Study: Tax breaks exceed state spending

Posted Nov. 15, 2010, at 9:19 p.m.
Last modified Nov. 16, 2010, at 5:15 a.m.

AUGUSTA, Maine — A study done by several state agencies at the direction of the Legislature has found the state spends more in tax breaks, credits and exemptions every year than it spends on programs in the state budget.

Tax expenditures, as they are called, are estimated at $6.6 billion for this two-year budget period. That is $1 billion more than state spending.

“Maine currently has 141 personal and corporate income and property tax reimbursement programs, and 133 sales tax and excise tax exceptions or preferences,” said Finance Commissioner Ellen Schneiter.

She is chairwoman of the working group conducting the study, which included representatives from Maine Revenue Services, the State Planning Office, the Department of Economic and Community Development and the Department of Labor.

She said the charge from lawmakers was to review all of the tax expenditure programs and recommend a process that makes sure all are reviewed regularly for their effectiveness.

Schneiter said the working group focused on economic development tax breaks, saying there are many tax expenditures that do not warrant detailed review because they will not be repealed.

“There are many of these exemptions, like sales tax on food or prescription drugs, that we didn’t think you would want us to spend a lot of time looking at,” she said.

Schneiter said the group identified 11 programs that are all related to economic development for further analysis and review. She said the programs, ranging from the Business Equipment Tax Reimbursement program to various tax credits that provide tax breaks to as few as five taxpayers, should be targeted for regular, comprehensive legislative reviews.

“These are all important programs that are in our economic development toolbox,” she said, “but we need to make sure they are effective and that we are providing oversight to make sure they are effective.”

The group is recommending the state adopt the same type of analysis used in the state of Washington to measure effectiveness of programs and report on them at least every four years.

“This is the result of legislation I put in and I am pleased with what you are presenting to us,” said Rep. Emily Cain, D-Orono, co-chairwoman of the Appropriations Committee. “We need to be making this sort of review to make sure these tax expenditures are needed, or warranted.”

She said there needs to be a close look at all state spending, and tax expenditures are a form of spending. She said if government is giving a tax break to a company, there should be a public benefit from that tax break such as job creation.

“There are significant amounts of money that fly under the radar, while there are other smaller amounts that are micromanaged,” said Rep. David Webster, D-Freeport, who co-sponsored the legislation that directed the study.

He said several software programs are available to aid the state in assessing whether a tax break is yielding benefits to the taxpayers that should be used as part of the review process.

Sen. Richard Rosen, R-Bucksport, said while reviewing tax expenditures is a good idea, he doubts it would have the momentum to be considered without the state budget shortfall that will require substantial budget cuts to bring spending into line with available tax revenue.

“I don’t think we have ever been in a position with such enormous budget pressure before,” he said. “I think the business community and people that are looking to invest in Maine will embrace an approach that evaluates these tax expenditures that are related to economic development.”

Schneiter told members of the Appropriations Committee that in her research she found several studies that raised doubts about whether any of the various tax incentive programs anywhere in the country provide the “tipping point” that results in a business locating in a state.

“It’s more the psychology that we have these incentives in our toolbox to offer,” she said.

Rosen said there might be some instances where tax breaks have been the deciding factor for a company to move to state or expand a business. He said that is one reason the review and assessment of the various tax breaks for business are important.

“We need to know what works,” he said.

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