State lacks proof that $46M in Pine Tree Zone tax breaks created jobs

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Editor’s note: This is the first of a two-part series examining the state’s eight-year-old Pine Tree Development Zone program.

Some people call tax breaks for businesses “economic development.”

Others call them “corporate welfare.”

In Maine, one of the names they go by is Pine Tree Development Zones.

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The premise of the program is that some businesses won’t create new jobs in Maine unless they get tax breaks.

The program has cost as much as $46 million in lost taxes since 2003, according to Maine Revenue Services estimates. That’s money other taxpayers had to make up to help the state balance its budget.

Proponents of the program say the cost is worth it because without the tax breaks, the businesses never would have created about 8,000 new jobs.

But a Maine Center for Public Interest Reporting investigation has discovered records that reveal the companies that get the tax breaks have never shown that they need them to create the jobs — even though the law says they should.

The fact that businesses are given a “bye” on providing evidence that they need the tax breaks means there is no certainty that the multimillion-dollar program can be credited with the new jobs.

Economists and others interviewed by the center called the statement businesses give to show they need the tax break “a fig leaf,” a “farce” and “fictional.”

The official state economist refused to sign off on a section of Pine Tree Development Zone applications because businesses weren’t required to prove they needed the tax breaks.

And a committee of Maine economists determined that they could not accurately assess the effectiveness of the zones because there was no way to correlate the tax beaks to the new jobs.

The center’s findings are based on a review of thousands of pages of records, including every application to the program, two state-sponsored studies, the legislative history, and interviews with experts.

Gov. Baldacci’s idea

The Pine Tree Development Zones were the brainchild of Gov. John Baldacci, who took over as the state’s chief executive in 2003, at a time when the state was losing manufacturing jobs and a faced a billion-dollar deficit.

One of his solutions — offered in his inaugural speech — was the Pine Tree zones.

“In the coming week,” said the Democratic governor, “I will be putting forth a detailed economic strategy. It will include ‘Pine Tree’ opportunity zones to spur economic growth in areas of Maine that really need it … .”

Since then, the program has become a key element in the state’s economic development strategy.

Baldacci was following the lead of what other states were doing to compete with growth in the business-friendly Sun Belt.

Pennsylvania and Michigan, for example, had aggressive business incentive programs. They went by different marketing-savvy names, such as Renaissance Zones, and were known generically as enterprise zones. They were designed to attract private investment to distressed areas in a state or a large city. The idea was to lower a business’s expenses, such as taxes, if they created new jobs.

Under the Baldacci administration, more than 300 businesses were certified for Pine Tree tax breaks. And although Gov. Paul LePage has said nothing publicly about the program, his administration has approved 37 businesses for the program since 2011, his first year in office.

Although nearly all of the academic studies of enterprise zones show there is little or no evidence they are effective, they have been popular with governors and legislators.

In 2009, the Federal Reserve Bank of Boston convened a panel of experts to debate enterprise zones.

Peter Enrich, a professor at Northeastern University, concluded that the scholarship on business tax breaks should lead government to “just say no” to them. Taxpayers, he said, have to pay for the breaks to businesses while there no assurance there is a corresponding benefit.

Another panelist had Maine expertise: state Sen. Richard Woodbury, an independent from Yarmouth and a Harvard–trained economist. As an economist, he said, he questions tax break programs because they mean the tax rate has to be higher for everyone else. But as a politician, he said, “If somebody comes to you with an issue, you want to … deal with it.”

In the end, he said, the “political system may overweight” the arguments from the economists.

In Maine’s case, Democrats and Republicans in the Legislature approved Baldacci’s Pine Tree Development Zones in 2003 and approved expansions of the program in 2006, 2007 and 2009.

‘Fictional letters’

The program works this way: Businesses apply to the state Department of Economic and Community Development and promise to create new jobs and make capital investments. In return, they get income and sales tax breaks and lower electric rates for 10 years in most parts of the state.

Most of the breaks kick in after employers have added a minimum of five new jobs. The more jobs they add, the larger the tax breaks.

Businesses must pass a key test to get into the program.

The law that created the Pine Tree zones says a business can qualify for the program only if “it demonstrates” that without the tax breaks it could not expand or start a new business.

