The Pine Tree Zones expire at the end of 2021 and will be considered for renewal.
The apportionment of taxes on the various descriptions of property is an act which seems to require the most exact impartiality; yet there is, perhaps, no legislative act in which greater opportunity and temptation are given to a predominant party to trample on the rules of justice. Every shilling with which they overburden the inferior number, is a shilling saved to their own pockets. James Madison Federalist Paper #10
In 2004 the Pine Tree Zone tax exemptions were enacted in Maine as a program to benefit low-income high unemployed areas.
In 2009 the Pine Tree Zone tax exemptions were amended to become state-wide tax exemptions for targeted areas, no longer restricted to low-income high unemployment areas.
In 2017 the Pine Tree Zone was scheduled to sunset, but they were extended for another three years until December of 2021. At the end of this year, they will be up for renewal again.
This is the story of what happened the last time that the PineTree Zone tax exemptions were up for renewal.
2017 Public Comments on OPEGA and the Pine Tree Zone
the 2017 OPEGA report on the Pine Tree Zone lists these questions as unanswerable due to lack of data:
- To what extent are those actually benefiting from the tax expenditures the intended beneficiaries?
- To what extent is the tax expenditure achieving its purposes, intent, or goals, taking into consideration the economic context, market conditions, and indirect benefits?
- To what extent is it likely that the desired behavior might have occurred without the tax expenditure, taking into consideration similar tax expenditures offered by other states?
- To what extent is the tax expenditure a cost-effective use of resources compared to other options for using the same resources or addressing the same purposes, intent, or goals?
Opega could not get the granular data needed to answer these questions.
A question not asked is how the Pine Tree Zones interact with the causes and consequences of wealth inequality? That question can be analyzed in part by considering the structural design and functional relationships within the state economic development policy.
The Office of the State Economist maintains publicly accessible demographic data and allows one to create one's own spreadsheet specifically designed for use by towns in the comprehensive planning process.
The data tells us what is, not why it is.
The data compilation resources do not interact with state economic development policy. I am reminded of the quantum theorists, who often emphasized that to understand what is taking place within the quantum domain one must apply two languages- that of mathematics, and that of a spoken language used in the world.
Amanda Rector is Maine's State economist
Amanda's biography says she started working for the state in 2004 and has been State Economist since 2011. She earned a BA in Economics from Wellesley College and her Master's in Public Policy and Management from the Muskie School of Public Service at the University of Southern Maine. Her name is on a report about income inequality published in 2018 Poverty and Income Inequality in Maine Forum on the Future System. This report compiles valuable data but does not incorporate discussion about Maine's centrally managed economic development policy of which the Pine Tree Zone is a key component.
Neither could I find networking with OPEGA (Office of Program Evaluation and Government Accountability). These two agencies working together perform an oversight function of state economic development policy. The apparent disconnect between the two is a stark contrast to the public networking within the culture of state economic development policies where the many different Maine economic development corporations and agencies are often listed on town websites and economic development agencies.
I sent Amanda Rector an email asking for a comment on the Pine Tree Zones.
The 2017 Public Comments for congressional testimony concerning the Pine Tree Zone Tax Incentives begins with the testimony of five businesses who are beneficiaries of the Pine Tree Zone Tax Incentives. Unsurprisingly they all testify in favor of the Pine Tree Zone. That is followed by testimony from George Gervais, commissioner of the Department of Economic and Community Development.
The DECD testimony references a report done by Investment Consulting Associates titled Comprehensive Evaluation of Maine’s Research & Development and Economic Development and Incentive Programs
The ICA report begins with describing a review of previous reports:
Findings from Previous Studies The team reviewed previous reports and documents prepared for the State to understand incentive and investment history in the State of Maine. One concern echoed by multiple entities is that this series of evaluation reports should be performed differently and to suggest new strategies for enhancing economic development within the State of Maine. While the present report does suggest new action items, many of these items were also presented in earlier reports but have not been enacted. Many are still relevant, and the team has included additional specific implementable action items to address these ongoing concerns as well (emphasis by author)
THE DECD dismisses evaluations as the task of the Maine Revenue Services
In May of 2015, there was a legislative bill in the works to set up a Pine Tree Zone evaluation schedule. George Gervais, the commissioner of the Department of Economic and Community Development, a partner and fiscal agent of the FAME corporation, testified before the Government Oversight Committee.
At one point OPEGA ( Office of Program Evaluation and Government Accountability ) Director, Ashcroft asked Gervais whether it was the Legislature’s responsibility to implement the recommendations from the 2006 OPEGA report in order to improve DECD’s programs.
