St. Croix Tissue opened in Baileyville in 2016, with its product ultimately going into the Fiora brand paper towels in this file photo. The tissue mill uses pulp from its adjacent sister mill, Woodland Pulp. Credit: Bill Trotter

Out of 32 places to give tax breaks to investors, Gov. Paul LePage had special discretion for two. For each of those special picks, LePage looked to paper towns.

The governor’s use of those special selections to pick Madawaska and Baileyville reflect a hope that, despite declines in most paper industry sectors, the mills that have endured some brutal years may still draw new investment or serve as an anchor for sustaining rural economies.

St. Croix Tissue in Baileyville said the designation will help advance its plans to add two more tissue paper machines — supporting about another 80 jobs — to capture a greater share of one of the few paper markets in which demand has grown in recent years.

The governor said his administration’s decisions were largely fueled by the potential for such major investments on the horizon. That appears part of the case in Rumford, where mill officials in March told LePage’s administration that designating Rumford as a federal Opportunity Zone would help them attract investment to build a tissue paper machine on nearby vacant land.

But a change of tone from the new owners of the mill in Rumford reveals how much new projects still depend on an underlying business decision, presenting a question that researchers hope to answer about the tax break program: Is it a giveaway for investments that would happen anyway, or a boon to low-income communities?

The mill’s new owner, the Hong Kong-based ND Paper, said it’s reevaluating the plan to add tissue production in Rumford, as it considers “several different strategic options” for the mill. It’s also evaluating whether it will seek to use the Opportunity Zone program.

Brian Boland, a vice president of government affairs for ND Paper, said the evaluation process “is just beginning and will require some time to complete.”

The program’s under similar evaluation at two other mills now included in such tax break zones, Twin Rivers Paper Co. in Madawaska and Sappi’s Westbrook mill, according to spokespeople.

The reaction among Maine’s paper industry also shows how policymakers and local officials were operating somewhat in the dark as they selected those zones in Maine, with many outstanding questions about how or whether it would ultimately help major projects.

The program has roots in trying to help economically depressed New England mill towns. The New York Times reported that Kevin Hassett, the chairman of President Donald Trump’s Council of Economic Advisers, proposed the policy in hopes of addressing the needs of towns like Turner Falls, Massachusetts, near where he grew up.

Doug Ray, a spokesman for Maine’s Department of Economic and Community Development, said the designations in those mill towns weren’t just for the mills, but for “a variety of reasons” that could help those local economies expand into new industries.

Public records reveal some of those other opportunities, but not for Madawaska or Westbrook. Those communities were two of five areas LePage picked without any specific public comment requesting designation of those tracts.

Westbrook’s tract includes an industrial corridor along Warren Avenue, and Madawaska’s includes all of the town of roughly 4,000 people.

[The major projects that spurred LePage’s Opportunity Zone picks]

LePage did leave out some towns with operating mills.

He did not pick Skowhegan, where owner Sappi had already begun a $165 million investment, or Jay, where Verso owns a mill. Verso’s move to shut its Bucksport mill and sell it for scrap angered LePage to the point of telling the company to “get out of the state of Maine.”

Paper chase

The federal Opportunity Zone program will allow investors who put money into businesses inside 32 new zones to defer and possibly get breaks on their capital gains taxes. The incentive intends to encourage investors to cash out existing investments and redirect them to smaller businesses or properties in economically distressed areas.

Investors likely won’t make those new investments directly but rather through a crop of intermediary fund managers and attorneys who will create investment funds, called Opportunity Funds, that have at least 90 percent of their investments in those zones.

That means a business like St. Croix Tissue could make its pitch for adding two new tissue machines to a new batch of financiers who are looking for investment-ready projects in distressed parts of the country.

Jim Usseglio, a principal in the tax practice of the accounting firm Baker Newman Noyes, said the specific rules and regulations for the program are still about a month away, leaving potential investors in these areas “in a holding pattern now.”

That’s true, too, for St. Croix’s project, which applied for an air quality permit with state regulators during the same week that the U.S. Treasury revealed a preliminary list of Opportunity Zones nationwide.

The project would include at least one using a newer technology called “through air drying” that the company said “produces a much higher quality product” but at about twice the cost of other tissue machines.

“We’re trying to understand and fully assess the impact with future investment,” said Scott Beal, a spokesman for St. Croix Tissue. “We don’t see anything bad associated with it, that’s for sure.”

That’s a different take from attorneys for St. Croix Tissue Inc. and its sister company Woodland Pulp, who wrote in March to LePage that the new project “won’t happen in Maine without incentives.”

That kind of language is common among tax incentive programs such as Maine’s Pine Tree Zone tax credit, which lawmakers recently extended for 10 years. The program requires beneficiaries to testify that “but for” those breaks, they would not have made an investment.

That kind of statement isn’t required for projects in Opportunity Zones.

The program aims to convince investors to part with earnings from perhaps more traditional investments — for example, Google or Amazon stock — and redirect that toward a fund focused on investments in these Opportunity Zones.

By doing so, they can defer paying any capital gains taxes as long as they hold the investment. If they hold it for at least five years, they can reduce the amount subject to taxation, an amount that drops again at seven years. If they hold investments for 10 years, they won’t have to pay any capital gains tax on profits from the Opportunity Zone investment.

For larger public companies, such as Sappi or ND Paper, Usseglio said he expects the program will be less useful because they would likely have to split off their businesses in Opportunity Zones to allow investors to target investments in just those areas. Such a company could potentially use the program, he said, if it sold assets that triggered capital gains taxes and reinvested that in its own subsidiaries in distressed areas, though he sees that as a less common use.

According to Al DiMillo, a former chief tax officer for Bath Iron Works and a certified public accountant, the incentives aren’t so sweet that they’d make an investor take on a significantly higher amount of risk.

“There has to be some economic sense, because it’s not that great of a deal to just do something dumb,” DiMillo said. “They’ll invest in places that make sense economically and just run away from those places that don’t. It’s sort of like you’re getting a benefit for something you were going to do anyways.”

Not just the mills

Both Madawaska and Baileyville are special selections because they don’t count as economically distressed, with local economies buoyed by fully operating mills.

As a condition of picking those areas, federal rules required LePage also to select a neighboring distressed area. The selections, in general, were driven by the promise of coming investment, like J.D. Irving’s massive plan for commercial and residential development on a part of the 51,000 acres it owns in the Fish River Chain of Lakes region. That project is adjacent to the Madawaska tract.

LePage went particularly out of his way to designate Baileyville, selecting a tract east of Machias that includes few existing businesses in order to allow his selection of the mill town.

In Rumford, hopes from the mill appears to have been part of the decision. The mill’s general manager in March petitioned the governor for the designation, saying it would propel an “investment-ready” tissue paper project to the next stage.

“All that remains is the financing,” the mill’s general manager for former owner Catalyst Paper, Randy Chicoine, wrote to LePage in a March letter.

The designation, he wrote, “would greatly enhance our ability to attract investors for this project.”

Catalyst, based in British Columbia, had already laid much of the groundwork for such an investment, by preparing to use the federal New Markets Tax Credit program, which also aims to spur investment in distressed areas.

While the new owners said that plan is under renewed review, economic development officials laid out other reasons for LePage’s selection of two tracts in Rumford, including a need for downtown residential investment, Nestle’s bottled water manufacturing plant and an industrial park where Town Manager Linda-Jean Briggs said a developer is working on an agricultural project.

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Darren Fishell

Darren is a Portland-based reporter for the Bangor Daily News writing about the Maine economy and business. He's interested in putting economic data in context and finding the stories behind the numbers.