BUCKSPORT, Maine — Proposed changes to two state tax programs meant to incentivize business growth are leaving some mill towns wondering how they’re going to absorb what could be crushing losses in revenue.
Gov. Paul LePage’s proposed biennial budget would end the Business Equipment Tax Reimbursement program, or BETR, which reimburses businesses for taxes paid to municipalities on investments in equipment made between April 1995 and April 2007. The program reimburses 100 percent of those taxes for 12 years, after which time reimbursement drops to 75 percent and decreases 5 percent each year thereafter.
Instead, LePage’s plan would exempt businesses from paying the tax in the first place through another program, the Business Equipment Tax Exemption program, or BETE. Under BETE, municipalities would be reimbursed by the state for 60 percent of what they would have collected in taxes — an immediate 40 percent revenue dive. Over time, that reimbursement would drop to 50 percent.
Maine Revenue Services has estimated the changes would save the state roughly $11.8 million in fiscal year 2015 — about $10 million of which would come out of the pockets of municipalities. The other roughly $2 million would come from a plan to pull the retail sector out of BETR without exempting its capital investments — effectively taxing retail equipment at 100 percent when it had previously been reimbursed.
The elimination of BETR would affect nearly every municipality in the state. But for Maine’s mill towns, which depend on the taxes from the huge industrial complexes in their backyards, the loss in revenue ranges from bad to near-catastrophic.
According to the Maine Pulp and Paper Association, the state’s 12 paper and pulp mills employ more than 7,300 workers. Maine is the second-largest papermaking state by volume, after Wisconsin, and the industry accounts for 60 percent to 80 percent of the property tax rate in mill towns, the organization says. Companies from the paper and pulp industries accounted for five of the top 10 BETR payment recipients in fiscal year 2012, when the industry received $15.5 million, or about 30 percent of total program reimbursements.
“Large-scale industrial communities are going to get hit really hard by this,” said Mike Noble, assessor for Millinocket, home to the Great Northern Paper Mill.
Property tax rates are calculated by dividing the total tax need of a town by its total taxable property value. Generally, the more valuable property a town contains, the lower the rate. Still, according to the most recent data from Maine Revenue Services, Maine’s mill towns have comparable property tax rates to similar nonmill towns.
Some municipalities are saying the elimination of BETR, along with other proposals that would decrease revenues for Maine’s towns and cities, would necessitate property tax increases.
Michael Allen, associate commissioner for tax policy at Maine Revenue Services, defended the governor’s proposal Wednesday, saying the goal is not only to save money, but also to streamline the process for businesses seeking tax relief by combining two programs into one.
“From a policy standpoint, this is a much more efficient way of running the program,” he said. “The governor is looking long-term here at what the state can handle and, in the long run, this is the correct approach.”
Of town officials interviewed recently, the bleakest projections come from Town Manager Michael Brennan of Bucksport, home to one of Maine’s two Verso Paper Corp. paper mills.
In recent years, Verso has been the largest recipient of BETR funds from the state. In fiscal year 2012, the company was reimbursed $4.06 million for equipment at its mills in Bucksport and Jay, according to Maine Revenue Services. That was the largest reimbursement in the state that year, when BETR payments totaled $52.7 million.
Under the governor’s proposal, Bucksport would lose at least $1 million in business equipment tax revenue, Brennan said. That’s about 20 percent of the town’s roughly $5 million annual budget.
“We would absorb as much as we can, but it would ultimately result in the reduction of services,” Brennan said. “We’d have to eliminate programs, cut staff. We’d have to draw some from the reserves, but there would likely be a [property tax rate] increase. There’s just no way around it.”
Brennan said that the changes to BETR and BETE are just one piece of revenue shortfalls that would hit Bucksport under the governor’s proposed budget.
Other changes, including a suspension of state revenue sharing and a loss in excise tax revenue — caused by the governor’s plan to divert taxes from large trucks to the state’s highway fund — will mean additional cuts to the town’s revenue sheet.
Brennan said his only cause for optimism is the icy reception this and other budget proposals have received from the State House, where Democratic majorities in both chambers — and even some Republicans — have bristled at the governor’s proposal.
“We’re working with legislators and moving forward on our budget, looking at various projections and putting ‘what-if’ scenarios together,” Brennan said. “But we really have to wait and see what the Legislature does.”
Allen said he knew that some towns would face more difficulties with the proposed changes than others. Mill towns, he said, would likely qualify for Enhanced BETE — reimbursement at a higher rate than the proposed 60 percent — to offset that pain, though some towns would still see a loss.
“How each town is going to be able to respond is purely up to the towns,” he said. “I don’t think you can say everyone is going to react the same way or have the same problems.”
Meanwhile, managers, finance directors and assessors in other mill towns across Maine are reviewing their options and preparing for cuts.
Lincoln, home to Lincoln Paper and Tissue, could lose about $500,000 in revenue if BETR is eliminated, said Assessor Ruth Birtz. She said the other proposals in the governor’s budget would result in a total loss of about $1 million in revenue — about 25 percent of the budget.
To make up the difference would require a $5 increase to the town’s property tax rate, she said, which town councilors have said is not an option. So department heads have been asked to propose budgets that account for a 25 percent cut.
“I hope these changes don’t pass,” Birtz said. “I know what a huge burden it would be for our residents.”
