While the state is considering cutting aid to schools and communities, it is also spending more than $100 million a year on tax breaks for businesses that an audit has criticized as risky investments.
According to the audit, 12 programs that reduce taxes on hundreds of businesses lacked the “ability to evaluate … performance and provide accountability.”
The state Office of Program Evaluation and Government Accountability studied 46 business incentives designed to promote job growth and designated a dozen as “high risk.” Among the problems found were inadequate performance measures, costly duplications and a lack of independent reviews that could cause “mismanagement and fraud to go undetected.”
The Legislature has had the report for six years, but no significant changes have been made in any of the programs, based on a review of legislation during that period.
On the contrary, just two years ago, lawmakers created a new business tax credit that in its first year will cost taxpayers more than $5 million, according to Maine Revenue Services.
Reducing or eliminating what critics call corporate welfare has proved difficult because of the political clout of businesses, the lack of actionable data and plain inertia, experts and legislators say.
“It’s just very powerful, the lobby for the business community,” said former three-term state Sen. Ethan Strimling, D-Portland. “They would come in front of you and say, ‘If you create this tax break, we will create 300 jobs.’ I’d say, ‘OK, we’ll put that in the contract language.’ They’d say, ‘Oh, no.’”
While the two-year budget submitted in January by Gov. Paul LePage includes such cuts as $400 million from aid to cities, towns and school districts, only one minor change is proposed to reduce the cost of the state’s multitude of tax breaks, loopholes and incentive programs for businesses.
That proposal would reduce the cost of the $55 million Business Equipment Tax Break by $2 million and suspend the program for one year. But it also shifts part of the cost of the programs to cities and towns. BETR is one of the dozen programs criticized by OPEGA.
LePage’s budget chief, Sawin Millett, commissioner of the Department of Administration and Finance, was unavailable for an interview or to reply to emailed questions despite numerous requests over more than a week.
OPEGA found “high risk” programs have an “increased likelihood” of being ineffective and unnecessary and of spending too much on administration.
Programs that rated poorly ranged from the annual $3.3 million for businesses in Pine Tree Enterprise Zones to one exempting businesses from paying a sales tax on manufacturing equipment at an annual cost of $22 million.
And the 12 riskiest programs do not tell the full picture of the incentives.
All 46 programs together cost $602 million from 2003 to 2005, according to OPEGA. There has been no official estimate since then, but all of the programs are still in effect.
Whether the incentive programs have the intended effect — job creation — is a matter of skepticism among experts.
In 2009, the Federal Reserve Bank of Boston convened a panel of experts to debate state business incentives. Peter Enrich of Northeastern University concluded that the scholarship on the issue should lead government to “just say no” because there is no assurance the programs create jobs.
A 2012 report by the Maine Center for Public Interest Reporting about the Pine Tree Zones program, which has cost the state $46 million since 2003, found the state has no documented proof that the program created jobs as promised.
The problems with business tax breaks have not gone unnoticed in the Legislature. There have been discussions for at least 10 years about whether they are worth the expense to the state’s budget, especially when other parts of the state budget are being cut.
But legislators say they have been stymied by two obstacles: the influence of big business and the lack of actionable data to determine which programs work and which don’t.
Former Sen. Strimling, who was on the Legislature's Taxation Committee, said he tried repeatedly to bring up business tax breaks.
“One year, there were going to be cuts to kids with brain injuries,” he said. “A couple of us on the committee decided to make a recommendation to the Appropriations Committee to eliminate sales-tax exemptions on advertising,” he recalled, to offset the cuts.
“Within three days, I had received 25 calls from people who were in the publication or TV industry just up in arms” and the idea died, he said.
Sen. Roger Katz, the assistant Republican leader, is a former member of the Appropriations Committee.
He said dealing with business tax breaks, credits and reimbursements “takes a great deal of political will because, almost by definition, these exemptions are enjoyed by groups and institutions that have successfully had a voice in the Legislature, and it’s hard to undo a benefit program, whether it’s a MaineCare entitlement or a tax credit.”
The potential influence of businesses that receive such breaks can be measured by their campaign contributions.
For example, since 2002, the top dozen businesses in the BETR tax-reimbursement program have given more than $1.3 million to candidates for the Legislature and governor and to political action committees.
Nestle Waters of North America , which bottles water in Maine under the brand Poland Spring, was a leading recipient of BETR in 2009, the most recent year available: $1.9 million. The company and its top executives made campaign contributions of $466,431 in the past 10 years. Nestle has not responded to requests for an interview.
The ‘secret budget’
The growing critique of business tax breaks has prompted legislative attention in the current session.
Sen. Emily Cain, of D-Orono, wants state budget documents to include both the financial impact and a justification for each program. But, so far, every attempt has been thwarted by a lack of data that compare what the programs intend to accomplish and what has been accomplished, she said.
A veteran Appropriations Committee member, Rep. Peggy Rotundo, D-Lewiston, said her bill would ensure that future programs benefiting businesses include “built-in transparency and accountability.”
None of the bills would lead to a change in the pending state budget.
Geoff Herman, the longtime lobbyist for the Maine Municipal Association, said one problem with making changes is that businesses have made investments based on promised support from the state.
Still, he said, some of the programs have been sweetened over the years, such as legislation in 2006 that changed the length of time businesses could get BETR reimbursements from 12 years to indefinitely.
He attributed the change to lobbying from businesses. Any changes now in business tax breaks, he said, would be hard to come by. "The horse is out of the barn,” he said. “It’s difficult once benefits are provided to any taxpayers, and then to rein them in becomes politically difficult.”
Although not impossible. Under the LePage administration and the Republican-led Legislature, for example, benefits were reduced for state and teacher retirees because pension costs were threatening to consume a growing portion of the state budget.
Katz, of Augusta, said he thinks he knows why the issue has lingered on the back burner. “It’s a huge issue,” he said “and to me the cause of it is pretty clear to see — because of two-year terms and term limits, we have institutional ADD (attention-deficit disorder) in the Legislature. And we need to figure out a way to work through our disability."
He added, “The kind of long-term planning and analysis that a well-run business would do is tough to see through."
His point is borne out by looking at the legislative committee that commissioned the OPEGA report, the report that has seen almost none of its recommendations followed.
Of the 12 members of that committee, not a single one is in the Legislature today.
The Maine Center for Public Interest Reporting is a nonpartisan, nonprofit news service based in Hallowell. Email: firstname.lastname@example.org. Web: pinetreewatchdog.org.