“I think that’s part of what’s gone wrong here,” she said. “There hasn’t been a follow-through on what needs to be done and an opportunity to get the report questions answered.”
Gervais didn’t directly answer the question.
It’s a good observation,” he replied.
….“The 2006 report hasn’t been our focus. It has not been, to use the term, our playbook,” replied Gervais, adding that his department has met most of the recommendations “within resources.” He (Mr. Gervais) said that forcing businesses to cooperate with audits should fall to Maine Revenue Services.
“Any action should be done by Maine Revenue Services because it conflicts with our role,” he said. “Our role is to help businesses. We can’t be pounding them over the head on other issues at the same time. But I agree that we need the data.” Portland Press Herald, Maine’s economic development chief says agency lacks staff to oversee tax incentive programs, by Steve Mistler Aug 20, 2015
Mr. Gervais makes it clear that the DECD evaluations are solely concerned with the effect on individual businesses that are awarded benefits by the DECD, implicating that legislative intent, goals, or taking into consideration the economic context, market conditions, and indirect benefits or costs of the program to other parts of the economy is not the concern of the DECD.
Maine Revenue Services says auditing the Pine Tree Zone is too much work
The testimony from Government Oversight Committee of the Maine Revenue Service asserts that OPEGA’s request for information that it is too burdensome and too expensive for the Department of Maine Revenue to provide, giving substance to OPEGA’s position that it does not have the data to answer the questions (above) stated in the 2017 OPEGA report on the Pine Tree Zone,
The DECD testifies that it is willing to work with and communicate with other agencies.
This report touched on the issue of better communication between state agencies to administer various aspects of PTDZ more efficiently. DECD appreciates that feedback and steps to improve communication and administration between various agencies is taking place. DECD congressional testimony regarding the Pine Tree Zone.
Testimony by the DECD is followed by more testimony by businesses addressing and contesting the OPEGA report and testimony from Representative Ryan Fecteau supporting OPEGA’s claim that it was not supplied with adequate data to produce a viable report. There are different views on whether OPEGA was given adequate data.
The following is an example of why the method used for measuring data can affect the perception of success or failure:
2014 ICA evaluation concludes that the costs of the Pine Tree Zone programs exceed its benefits
A 2014 Portland Press Herald article by Jessica Hall describes a report done by Investment Consulting Associates, the same consulting firm that produced the 2017 report. A clear method is used to arrive at the conclusion.
(The investigation) found that the Pine Tree Development Zone program’s costs exceed its benefits. Specifically, it said the PTDZ delivered total direct benefits to the state of $358 million in 2012, in terms of people employed and salaries and total sales in the state. The program, however, had $457 million in total direct costs related to lost taxes, administrative costs, overhead and other expenses.
…. According to the ICA report, the total value of corporate incentives was divided by the total number of newly created jobs, which provides a “rate per created job” or information on what governments “paid” for one new job.
Maine awarded total incentives worth $159,000 per created job for the period from 2010 through 2013, the report found. Portland Press Herald. Pine Tree Zones tax breaks costing state more than they deliver by Jessica Hall April 14 2014
In 2017 a different system used by ICA and applied exclusively to the PTZ program produced dramatically different results:
The IRR of the PTDZ CBA equals 297.2%, which results in a return of $3.972 on each dollar invested in the PTDZ program by the State of Maine, implying $2.972 of additional tax revenue generated by the PTDZ program for the State of Maine. As mentioned, this is the case in the scenario where all PTDZ recipients would not have realized their investment or expansion in the absence of the PTDZ program and, as such, is the most favorable scenario. 2017 Report
Comparing the two different methods used to evaluate the Pine Tree Zone in the 2014 and 2017 reports by ICA, is like comparing apples to oranges.
The method used by ICA in the 2017 report is stated as being the same method used in the 2014 report except for the Pine Tree Zone which used a method based on assuming the answer to one of the questions proposed by Opega; “To what extent is it likely that the desired behavior might have occurred without the tax expenditure, taking into consideration similar tax expenditures offered by other states?”,
The report produced by ICA states that there was a special model used to collect data for the Pine Tree Zone which began with assuming that companies would not locate in Maine but for the Pine Tree Zone Tax exemptions, The description below makes it sound as if the IRR model adds an additional level to the Costs Benefits Model. My reading is that the IRR model replaced the Costs Benefits model in evaluating the Pine Tree Zone tax incentives.
The Economic Development Survey developed for the 2014 and 2016 reviews was used again during this evaluation to obtain information from participating companies on doing business in the State of Maine as well as to collect input values for the Cost Benefit Models (CBM). With Investment Consulting Associates (ICA) Comprehensive Evaluation of State Investment in Economic Development Prepared for Maine DECD much hard work from both DECD and MTI staff, a completion rate of over 90% was obtained for those that replied to the survey request.
