The Maine Clean Election initiative, to be voted on tomorrow, would be funded by the elimination of certain business tax benefits.
Proponents of the ballot question have stated that the funding would come from eliminating $6 million in “low performing, unaccountable” corporate tax exemptions, deductions or credits “with little or no demonstrated economic development effect.” They have also stated that Maine currently exempts about $1 billion per year through tax breaks for business.
I am not sure where the group got the $1 billion in business tax breaks. The March 1, 2015, Maine Revenue Services report presented to the taxation committee estimated the fiscal year 2016 business “tax expenditures” to be about $1.7 billion. Tax expenditures are defined as the loss of revenue to the state from all exemptions, credits or other reductions in sales, income and property taxes.
In addition to the $1.7 billion in business tax expenditures, the report estimated that individuals benefited from about $2.5 billion in tax expenditures and that there was an addition $200 million-plus for nonprofits and governmental organizations.
In total, the loss of revenue is estimated to be $4.4 billion a year, with sales tax expenditures totaling $3.1 billion, and income and property tax expenditures at $1.3 billion.
The tax expenditure reports have been reviewed by the Legislature and special committees several times in the past with no real changes.
When you look at the detail of the $1.7 billion in business tax expenditures, I believe there is only about $45 million that should be examined to determine if it should be reduced or eliminated.
Here’s how I get to that number: by eliminating tax expenditures that are both consistent with other states and that are fairly consistent or equitable with tax expenditures received by individuals. As I noted above, individual tax expenditures are $800 million greater than the business tax expenditures.
Let me break it down further. Of the sales tax expenditures, $2.3 billion came from the exemption of sales tax on services, with businesses receiving $1.3 billion, and individuals receiving about $1.0 billion. Despite the recent attempts to tax services in Maine, the fact is very few states tax services purchased by either individuals or businesses.
In terms of equity and consistency, Maine’s sales tax treatment of services does not create an unfair “tax break” for businesses, and, accordingly, the taxation of services should be eliminated from the $1.7 billion in business tax breaks on the table for review.
That reduces the $1.7 billion down to $400 million. About another $285 million in sales tax expenditures relates mainly to the exclusion of sales tax on the costs of the manufacturing process and the equipment used in manufacturing. The vast majority of states have the same exclusions, so Maine is consistent with other states.
While there are no direct comparisons to sales tax exclusions for manufacturing on the individual side, the tax expenditures that benefit individuals include about $368 million from the exclusion of sales tax on food, medical costs and home utilities.
Based on equity and consistency, there are no significant sales tax changes that should be made related to business at this time.
At this point we are down to about $115 million in business tax expenditures, which consist of about $45 million in various income tax credits and about $70 million in property tax benefits on business equipment.
Maine’s treatment of property tax on business equipment is consistent with the majority of states. With regard to consistency with individuals, Maine does not tax individual’s personal property, so the tax treatment is relatively consistent with the business treatment.
Accordingly, the only remaining business tax expenditures that should be examined in detail are the approximately $45 million in income tax credits.
The $45 million in tax credits is different than the other tax expenditures in that the others are the exclusion of items from a tax, while the $45 million represents a cash payment or a tax credit to businesses to reward them for what is deemed to be an act that will have economic benefit for the state of Maine.
Most businesses (despite claims otherwise) should be able to demonstrate how the credits affected their business decisions and be able to illustrate why the state of Maine should continue the credits. Most businesses do detailed cost-benefit analyses before making any significant investments, and the state tax consequences, if any, are part of that analysis.
My experience as a corporate tax director for 20 years and from my associations with other tax directors is that state tax incentives are never a major factor in business investment decisions.
Finding $6 million or more in ineffective tax credits from this group — as the Clean Election proponents want — should not be difficult.
The loss of these tax breaks would have no impact on Maine’s economy for two reasons: because the number is so small and because the tax breaks were never a major factor in businesses’ decision to make investments in Maine.
Here’s what makes up the $45 million in tax credits:
- $14 million for employment tax increment financing,
- $13 million for the rehabilitation of historic properties,
- $9 million for the new markets capital investment credit,
- $3 million for pine tree development zones,
- $2.9 million for the Bath Iron Works shipbuilding credit, and
- $1.8 million for the seed capital investment credit.
There are several other credits that are estimated to be less than $500,000 each. All of the credits, except for the historic rehabilitation credit, are similar in that they are economic development “incentive” credits.
All of the economic developments credits should be examined in detail to see if they are effective and that the benefits are greater than their cost. The historic rehabilitation credit should be examined both to see if it is effective and to ask whether saving these historical properties should be accomplished with taxpayer dollars.
In addition to the above credits, there is one individual credit that should be examined: the educational opportunity tax credit. This credit was estimated to cost $7 million in 2016, but it was recently increased, and the cost may be more than $10 million in the future.
While this credit claims it helps to keep Maine college graduates from leaving the state, I doubt it is effective. It should be examined as closely as the business credits.
The review of these tax credits cannot be done by the Legislature or a committee they choose, as the politics and lack of expertise will make it fail, as in the past.
The review must be done by a small, independent group of experts with significant tax and business experience, and the group needs to have the authority to audit the businesses that are currently claiming the credits.
My experience with state tax incentives — in all 50 states — is that the vast majority of the incentives are very ineffective, and their cost greatly exceeds their benefit to the states.
Sadly, the jobs created are often the thousands of new accounting, tax, legal, lobbying and consultant jobs created to capitalize on the multi-state tax incentives industry.
Albert A. DiMillo Jr. of South Portland is a retired corporate tax director and CPA with more than 30 years of tax experience. He can be reached at aadimillo@yahoo.com.
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