This is known as the “but for” principle.

It means that “but for” the tax break, the business would not add new jobs and make investments in the state.

But never in the eight years of the program has a business been asked for, or even volunteered, any written evidence that it needed the tax breaks to start a business or to expand, based on the center’s review of every application in the state’s files.

Instead, the agency that oversees the program, the DECD, tells the businesses what to say in their application letter to meet the “but for” test. DECD directs applicants to copy the following sentence from the sample letter it provides:

“Please be assured that the development project would not occur within the state but for the availability of the Pine Tree Development Zone benefits.”

By including that phrase in its application, the business is seen as meeting the “but for” requirement.

Nearly every letter of the hundreds reviewed by the center contained that wording, although sometimes the business would fill in its own name.

“The ‘but for’ letter is a fig leaf,” said Charles Colgan, a former state economist who teaches economic development at the Muskie School of Public Service at the University of Southern Maine. He was also chairman of the state’s Consensus Economic Forecasting Commission between 2003 and 2010.

The Legislature in 2009 was so concerned about the costs of the Pine Tree program that it passed a law requiring Colgan’s forecasting commission to calculate the tax revenue paid to the state from the new jobs versus the cost of the tax breaks. The idea was to find out whether the program was worth its cost.

The commission — made up of economists and business leaders, all with advanced degrees — wrote on Nov. 1, 2010, to Baldacci and the Legislature that they were unable to answer the Legislature’s question:

“After considerable deliberations, the (commission) has concluded that we are unable to develop a credible separate forecast” due to the unverifiable assumptions built into the “but for” concept.

They asked that the law that required their analysis of the program be repealed. To date, it has not.

Governor vs. experts

The discouraging report from the economic experts — two of the five members were appointed by the Baldacci administration — did not deter the governor from claiming the program was working.

Less than two months after getting that letter from Colgan’s commission, Baldacci pronounced the program a success.

In December 2010, with only weeks left in his last term, Baldacci gave a farewell interview to the Maine Insights newsletter, a pro-Democratic Party publication.

“As of September, 309 companies have located to Maine or expanded their businesses here because of PTZ incentives,” Baldacci said. “But if not for this program, they wouldn’t be here.”

Not only did the state panel of economists doubt that was the case, but so did the Baldacci administration’s official state economist.

Part of the approval process for being certified for the zone was an “advisory opinion” from the state economist.

Michael LeVert held that job from 2007 to 2010.

He said he often declined to check the box on the advisory that stated, “To the best of my knowledge, the proposed business activity will not go through without program financing.”

In effect, this was another way of saying “but for.”

LeVert said that after leaving that box unchecked a number of times, he asked the DECD to eliminate that question, and it did.

“I didn’t feel comfortable making that assertion from the information I had,” he said. “I left it blank most of the time.”

LeVert said Catherine Reilly, who preceded him as state economist, also sometimes left the “but for” clause blank, a fact confirmed by the records and by Reilly.

Governor’s response

Baldacci is currently the director of military health reform in the U.S. Department of Defense in Washington. Through his former deputy chief of staff, he told the Center for Public Interest Reporting that the DOD prohibits him from speaking on “potentially political stories.”

Instead, his former Deputy Chief of Staff David Farmer responded to the center’s questions.

“Measuring the effectiveness of economic development programs is difficult, but it’s much easier to see what happens when a state, competing for new jobs, can’t offer an aggressive policy. The jobs go elsewhere,” Farmer wrote in an email response to the center’s questions.

“Pine Tree Zones have helped to create thousands of good-paying jobs with benefits and led to hundreds of millions of dollars worth of investment in our state. It’s better to invest resources to create good jobs, which Pine Tree Zones require, than it is to spend that money to address the consequences of more people being out of work.”

Baldacci’s confidence in the program is confirmed by some business owners, such as the vice president of Rumery’s Boatyard in Biddeford, a certified Pine Tree Development Zone business. Sean Tarpey told the Portland Press Herald in 2006 that the Pine Tree benefits made it easier to “go out on a limb and hire people and pay a good wage and hope the business will expand the way we want.”

