Change in tax policy helps Maine’s aviation industry take off

Allyn Caruso, president and CEO of Maine Aviation Corp., stands in his company's hangar at the Portland International Jetport. Behind him is a corporate jet from Kansas that is receiving routine maintenance. A 2011 change in tax policy that exempts aircraft parts from Maine's 5 percent sales tax has helped Caruso grow his aircraft maintenance business by as much as 25 percent in the past two years.
Whit Richardson | BDN
Allyn Caruso, president and CEO of Maine Aviation Corp., stands in his company's hangar at the Portland International Jetport. Behind him is a corporate jet from Kansas that is receiving routine maintenance. A 2011 change in tax policy that exempts aircraft parts from Maine's 5 percent sales tax has helped Caruso grow his aircraft maintenance business by as much as 25 percent in the past two years. Buy Photo
By Whit Richardson, BDN Staff
Posted Sept. 13, 2013, at 8:17 a.m.

PORTLAND, Maine — Six aircraft, some stripped down to not much more than their shells, are crowded into Maine Aviation’s hangar on the outskirts of the Portland International Jetport.

The planes range in size from two-seaters to small corporate jets. The hangar doors are wide open to allow a seventh, much larger plane — a 16-passenger jet owned by a hedge fund in Washington, D.C. — to fit its nose inside so mechanics can install a new, $40,000 windshield.

Allyn Caruso, president and CEO of Maine Aviation, walks among the planes, pointing to one after another and explaining what type of work his mechanics are completing. Most of these planes, he says, wouldn’t be here if it weren’t for a change in tax policy the Maine Legislature adopted in 2011 that exempts aircraft parts from Maine’s 5 percent sales tax.

There’s a nine-passenger Hawker 1000 in for routine maintenance. Its owner lives in Wichita, Kan., and otherwise has no connection to Maine. There’s a twin-engine, six-passenger Beechcraft Baron that’s receiving a new autopilot and an annual inspection. Its Florida-based owner flew into Portland on his way to Europe and liked the service, so he keeps coming back.

“We give him good value, we give him a good price and it’s tax-free. He likes us,” Caruso says. “He wouldn’t like us, though, if we charged him a 5 percent tax.”

Out on the tarmac are six more Hawker 1000s, each waiting for complete overhauls that will cost as much as $2.5 million apiece, Caruso says.

“There’s no way these planes would be sitting here [without the exemption],” he says. “They’d be sitting somewhere else.”

Revenue from Maine Aviation’s aircraft maintenance division is up 25 percent from 2011, Caruso says.

Maine Aviation plans to build a new, $7 million hangar next year and hire an additional 20 employees to increase its capacity, Caruso says.

“Clearly we‘re in growth mode, and this [tax exemption] is certainly making that possible,” he says.

According to aviation industry and economic development officials, the tax exemption on aircraft parts has helped Maine’s aviation industry grow and create jobs, and provides an example of how tax policy can be used as an effective economic development tool.

Maine Aviation isn’t the only Maine aviation business that has benefited from the tax change.

C&L Aerospace, which employs 115 at its aircraft repair and maintenance facility at the Bangor International Airport, is expanding and expects to add as many as 70 new jobs, according to Chris Kilgour, the company’s CEO.

And just last week, on Sept. 4, South Carolina-based Tempus Jets announced it would be moving its aircraft repair business from Virginia to the Brunswick Executive Airport, part of the former Brunswick Naval Air Station. Tempus expects to employ 25 in Brunswick by the end of the year, and double that number by the end of 2014. If all goes as planned, the company could employ up to 200 people in Brunswick within a few years, according to Scott Terry, Tempus’ CEO.

While it wasn’t the only factor in the company’s decision, Tempus likely would not have chosen to move to Maine if it weren’t for the sales tax exemption on aircraft parts, Terry told the Bangor Daily News.

“It’s safe to say that if Maine didn’t have that sales tax exemption that we would have most likely reconsidered [moving here],” Terry said.

The case for the tax exemption

It all goes back to a “use” tax that Maine imposed on aircraft that were purchased outside Maine, but spent more than 20 days — cumulative, not consecutive — in Maine during the first year of ownership.

By most accounts, it was not good policy.

It was an “onerous and fairly ridiculous situation,” according to Bob Ziegelaar, a former director of the Bangor International Airport and former president of Bangor-based Telford Aviation Services, which sold its aircraft maintenance business in 2010 to Maine Aero Services and C&L.

Steve Levesque, executive director of the Midcoast Regional Redevelopment Authority, called the tax “a black mark on Maine” that caused small aircraft owners to shun the state. Aircraft owners who had homes or businesses in Maine would fly to New Hampshire, where they would store and maintain their aircraft, and rent a car to drive into Maine, Levesque said.

Two bills were introduced in 2011 to repeal the “20-day” tax — one by then-Republican Senate President Kevin Raye of Perry, and another by state Sen. Stan Gerzofsky, D-Brunswick. In addition, Gerzofsky introduced a companion bill that would exempt aircraft parts from Maine’s 5 percent sales tax.

