With tax breaks, Maine should take cue from financial managers

Posted Aug. 11, 2013, at 10:21 a.m.

For years, the Maine Legislature has added dozens of tax credits, exemptions and refunds to the state’s tax code. Rarely have lawmakers revisited those carve-outs to assess whether they’re accomplishing their original goals, much less repeal them.

Currently under Maine law, a nonresident can buy a boat in Maine and avoid paying Maine sales tax if the out-of-state owner uses the boat outside of Maine. The purpose for the exemption is “economic development,” Maine Revenue Services states in its biennial compilation of the state’s hundreds of tax expenditures. There’s a similar setup for purchases of snowmobiles and all-terrain vehicles.

Maine Revenue Services records the same “economic development” purpose for exempting machinery and equipment sales to businesses fulfilling the terms of U.S. government contracts from the sales tax.

Those exemptions might indeed be spurring economic growth in Maine and creating jobs that wouldn’t exist otherwise. But no one knows for sure. Maine has no mechanism for determining whether it’s getting a return on its investment for exempting certain goods and services from the sales tax and for freeing certain new and expanding businesses from all state tax obligations for five years.

Fortunately, that situation will soon change.

As part of the newly enacted state budget, a 13-member task force will comb through the state’s tax laws and come up with $40 million in tax breaks to eliminate or scale back. More importantly for the long term, that same group will also be charged with developing a regular evaluation for those incentives.

As that 13-member panel starts its work, a firm hired by the Department of Economic and Community Development will be working on a comprehensive evaluation of the effectiveness of some of the state’s key economic development programs. By Feb. 1, 2014, lawmakers should have information that will allow them to judge whether some of those programs, like the Pine Tree Development Zone tax credit, which frees more than 300 new and expanding businesses from all state tax liability for five years, are responsible for job growth.

Finally, policymakers will have data at their fingertips, rather than anecdote, to guide discussions on whether the state’s tax breaks should stay in place, be redesigned or ended.

“These programs, taken together, constitute an investment portfolio that ideally should be designed and managed to assure that the state is getting the best return on its investment,” the Legislature’s Office of Program Evaluation and Program Accountability wrote in a 2006 report.

But since the state’s approach to managing its economic development tax breaks has been nothing like that of a financial manager one would hire to oversee a retirement account, the state has likely been investing in ineffective and unneeded programs and missing other investment opportunities that could bear fruit. When the state forgoes tax revenue unnecessarily, it has to make it up somewhere else. So other taxpayers make up the difference.

It’s not only crucial that policymakers have data to help them judge whether Maine is making smart investments in economic growth initiatives. It’s crucial that policymakers act on those data. They should end the programs that are ineffective, redesign programs that could become effective with some tweaking and continue — perhaps expand — the programs that are producing a return on investment.

And when lawmakers decide to write new tax breaks into law, they should act responsibly. They should write new laws in such a way that doesn’t simply help businesses to claim another tax credit for work they already do. They should also attach a sunset clause to every new tax break and require a performance evaluation. When the expiration date arrives, policymakers should use the performance data to determine whether the tax break should continue to lapse.

If a market investor would expect it from a financial manager, the state should do as much for its taxpayers.

http://bangordailynews.com/2013/08/11/opinion/editorials/with-tax-breaks-maine-should-take-cue-from-financial-managers/ printed on July 29, 2014