Corporate and out-of-state financiers have reaped tens of millions of dollars from Maine people through the abuse of a state tax credit program and by making deals that call to mind the worst of Wall Street and corporate practices. Good management of the state requires us to stop this corporate tax abuse and take action to get Maine people’s money back.
As recently chronicled in a Portland Press Herald series, investors have exploited the New Markets Capital Investment program, which was ostensibly designed to foster economic development, particularly in rural and poor communities, by providing tax credits in the form of cash payments to companies and investors who bring new investment to economically distressed Maine communities. Financial middlemen and bankers worked together to take tens of millions of dollars from Maine people using a form of tax abuse called “sham transactions .”
If a corporation gets a tax credit but doesn’t do what it is supposed to do to earn that credit, it could be considered a sham transaction by the IRS or a judge. In several instances, corporations applied for and received tax credits from the Maine New Markets Capital Investment program without making the required investments. They left communities without the promised local investment and jobs, and they left taxpayers responsible for the state’s end of the (bad) deal.
For example, in the case of Great Northern Paper, records show that a $40 million investment by Stonehenge Capital and Enhanced Capital, both of Louisiana, was made up of $32 million in one-day loans, $7 million of high-interest debt payments, and broker fees. Refinancing high-interest debt does not yield a new investment in an economically distressed community, and $1 million in transaction fees simply do not meet the definition of “investment” under any reasonable interpretation of the spirit of the law. But despite the fact that no honest effort was made to benefit the community, taxpayers are still obligated to pay $16 million to the investors under the New Markets Capital Investment program.
And in the case of JSI Store Fixtures, $24.8 million of “investment” by Advantage Capital, also of Louisiana, was actually a $15.8 million one-day loan and $9 million to refinance debt incurred by out-of-state investors that purchased the company just months before. Neither of these transactions resulted in any new investment in the state or the facilities, and they certainly haven’t resulted in local investment that would save jobs or spur secondary economic benefits.
So far, Maine is on the hook for more than $30 million in tax credits based on one-day loans and other sham transactions providing no benefit to the state.
We need to do two things: first, halt the program and complete a thorough, independent investigation of the results to date; and second, get our money back from the deals that failed to produce the investments in distressed communities that are the entire point of the NMCI program. These abuses by out-of-state investment firms have hurt Maine already and will continue to do so unless responsible actions are taken.
This is why the Labor, Commerce, Research and Economic Development Committee, when presented legislation to expand the program, amended that bill to create some badly needed accountability and “claw back” the money that Maine taxpayers owe these corporations based on their sham transactions. Specifically, the majority on the committee — six Democrats and one unenrolled member — voted against spending more money on this program that has clearly been subject to scams by out-of-state investors and voted to outlaw one-day loans within the program, direct an investigation of the program and, most crucially, institute a clawback measure for any deals deemed “sham transactions” so we can get our state resources back.
In a state like Maine, where every budgeted dollar counts, and taxpayers demand accountability, getting this money back should be a priority for lawmakers on both sides of the aisle. The legislation advanced by Democrats on the Labor Committee will do just that if it can gain support from the rest of the Legislature and the governor.
Unfortunately, Republicans on the committee do not support these actions and even refused to agree to an independent, official review of the New Markets Capital Investment program to prevent sham transactions from occurring in the future. Republicans in the full Legislature opposed these common-sense measures as well.
Thirty million dollars is a lot of money, especially now as lawmakers wrestle over how to run an efficient and effective government for all Maine families that includes quality public education, economic development, public safety and vital state services for seniors and Mainers with disabilities. We know that these were sham transactions, and Maine can’t afford to let unscrupulous financiers take advantage of us. Taxpayer money should be used for investments that actually help Maine people and our economy.
Sen. John Patrick, D-Rumford, serves on the Legislature’s Labor, Commerce, Research and Economic Development Committee. He is serving his third term in the Senate.