AUGUSTA — Lawmakers serving on the Taxation Committee explored business tax exemptions Wednesday as a potential source of income to help cope with the state budget shortfall.

Legislators looked at a list of tax breaks and incentives offered to various industries and highlighted two for more scrutiny: the 95 percent sales-tax exemption on fuel and electricity purchased by manufacturing companies and the shipbuilding tax credit, worth up to $3 million a year, given to Bath Iron Works.

“Anything that we suggest to the Appropriations Committee, if it’s going to increase costs to businesses, there’s going to be a lot of political flak on it, but is that an area we need to look?” said state Rep. Tom Watson, D-Bath, House chairman of the committee, referring to the manufacturing sales-tax break.

“It was developed at a time when Maine was a manufacturing state; it’s no longer there,” he said.

State Sen. Richard Nass, R-Acton, the Senate chairman of the committee, agreed it was a “good example” of a place the committee should look to make changes.

“I want to be open to these things,” he said. “I think a lot of these are going to require a little more looking into before we sign on or reject things.”

The discussion took place at the same time the Appropriations Committee met to continue working on finding the $30 million it needs to fill a hole in the current budget. On Friday, Gov. John Baldacci will unveil a supplemental budget proposal aimed at closing an additional shortfall, projected to total about $400 million. Baldacci’s proposal will likely include cuts to a variety of state programs and services, but he has said he will not raise taxes.

Members of the Taxation Committee said they wanted to prepare recommendations for legislative budget-writers, but lawmakers acknowledged it would put them in an uncomfortable political spot.

“It may be very thin ice we are skating out on if we decide to take a position at all,” Watson said.

Watson, who noted he is ineligible for re-election because of term limits, said another area to look would be the shipbuilding tax exemption, which was carved out for Bath Iron Works, one of the state’s largest employers.

“It’s an expensive program and we’d certainly hear about it if we looked at it,” he said.

Mike Allen, director of Maine Revenue Services, said the shipbuilding credit, which is in part based on employment levels, costs the state about $3 million a year and was written to last 20 years. It’s scheduled to expire in 2018.

BIW spokesman Jim DeMartini said he was surprised Watson, who represents Bath, was the lawmaker who suggested looking at the shipbuilding credit.

“We’re very cognizant of the revenue situation in the state and we understand the need to look at every option,” he said. “We found it a bit surprising that (Watson) would be putting this one on the table. He, if anybody, should know how important this tax credit has been to us.”

DeMartini said the tax exemption discussion “raises some concern on our part.”

“I don’t envy the legislators in trying to deal with this, but we want to keep BIW operating as best we can, so we employ as many people as we can,” he said.

Paper mill representatives said any changes to their fuel and electricity sales-tax exemption would come with consequences.

“It would have a real devastating effect (on the paper industry),” said John Williams, president of the Maine Pulp and Paper Association. “It would drive up costs in an area where there is already a lot of concern. Pulp and paper manufacturing is very energy intensive, so we use a lot of fuel. Already, fuel is, in many cases, the highest cost.”

Bill Cohen, spokesman for Verso Paper, which operates a mill in Jay, said lawmakers must remember that keeping people employed is a key to economic recovery.

“If they start chipping away at what’s currently in place, we’re likely not to fill openings or fill them far slower than we otherwise might have; it’s a fragile time to be making changes,” he said. Verso Paper employs about 1,300 workers in Maine.

Cohen said his company is in the middle of its budgeting process and is looking for certainty in the business climate.

“We clearly empathize with the state, but the impacts of a short-term savings may have a long-term cost,” he said.

Lawmakers, however, questioned whether the incentive was working as intended.

“I think that’s what the whole goal of these are, is to attract business, and we have to look at that and see if that’s really worked,” said state Rep. Kathleen Chase, R-Wells.

State Rep. Gary L. Knight, R-Livermore Falls, said he wanted to know who would be affected by changes the committee recommends. The most recent paper mill to close in Maine was in Knight’s district.

“I’m not going to be sponsoring anything that hurts our business environment; we need to encourage businesses in our state,” he said.

rmetzler@sunjournal.com