AUGUSTA, Maine — Gov. Paul LePage’s exploration of a state tax elimination plan proposed by the conservative Maine Heritage Policy Center has legislative Democrats drawing battle lines in what looks to be a State House fight over economic development initiatives.
Last week, in an interview with the Bangor Daily News, George Gervais, commissioner of Maine’s Department of Economic and Community Development, said the administration is exploring the use of an economic development initiative that would eliminate state taxes in Maine’s most economically distressed counties as one of its legislative priorities next session.
Each of Maine’s 16 counties would be rated against a set of four economic metrics — the unemployment rate, the poverty rate, the five-year change in population and the five-year change in the private sector share of personal income — and given an index score. The county with the lowest score — currently Washington County, with Aroostook a close second — would have its personal income, corporate income and sales taxes eliminated in an attempt to boost investment in the county and improve its economy.
The idea is that as the lowest-rated county’s economy grows, another county then would drop to the lowest spot on the list and gain the same tax advantages, Gervais said.
Gervais revealed the administration’s interest in the plan while discussing the impact of a sales tax exemption for Maine’s aviation industry.
If the plan doesn’t work, the harm would be minimal as Washington County doesn’t send a large amount in taxes to Augusta to begin with, Gervais said, “but if it proves successful and economies did start to grow, then everybody would win and Maine’s economy would begin to rise immediately.”
While the initiative has its proponents, three senior Democratic lawmakers already have voiced concerns with the plan, calling it short-sighted, claiming it wouldn’t necessarily improve the state’s economy and saying it raises troubling questions of unequal taxation.
The LePage administration is not the source of the initiative. It is, in fact, the newest policy idea to come from the Maine Heritage Policy Center.
In a report released last month, the center laid out its plan for what it calls the Free ME initiative. In the introduction, J. Scott Moody, the center’s CEO, calls the initiative “a realistic strategy for spurring economic development statewide.”
In an interview with the BDN, Moody backs up that belief.
The Free ME initiative is inspired by the state’s Pine Tree Development Zone program, he said, which originally offered tax incentives to businesses that invested in economically distressed areas of the state. The program, Moody points out, was signed into law and expanded to cover the entire state by Democratic Gov. John Baldacci.
The Pine Tree Development Zone program is estimated to have created 8,000 new jobs in the state, according to Maine Revenue Services. In 2012, there were 327 businesses that qualified for Pine Tree Zone benefits, saving them more than $11.4 million in taxes, according to the center’s report.
Washington County is in “terminal economic decline,” Moody said. “We need to maximize the impact the Pine Tree Zones are having, so let’s take them to their obvious conclusion. Reduction of taxes is good, but complete elimination of taxes would be best.”
Washington County sends $35 million to Augusta in the form of personal income and sales tax, according to Moody.
“That’s a rounding error in the state budget,” he said. “Why are we even taking $35 million out of an economy in such need and sending it to Augusta and then sending it back in the form of welfare, especially Medicaid? We’re actually sending more back in Medicaid than we’re collecting in taxes.
“We can’t afford to have huge swaths of the state receiving more in services than we’re receiving in taxes. That’s unsustainable in the long run,” Moody said.
The Free ME initiative would allow Washington County residents to keep more money in their pockets, reduce all associated costs of collecting taxes, spur commercial investment and improve the area’s economy, Moody said.
According to the plan, a county would have taxes reinstated when its index score — remember those four economic metrics? — meets the statewide average for three years in a row. When that time comes, Moody doesn’t think the existing tax structure should be redeployed, but he’s willing to leave that debate until later.
The initiative has proponents in the rim counties that would be its beneficiaries.
Jonathan Reisman, an associate professor of economics and public policy at the University of Maine at Machias, believes the state should embrace the plan.
“Removing state income and sales taxes from Washington County has the potential to address our economic and demographic challenges,” Reisman wrote in an email to the BDN. “The economic drivers, such as they are in Washington County, are government and government-funded nonprofits, not the private sector. This has produced stagnation, unabated poverty and a culture of dependency.”
