalities, their governance is up to county administrators, who have neither the local knowledge nor interest to use TIF to a unorganized territory’s advantage. Since there is an unequal distribution of political, social and intellectual capital in Maine municipalities, TIF effectively siphons state tax revenues from poor municipalities to wealthy ones.

The budget shortfall through 2015 is a serious issue that affects all Mainers, and expenses that are not necessary must be cut. Although I disagree with Gov. LePage that municipal revenue sharing is the pot of money to cut from, LePage is correct that we need solutions and not complaints.

If LePage wants to go after wasteful spending, and he is picking municipal aid to cut from, wealthy towns abusing TIF is a great place to start.

Tightening the regulation and use of TIF would cut spending, and shift state expenditures from unnecessary and extravagant programs to the basic infrastructure needs of poor but growing towns, where the money is really needed.

Michael Havlin of Hampden is a University of Southern Maine student.

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