Maine studies tax breaks for businesses, but still doesn’t know their value

Posted Feb. 22, 2012, at 8:13 p.m.

Editor’s note: This is the second part in a two-part series about the state Pine Tree Development Zones.

There are two ways the state spends money.

One is by paying for goods and services, from roads to colleges to Medicaid.

The other way is by not collecting taxes on some businesses, services and goods. This is known as foregone revenue or “tax expenditures,” expenditures being accountant-speak for spending.

Sources of foregone revenue in Maine include the state’s 46 economic development programs. They give businesses tax breaks because the state believes that’s a good way to encourage business start-ups and expansions.

What does that cost?

How about $602,181,397 from 2003 to 2005.

On an annual basis, that’s about the size of the hole in the state budget that Gov. Paul LePage and the Legislature have spent the last few months trying to fill.

And those numbers, which come from a 2006 study by the state Office of Program Evaluation & Government Accountability, don’t include administrative costs. That adds another $22 million, according to OPEGA.

All of those programs are still operating and the costs continuing, although there has been no study to bring the total costs up to date.

As OPEGA pointed out in its report, the Legislature long has worried that state economic development programs, including Pine Tree Development Zones, are not the best use of taxpayer money.

The Legislature has tried to find out by commissioning at least three studies.

First came the OPEGA study that was completed in 2006, which found serious problems with all the programs, including the Pine Tree zones. The problems were serious enough to prompt a follow-up study of that specific program.

Although the follow-up study in 2008 gave the program good marks in some areas, those grades were based partly on asking the businesses that got the tax breaks if they liked the program.

Even that study — commissioned by the agency that was being studied — found that the companies getting tax breaks on the promise to create jobs had fewer employees during the year of the study than they had the year before.

A third study, in 2010 — also aimed at the Pine Tree program — could not be done because economists said information about the program could not be verified (see part 1 of this series).

The Maine Center for Public Interest Reporting’s investigation of the Pine Tree Development Zones has shown a pattern of doubts raised, studies commissioned, more doubts raised and recommendations rarely followed.

“It’s very frustrating. We go from one study to another and never get what we want,” said state Rep. Peggy Rotundo, D-Lewiston, a veteran member of the Appropriations Committee.

In the end, programs such as the Pine Tree zones may be questioned, problems may be identified, but they live on because changing them, experts say, poses political and financial risks.

Program ‘weaknesses’

“OPEGA’s research validates that economic development programs are inherently difficult to evaluate due to their complex and politically-charged nature.”

— From OPEGA’s 2006 study

The study, while full of details and not shy about criticizing some politically favored programs, admits it did not answer one of the most crucial questions about programs such as the Pine Tree zones: Do taxpayers get their money’s worth?

The question, the report said, “was outside of the scope of this review.”

It was outside the review because the Legislature did not include it.

Nevertheless, the OPEGA study found “weaknesses” in almost all of the programs, concluding, “it will likely be some time before” the state could run the programs in a cost-effective way.

When it came to the Pine Tree Development Zones, OPEGA found five areas where the program posed a “high risk” of threatening the state’s investments.

Among the risks: There was not enough financial data and independent review to know if the program was effective.

The problems, the report said, “may allow mismanagement or fraud to go undetected.”

OPEGA said the Department of Economic and Community Development, which administers the Pine Tree program, should make an annual report to the Legislature that assesses the program against criteria in the state law called “Evaluation of Economic Development Programs.”

The Maine Center for Public Interest Reporting asked the Department of Economic and Community Development for those reports. A report was only done once, in 2008, because money never was appropriated to do it again, according to George Gervais, commissioner of the department, who took over less than a year ago.

That report — the Maine Comprehensive Economic Development Evaluation — cost the state $150,000.

“The general consensus was that it didn’t do the full job,” said Gervais, who was in a lower-level position at the department when the report was completed.

For example, the Legislature directed that the evaluation should include determining “the extent to which each program has created new jobs or retained jobs and whether jobs would have been created or retained without the benefit of the programs.”

This instruction was an attempt to get a direct answer to the question: Would businesses have created jobs if they did not get the tax breaks from programs such as Pine Tree zones?

