After 14 years, a program originally intended to spur economic growth in distressed areas of Maine is having difficulty proving its worth. The Maine Legislature should allow the Pine Tree Development Zones, which offer a smorgasbord of tax breaks to businesses, to continue to sunset, as they were intended to do, and use the opportunity to craft more effective economic development programs for the state.
The Office of Program Evaluation and Government Accountability recently released a partial analysis of the Pine Tree Development Zones program, which was enacted in 2003 to provide income tax credits, sales tax exemptions and other benefits to businesses that expand or begin operations in designated zones of the state. Over time, the zones were broadened until the entire state became eligible for some level of benefits.
The nonpartisan office was not able to determine whether the tax breaks were a cost-effective use of resources, compared with other options, or even whether any business expansions resulted from the program, because it would have taken too much effort. The data could be obtained, the nonpartisan office wrote, but gathering it, preparing it and assessing it would have required “a significant amount of time.” With the program already winding down, the office concluded it simply wasn’t worth it.
Already that should lend an idea of the problem: There has been little accountability for a program that, combining forgone revenue and administrative costs, carried a pricetag of at least $11.4 million in fiscal year 2016 and $12.2 million in fiscal year 2017. But even though it didn’t answer all the questions it was charged with addressing, OPEGA did produce a conclusion based on more readily available information: Pine Tree Development Zones are not designed to achieve their intended goals.
“The current program design does not adequately support achievement of any of the program’s desired outcomes or ensure benefits flow only to businesses that add qualifying jobs,” it wrote.
Here are just some of the design flaws:
— To be eligible for most of the program’s benefits, businesses must hire at least one qualified employee within two years of being certified for the program. But the benefits apply immediately, meaning a business could reap rewards for two years and never hire anyone.
— A business that hires one new employee can receive the same substantial benefits as a business that hires many.
— The state must ensure that employees listed as new hires have not simply been shifted from another part of the business, but it has no way to verify this is the case.
— To qualify, businesses must say that they wouldn’t have been able to expand “but for” the program benefits. Given that Pine Tree Development Zones are largely for growing businesses, it’s unclear how they can honestly make that declaration. “OPEGA has confirmed with stakeholders that much of the business community also sees the ‘but for’ requirement … as having little practical meaning,” according to the report.
— In 2015, legislators changed the law to allow call centers in Aroostook and Washington counties to receive program benefits but pay their employees less than other qualifying businesses, diluting the program’s purpose to improve job opportunities.
— Every community in the state is currently a Pine Tree zone, meaning resources are not focused on significantly economically distressed areas. In fact, OPEGA found in 2015 that 67 percent of the businesses that received a specific perk, the employment tax increment financing benefit, were in areas of the state with low unemployment rates.
On top of being a poorly designed program that has never been able to demonstrate real outcomes, it’s based on an outdated mode of thinking about economic development: that tax incentives are a major factor in business investment decisions.
Research generally shows that state and local taxes make up a small portion of all business costs: 1.8 percent across all states, according to a 2012 paper by University of Iowa economist Peter Fisher. As a result, they play a small role, if any at all, in determining where businesses set up shop.
The OPEGA report points out that there is research on which types of business expansion projects are most likely to help an economy: They result in new employment and have supply chains within the state; the businesses are exporting a product; their investments often require construction or other temporary staff sourced from within the state; and the projects require new equipment that is sourced from within the state.
The Pine Tree Development Zone program does not require or encourage most of these elements. If the Legislature remakes its tax relief programs, which it should do, it should keep these basic principles at the forefront.