Because of the existing tax structure and the lack of private investment, Reisman says a “substantial underground economy” has developed in Washington County.
“The biggest private entrepreneurial activity here over the last 20 years was the big industrial pot farm that got busted three years ago,” Reisman wrote. “The Free ME initiative has the potential to unlock that entrepreneurial energy, and replace a culture of dependency and redistribution with a culture of opportunity and wealth creation.”
Ryan Pelletier, director of economic development at the Northern Maine Development Commission, initially was wary of the plan because it was a product of the Maine Heritage Policy Center, but said he was pleasantly surprised by the details.
“I think it has a lot of merit,” Pelletier said. “And it’s not like they’re really going out and coming up with a crazy idea by themselves. These type of enhancement or enterprise or empowerment zones, or whatever you want to call them, have been around for a while. … I think we would welcome it because it would be another tool in our toolbox to encourage economic development activity.”
The administration has not decided to embrace the initiative as proposed, according to John Butera, LePage’s senior economic adviser.
The administration is constantly exploring ideas for how public policy could be used to improve the state’s economy, he said, “whether by industry or geography or anything that takes the realities of how economies work in a situation like we’re in and make them better.”
However, initial feedback from Democratic leaders suggests the initiative, regardless of whether the administration gets behind it, will face a battle in the Legislature.
“Unfortunately, the administration has a long history of proposing new tax loopholes and then not being able to pay for it,” House Majority Leader Rep. Seth Berry, D-Bowdoinham, told the BDN on Tuesday.
Berry questioned the plan because he believes it would shift more of the tax burden onto property taxpayers and would not create jobs as much as shift them from neighboring counties.
“What the studies of these incentives show is that jobs are not created, jobs are moved around,” Berry said. “Businesses currently operating in Cumberland or Penobscot counties might move to Washington County to take advantage of the incentive. Then what you’ve done is created no jobs and reduced your tax base, and to pay for it you have to raise everyone’s tax rate.”
Berry criticized the administration for continuing to pursue extreme tax changes.
“When all you have is a hammer, everything is a nail, and cutting state taxes and pushing that onto property taxpayers seems to be the only tool this administration has in its toolbox for economic development, and that’s unfortunate,” Berry said. “Until I see a better plan to pay for it, I would have a hard time taking any new proposals for backdoor spending seriously.”
Sen. Anne Haskell, assistant majority leader in the Senate and co-chairwoman of the Taxation Committee, also questioned whether the plan would improve the economy in targeted counties. The Portland Democrat said businesses want consistency, and to create an artificial tax haven would not provide long-term consistency that business owners desire.
“This just says don’t tax them and they will come,” she added. “I think that’s short on reality.”
Haskell also said the initiative would raise constitutional issues surrounding unequal taxation.
Rep. Adam Goode, a Democrat from Bangor who is co-chairman of the Taxation Committee, echoed Haskell’s concern, asking why the tax code should be used to benefit people in one county — both struggling and well-off — when there are ways to use the tax code, such as the Earned Income Tax Credit, to help all economically distressed areas throughout the state.
“I think we’d be missing the mark if we used the tax code to address poverty just in one county,” he said.
The three legislators all said, however, they’ll reserve judgment over any future legislation until a bill is in play.
“We certainly need economic development in these areas of our state,” Haskell said. “I’d have to see a lot more than what they’ve got in place to be prepared to step out and be in support of this theory.”
Regardless of whether the LePage administration supports the Free ME initiative, the Maine Heritage Policy Center will be pushing legislation crafted from the initiative during the next legislative session. The center plans to circulate a pledge among legislators to solidify support and hold informational meetings and events in Washington and Aroostook counties in the coming months to disseminate information about the initiative, Moody said.
If the initiative doesn’t gain traction in the Legislature, Moody said a citizens’ referendum “may become a very real possibility.”