Millinocket Assessor Mike Noble said he didn’t yet have figures on how much the town would lose if the BETR program is killed, but said it would mean roughly $360,000 less in revenue from the town’s largest taxpayer, Great Northern Paper, alone.
He said the town also would see revenue decrease from other large companies, such as Great Lakes Hydro America.
“Personal property makes up a significant portion of our tax base,” he said. “With any legislation, they try to do a one-size-fits-all solution, but it really doesn’t work.”
Other municipalities, such as Jay and Old Town, say their outlook is brighter thanks to mitigating factors that blunt cuts resulting from BETR’s elimination.
In Old Town, the removal of paper machines at Old Town Fuel and Fiber means there’s less equipment moving into the exemption program. Assessor Travis Roy said the town would lose about $144,000 in tax revenue from the mill, Labree’s Bakery and other businesses.
In Jay, home to Verso Paper Corp.’s second Maine paper mill, Town Manager Ruth Cushman said there are no early estimates on potential losses to the town, but any drop in revenue would be bad, though manageable.
That’s because two different tax increment financing districts have had the town reimburse businesses such as the Androscoggin mill for between 60 percent and 100 percent of their local taxes anyway.
“Because they wouldn’t be taxed on it, we won’t have to pay them back that tax money anymore,” she said. “To say we’re going to get by unscathed wouldn’t be accurate, but the impact is going to be minor for us.”
Cushman said she’s more concerned about the effect the business equipment tax changes will have on Maine’s mills: While the plan may work well for the companies in the long term, there’s a more immediate catch.
The proposal includes a lag time between losing the tax reimbursement for all of 2013 and becoming exempt in mid-2014. That means companies will suddenly see a steep increase in their tax bills for about a year and a half, without reimbursement or the program’s new exemptions.
“Because the paper industry is so tenuous, we’re concerned about the impact the extra millions of dollars they’ll have to pay will mean for them,” Cushman said.
The suspension of reimbursement for more than a year will cost Verso an estimated $4 million in new taxes, according to company spokesman Bill Cohen. He said those payments wouldn’t be recovered by exemptions until 2021.
“It’s the suspension [of payments] that just kills us,” Cohen said. “He’s skipping a year-plus worth of payments.”
When BETR was created under former Gov. Angus King in 1995, the goal was to incentivize businesses to make large, job-creating capital investments in their companies. Cohen said doing away with the program now would be unfair to those businesses.
“These incentive programs were put in place to encourage us to make investments, and we’ve made them,” he said. “Now, partway through the process, the governor in his budget is going to take them away. I don’t call that business-friendly.”
John Williams, president of the Maine Pulp and Paper Association, said Maine’s paper industry could also end up bearing the brunt of municipalities’ potential property tax rate increases.
“This really does hurt the towns we operate in financially, so they’re going to be forced to choose between cutting services and raising the [property tax] rate,” he said. “Since our companies are usually the largest taxpayers in the town, the companies will end up paying for that shift.”
Williams said his organization would lobby the Legislature and the governor to strike the elimination of BETR from the budget proposal.
“Ideally, we’d like to leave the BETR and BETE programs as they are,” he said. “But, recognizing that the state is in a difficult budget situation, we’ll work with the governor and the Legislature to see if there are any alternatives we could support.”
Allen, at Maine Revenue Services, said he understands businesses’ concern about the year-and-a-half delay, but said it was the only way to implement the change. He said without the gap year, the state would end up paying reimbursements to businesses and municipalities on the same equipment, thanks to BETR’s payment schedule.
He said that despite the effective year-and-a-half tax hike, businesses will still benefit from eliminating BETR. Where companies were previously reimbursed for a percent of taxes paid, he said, they’ll now be 100 percent exempt.
“We understand the companies lost that last year of BETR, but they’re gaining a full exemption and a much simpler system,” he said.
Emily Cain, a Democratic state senator from Orono and member of the Senate Appropriations Committee, said the changes to BETR and BETE are just one piece of the governor’s proposal, and can’t be considered in a vacuum.
“The BETR and BETE proposal is side by side with the homestead exemption, revenue sharing, excise tax, school aid,” she said. “Municipalities are dealing with it from all sides in the upcoming budget.”
For now, Cain said, the Legislature is still working to wrap up the supplemental budget for the current biennial. Public hearings on the next budget will begin in a few weeks, she said, and she expects municipalities and businesses — not just paper mills — to offer testimony.
“We need to hear from them,” she said. “That’s the only way we’ll be able to gauge the appropriate next steps.”
Republican state Rep. Dick Campbell represents Bucksport and Orrington in House District 40. He said he appreciates the governor’s zeal for finding new ways to save the state money, but cautioned against doing away with BETR.
“I like that the governor is forcing us to look at things differently. We can’t expect to do everything the way we always have and see improvements,” he said. “But it’s going to require more conversations between businesses, towns and the Legislature before we just start yanking programs out from under people.”
Disclosure: Bangor Publishing Co., owner of the Bangor Daily News, was reimbursed $15,427 through BETR in the fiscal year ending June 30, 2012. Northeast Publishing Co., which is owned by Bangor Publishing, was reimbursed $9,830.
Follow Mario Moretto on Twitter at @riocarmine.