The bipartisan legislation won approval from the House and Senate, but died because lawmakers on the budget-writing Appropriations Committee could not find a way to pay for it. In order to make sure the tax exemptions made it into law, Gov. Paul LePage’s administration inserted it into that year’s $6.1 billion biennial state budget with a two-year sunset clause.

The tax change put Maine on equal footing with its neighbors in New England, none of which had a similar use tax on aircraft or a sales tax on aircraft parts, according to the Aircraft Owners and Pilots Association.

There are no comprehensive economic impact figures available for how the tax exemption affected Maine’s economy in the past two years, but the anecdotal evidence was convincing enough that legislators in the last session extended the exemption for another 20 years, to 2033.

In 2011, the Office of Fiscal and Program Review estimated the tax exemptions would cost the state about $608,000 a year in lost tax revenue the first few years, increasing slightly to $650,465 during the state’s 2015 fiscal year.

Maine Revenue Services updated the figures for the last legislative session, estimating the tax loss in fiscal year 2017 would be roughly $704,000.

Gerzofsky said the benefits have certainly outpaced the loss of tax revenue.

“We created a lot of jobs, we created a lot of payroll taxes and we created an industry we didn’t have,” Gerzofsky said.

Ziegelaar, who is no longer involved in the aviation industry but is still a keen observer, said it’s a bit of an exaggeration to say the tax exemption “created” the industry, but it has definitely helped.

“There’s no question that the exemption has been helpful for the industry. When we were running Telford it was a hindrance. I don’t think it was an absolute killer, obviously, because we were doing OK, but it certainly was helpful in growing the industry in general,” he said.

Levesque agreed: “I think it’s too early to tell, but from what we’re seeing so far it’s showing some significant impact.”

Brunswick — which inherited airport infrastructure from the U.S. Navy that would cost roughly $4 billion to build today, according to Levesque — probably has the most to gain from this burgeoning aircraft maintenance industry. Its runway and hangars are big enough to handle some of the largest commercial airliners.

“Brunswick is probably the best aviation facility available on the East Coast right now, and that should yield huge, huge returns for the state of Maine in terms of the aviation industry,” said Caruso at Maine Aviation. “You get one airline MRO” — a maintenance, repair and overhaul facility that handles large commercial airline jets — “and that could be 500 jobs.”

Aviation companies are not the only ones benefiting from the tax change. Local machine shops, precision manufacturers, upholsterers, anyone along the supply chain, all have the potential to see an increase in business.

Tami Keirstead owns and operates Tam’s Upholstery Touch in Glenburn. Before 2011, her business was split 50-50 between doing car upholstery and upholstery for planes, a job she’s been doing since getting her FAA repair license in 1991. Since the tax exemption in 2011, that ratio has tipped decisively in favor of aviation, which now consists of 85 percent of her business. She estimates her sales have increased as much as 40 percent since 2011.

It used to be winter was a quiet time for her business, but “we stayed busy right straight through the last three years,” she told the BDN.

So far it’s still just herself and one other employee. But if the business continues its upward trend, she’ll have to hire more people and likely expand into a bigger space.

The lessons

From an economic development perspective, Levesque said, the sales and use tax exemption on aircraft and parts offers a perfect example of how policy can be used to leverage existing assets, such as the world-class facilities in Brunswick, to bolster an industry and create hundreds of jobs.

In addition to helping one industry grow, the tax change also sends a strong message that Maine is willing to work with the private sector to improve the state’s business climate, George Gervais, commissioner of the Maine Department of Economic and Community Development, told the BDN.

“We need to send more messages like this that show we’re aggressive regarding tax policy that benefit businesses in the private sector,” Gervais said. “It’s proven through example in this case that it does grow Maine’s economy when we make aggressive tax policy decisions in the right direction.”

Other industries — yacht maintenance, for example — could be targeted by policy-makers for tactical changes to the tax policy that would spur growth.

“There’s no question in my mind that the sales tax example is helpful and could potentially serve as an example for some other industries,” said Ziegelaar, who now runs his own business consulting firm in Brewer called MainXPO.

Ziegelaar, who’s an economist by training, doesn’t believe in giving tax exemptions willy-nilly to different Maine industries. He supports, though, a calculated effort to change tax policy in ways that will yield a net gain for Maine’s economy.

“If you can make the case that it’s a wash or close to it, why not do that?” he said.

For Caruso, who’s watching his business grow as a result of the tax exemption, there’s no doubt the tax change will yield a net positive.

“Five years from now when you look back you’ll see a whole new picture of this industry,” Caruso said. “The state made an investment in it and it’s going to pay off.”

http://bangordailynews.com/2013/09/13/business/change-in-tax-policy-helps-maines-aviation-industry-take-off/ printed on July 25, 2014