As a new governor and Legislature wrestle with ways to close a $1 billion budget gap, reconsidering the state’s massive tax breaks must be part of the discussion. A recent report found that so-called tax expenditures added up to more than $6 billion per biennium, more than the state takes in and spends every two years.
Taking away tax breaks has long been anathema to Republicans, who equate the elimination of a tax break with a tax increase. But with hundreds of tax incentives — and little evidence that they have led to job creation and economic growth — a fuller review of these programs, which could lead to lower tax rates for families and businesses, is overdue.
A committee created by the Legislature earlier this year began this work. In a report last month, the group, which included representatives from Maine Revenue Services and the Departments of Economic and Community Development, Labor and Administrative and Financial Services, chronicled 274 tax exemptions, credits and reimbursement programs. There is little work done to assess whether these tax breaks, which range from sales tax exemptions on food and medicine to a tax credit for shipbuilders with more than 6,500 employees, are effective.
This follows work done by the Office of Program Evaluation and Government Accountability. In 2006, OPEGA reviewed 46 state economic development programs, ranging from tax exemptions on fuel and electricity used at manufacturing facilities to agricultural grants. OPEGA found that a quarter of the programs had no clearly stated public purpose, a quarter did not have specific objectives and a third did not report their performance regularly.
Unlike state spending, such tax expenditures do not undergo routine scrutiny. Once a new credit or exemption is enacted, it may not be reconsidered for years. When the amount of money not collected due to these breaks and exemptions exceeds what the state does collect, this is untenable.
After reviewing what other states do to assess the effectiveness of tax incentives, the committee found that Washington had the most thorough review process. On a 10-year cycle, every incentive is reviewed to see if it is meeting clearly defined objectives and whether it has unintended negative consequences. Each tax incentive’s impact on the state economy is also considered.
By offering so many tax breaks — many of them for businesses — Maine has, in essence, shifted the tax burden from those who get a lot of breaks to those who don’t. In the case of business incentives, working families are subsidizing corporations. Mortgage tax breaks, child care credits and homestead exemptions shift the burden to businesses.
Worse, the state has gotten a black eye for having high tax rates. Many of these rankings, however, do not take into account the many exemptions and credits that Maine offers. So the state is losing billions of dollars in revenue, yet being routinely criticized for having tax rates that look high on pa-per but in reality may not be.
A simple solution is to reduce personal and corporate income tax rates across the board while eliminating the least effective tax breaks. This would earn Maine kudos for having lowered taxes, while eliminating a system that now offers benefits to some companies and individuals and not others.