One of the jewels in the program has been T-Mobile, which announced in 2004 it would open a call center with 700 jobs in Oakland. Baldacci has said the Pine Tree program was key to bringing T-Mobile to Oakland. However, at one of the official events surrounding the opening, Maine Public Broadcasting reported that when T-Mobile Vice President John Birrer was asked about the benefits, he said, “We would have come here without the incentives.”

One of the few legislators to object to the Pine Tree program from the beginning was Peter Mills, the Republican from Cornville, currently executive director of the Maine Turnpike Authority.

He said that one of the purposes of the “but for” requirement was to “empower the administration to claim that the ensuing jobs were actually created by a tax concession — as if to say that tax law manipulations alone could create such opportunities. That was largely fictional … .”

But state Rep. Christopher Rector, R-Thomaston, believes the program has been successful, at least in his district.

“While the benefits can be substantial to the businesses, the benefits in employment in our region here in the mid-coast have also been substantial,” he said. “Both Boston Financial and Athena Health are examples of the recruitment power of the Pine Tree Zone benefits. They have said it would not have been the first location choice for their operations were those benefits not in place.”

The signed advisory opinion from the state economist in Boston Financials’ Pine Tree zone file leaves blank the question of whether the businesses would have been opened without the tax breaks. The Athena file did not contain an advisory opinion.

Maine & Co. is a nonprofit that helps recruit new businesses. Peter DelGreco, the president and CEO, said Pine Tree zones are an essential recruiting tool.

“I know firsthand that there are companies that would not be here but for the existence of those programs,” he said, although confidentiality rules prohibited him from naming the companies.

George Gervais has been commissioner of the DECD less than a year, but he has been in the department since 2008, at lower positions.

Whether the “but for” letters are window-dressing “is a hard question to answer,” he said. When he came into the agency, Gervais said he was trained that a company met the “but for” test if its decision to locate in Maine versus another state was dependent on the Pine Tree zone tax breaks.

He said he could understand why the ‘but for’ language is viewed with “skepticism.”

“There are companies who are very comfortable saying that, when it may not be true,” he said.”How do you prove that?”

He recalled businesses that decided not to apply for the zone because they felt “they could move forward without the program.”

Former state Rep. Nancy Smith, D-Monmouth, former co-chairwoman of the Legislature’s Economic Development Committee supported the Pine Tree program when she was in the House. As for the “but for” requirement, she said, “Get rid of it. It’s a farce. It doesn’t pass the straight-face test. That’s not to say incentives for businesses don’t have value.”

Why are governments so enamored of tax-incentive programs — Maine has a total of 46 — when there is so much skepticism from economists?

Colgan, the Muskie School economist who has been involved with Maine government for decades, has an explanation:

“Let’s just say that enterprise zones are some people’s ideas of what government ought to do,” he said. “Since it fits those ideas, then they think, it must be a good idea.”

The Maine Center for Public Interest Reporting is a nonprofit, nonpartisan news service based in Hallowell. Web: pinetreewatchdog.org. Email: mainecenter@gmail.com. Staff member Morgan Filbert assisted with the research.

Getting into the Pine Tree program

Here are the basic guidelines for qualifying to be a Pine Tree Development Zones business:

* Create at least one “quality job.”

* A quality job is defined as one where pay-plus-benefits are more than the per-capita salary in the county where the business is located. They range from the low of $29,464 in Washington County to the high of $45,147 in Cumberland County.

* The employees must also have “access” to group health insurance and retirement benefits.

* The business must be in one of the following sectors: biotechnology, aquaculture, marine technology, composite materials, environmental technology, advanced technologies for forestry and agriculture, manufacturing, precision manufacturing, information technology or financial services.

Source: Maine Department of Economic and Community Development

Pine Tree Zone benefits

Here are the benefits to businesses that are certified under the Pine Tree Development Zone programs:

* Corporate income tax credits

* Insurance premium tax credits

* Income tax reimbursements

* Sales and use tax exemptions

* Sales and use tax reimbursements

* Access to reduced electricity rates from Central Maine Power, Bangor Hydro Company and Maine Public Service as approved by the Maine Public Utilities Commission

Source: Maine Department of Economic and Community Development

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