The Maine Comprehensive Economic Development Evaluation first says yes, then later throws cold water on its own answer:

On Page 7 the report states: “our research indicates that Maine’s investments do appear to meet this important ‘but for’ criterion.”

But a footnote on the same page concedes it “relied on those administering the program and respondents to the survey to indicate if the ‘but for’ criteria was satisfied.”

In other words, the study asked the two groups directly tied to Pine Tree zones — the department that boasts of its success and the recipients of $46 million in tax breaks — for their conclusion about whether it was working.

“Big surprise,” said Sen. Richard Woodbury, one of the Legislature’s experts on economic development and taxation. Woodbury is an independent from Yarmouth and a Harvard-trained economist.

As an economist, he said the state would be better off if there were many fewer tax breaks such as the Pine Tree zones.

Their effect is to give a favored set of businesses lower taxes, which means everyone else pays more to make up the difference.

The argument that the tax breaks are a net plus for the economy because they create jobs is “enormously hard” to prove, he said.

“They’re not focused well enough or monitored accurately enough and as such can be a giveaway,” Woodbury said.

Taxpayers lose

Lee Webb, a Union resident, formerly helped run economic programs in New York state.

Webb, now a senior fellow at the Margaret Chase Smith Policy Center at the University of Maine, said the experience turned him against programs such as Pine Tree zones.

“There are three winners and one loser,” he said. “The governor who gets to announce the company is relocating, the economic development official and the company which received the tax break are winners. The taxpayer is the loser.”

Another skeptic has been Peter Mills, a former Republican legislator from Cornville and now executive director of the Maine Turnpike Authority.

Maine, he said, may have to keep programs such as the Pine Tree zones not because they can be proven to work but because most other states have them and Maine has to compete.

“The arbitrary public giveaways created by the patchwork competition among the states seems unhealthy for our economic future,” he said. “At the very least, it breeds cynicism.

“That doesn’t mean we can do without them. Because they are so nearly universal, a state like Maine would likely be eliminated from many opportunities if it didn’t give away taxes,” he said.

Gov. John Baldacci said through a former aide that he is prohibited from commenting on political issues by the Department of Defense, where he is the director of military health reform.

The aide, former deputy chief of staff David Farmer, said Baldacci has authorized him to answer the The Maine Center for Public Interest Reporting’s questions.

“It’s appropriate to question how resources are being used,” Farmer wrote in an email, “especially when budgets are tight and there are many competing needs. But job creation has to be high on the priority list. By helping businesses to grow and expand in Maine, Pine Tree Zones make sure more people have access to good jobs with benefits.”

LePage aide: ‘fix foundation’

The administration of Republican Gov. LePage has continued the Pine Tree Development Zones and other economic development programs, many enacted during the 30 years that Democrats dominated state government.

But that may not be the case indefinitely.

John Butera is senior economic adviser to LePage, a veteran economic developer in Southern states, and just before going to work for LePage was executive director of the Central Maine Growth Council.

While he agrees governments need the “right tools” to attract investment, he also said, “The Legislature has every right, and the public, too,” to know if the tools, such as Pine Tree zones, are “cost effective.”

But when asked about the administration’s opinion of programs such as the development zones, Burger said, “We’re more interested in creating a business environment without government assistance that is conducive to creating prosperity.”

That means, he said, lowering the overall tax burden, lowering energy costs, having a qualified work force and better schools and colleges.

“That’s our focus — fixing the foundation,” Butera said. “If we fix that, we’ll start looking at other tools and their effectiveness.”

Rep. Rotundo has another solution: Require that development zones and all the other tax expenditures be considered as line item appropriations so they can be compared with all other spending items in the state’s biennial budget.

They are not now routinely reviewed by the governor or the Legislature, according to a 2010 report on transparency and accountability in tax expenditures.

“We should sit down every other year and see where that money’s going. Then we can evaluate those programs like we do to every other program. Right now,” she said “it’s out of sight, out of mind.”

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

Staff member Morgan Filbert assisted with the research.

 

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