In 2015, several news reports detailed out-of-state financiers’ exploitation of Maine’s “New Markets Capital Investment Credit” program.
While that story got significant attention, the Legislature passed an even more troubling waste of taxpayer money in early 2015, retroactively giving millions in tax credits to large, multistate corporations and a few wealthy individuals for the year 2014.
On Monday, the Legislature’s Taxation Committee will hold a public hearing on LD 1564, which would extend this ineffective corporate tax break.
The “Maine Capital Investment Credit” started in 2011 and has been extended every year since. Monday’s hearing will again look at retroactively applying this totally ineffective and mathematically challenged tax credit to investments made in the year that just ended.
In addition, the proposal is to extend this credit for four additional years through 2019. The credits allowed will total about $55 million over the five years.
The first problem with any investment tax credit applied retroactively is that its retroactivity makes the credit’s value very questionable. The unproven theory around many investment credits is that the credit will be an incentive for businesses to make more investments in Maine, driving economic growth. Providing tax credits after a business has already made an investment is irrational and poor tax policy.
Accordingly, at the very least the 2015 portion of the capital investment credit should be eliminated.
The Maine capital investment tax credit’s history stretches back to Gov. Paul LePage’s first proposed budget after he took office in 2011. In that two-year budget, LePage proposed conforming Maine tax law to federal law regarding “bonus depreciation,” which allows businesses to write off equipment costs. Maine, like 35 other states at that time, did not conform.
For several years in response to millions of dollars in corporate lobbying, Congress has extended the “temporary” bonus depreciation provision for one year at a time for federal income tax purposes. The budget Congress passed last month extended bonus depreciation through Dec. 31, 2019.
Several studies have questioned the effectiveness of the federal bonus depreciation incentive, including a 2014 Congressional Research Service report. Because the benefit is simply a timing issue — an income tax reduction in the first year of new equipment or property that reverses in later years — the benefit is the equivalent of an interest-free loan over the life of the depreciable property.
The federal bonus depreciation benefit is effectively six times that of the Maine benefit. Clearly, the Maine bonus depreciation tax benefit would never have a significant impact on a business decision to invest in Maine.
Since there is very little proof the federal bonus depreciation drove investment decisions in the past, why would a Maine benefit one-sixth the size have an impact?
In February 2011, I testified before the Legislature against conforming Maine tax law to federal law on bonus depreciation. The incentive was too small to matter, I argued, the majority of the benefit would go to large out-of-state corporations, and, based on Maine’s income apportionment formula, businesses that made no investments in Maine but invested elsewhere would lower their Maine income tax through bonus depreciation.
I suggested as a compromise giving the businesses a tax credit for their investments in Maine. I provided calculations illustrating that the benefit of allowing bonus depreciation was very small — equivalent to about a 1 percent investment tax credit.
Unfortunately, the Legislature passed a budget that included a 10 percent investment credit retroactive to Jan. 1, 2011. The 10 percent credit was in effect through 2013 before falling to 9 percent in 2014. Through Dec. 31, 2014, corporations and a very small group of wealthy individuals received at least $40 million in Maine capital investment credits in excess of the 1 percent credit I suggested.
LD 1564 proposes credits that should be eliminated because they are totally ineffective in creating investment in Maine. As a compromise, the credits could be reduced to the 1 percent credit that is equivalent to the bonus depreciation benefit. This move would reduce the credits to less than $7 million over five years, saving taxpayers over $48 million.
Unfortunately, the Legislature has shown many times before that it does not understand tax matters and has trouble with math, so stopping this massive waste of taxpayer money will be difficult.
Albert A. DiMillo Jr. of South Portland is a retired corporate tax director and CPA with more than 30 years of tax experience and can be reached at aadimillo@yahoo.com.