…… The IRR model for PTDZ was similar but included a sensitivity factor keyed to the assumption that companies made their decision to locate in Maine based on the “but for” clause in the PTDZ legal agreement. In other words, that if not for the incentive, the project may not have proceeded in Maine. 2017 Report
The IRR model does not negate the results obtained from the cost-benefit model which is the measure used to assess the benefit of the public, a purpose declared in the Pine Tree Zone enabling legislation:
Chapter 206: DEVELOPMENT DISTRICTS: Subchapter 4: PINE TREE DEVELOPMENT ZONES
§5250-H. Findings and declaration of necessity 3. Declaration of public purpose. The Legislature declares that the actions required to assist the implementation of these development programs are a public purpose and that the execution and financing of these programs are a public purpose. [PL 2003, c. 688, Pt. D, §2 (NEW).]
The IRR model is an internal investment model, that does not take into account the benefits to costs to the public, the source of a large part of the investment capital. The ICA Report treats the state as it would a private development corporation investing its own funds and never goes beyond those parameters to where the state is accountable to the public beyond the private corporations that directly receive the benefits.
What is the Internal Rate of Return (IRR)?
The Internal Rate of Return (IRR) is the discount rate that makes the net present value (NPV) of a project zero. In other words, it is the expected compound annual rate of return that will be earned on a project or investment. In the example below, an initial investment of $50 has a 22% IRR. That is equal to earning a 22% compound annual growth rate. corporate finance institute
The DECD testimony is followed by a testimony from Investment Consulting Associates. The testimony states:
“Our survey of companies receiving PTDZ benefits yielded a response of 72% and evaluation of survey results enabled us to evaluate the real results of the program in terms of hiring and financial benefits”
The data provided by the third-party independent report used by the DECD is derived solely from those who receive the tax incentives. The ICA report reads like it is evaluating the Pine Tree Zone Tax incentives in the service of a development corporation's goals, excluding the questions asked by OPEGA relating to the intent of the enabling legislation and benefits and costs to the public.
The Maine Seed Capital Tax Credit permits companies to receive a refundable tax credit worth up to forty percent of their capital investment. A refundable tax credit is one in which the holder is due the value of the credit if the holder does not owe taxes. Tax incentives are instrumental in transforming refundable tax credits into subsidies by reducing the taxes owed up to 100%, The refundable tax becomes a public investment in the means of production owned by a private enterprise.
According to the Pine Tree Zone Tax Credit Guide put out by the Maine Revenue Services in the year 2020 For the first five years, the credit for new QBA in a Tier 1 location is equal to 100% of the tax liability; for the next five years it is equal to 50% of the tax liability.
Chapter 110: FINANCE AUTHORITY OF MAINE
Subchapter 9: MAINE SEED CAPITAL TAX CREDIT PROGRAM
A.......For investments made on or after April 1, 2020, a tax credit certificate may be issued to an investor other than a private venture capital fund in an amount not more than 40% of the amount of cash actually invested in an eligible Maine business in any calendar year. Rules adopted pursuant to this section are routine technical rules as defined in Title 5, chapter 375, subchapter 2-A. [PL 2019, c. 616, Pt. LL, §1 (AMD).]
Since a refundable tax credit becomes a cash payment from the taxpayers on the condition that no taxes are owed, without the Pine Tree tax exemptions, a refundable tax credit may not qualify to be transformed into a subsidy.
In negotiations with private companies, the state trades special corporate benefits, including tax exemptions, for a quantified number of "quality jobs" defined as jobs that pay higher than average wages and benefits for an area. The personal income taxes on the quality job are not tax-exempt and so the personal income taxes paid by the workforces contribute to the pool of public funding used to capitalize the privately owned means of production that employs the worker. Job creation is said to be the public benefit that justifies the entire system, but the term "workforce" is indicative of a business asset.
This system, and ones similar to it, are components of the state's central management of the economy, that has been in place since the seventies, during which time the wealth gap has expanded and housing, either rental or homeownership, has become unaffordable to a widening demographic, resulting in a new popular dialogue today in which we are increasingly hearing about "affordable workforce housing".
The capitalist system favors those who own property, Homeownership is the most basic level of property ownership. The "workforce" is struggling to reach a basic level of ownership as it is taxed to finance privately owned means of production, a higher level of ownership, that can be used to generate further wealth on an ongoing basis.
The qualifications for attaining middle-class status have shifted since the seventies when earning a middle-class income was enough to afford homeownership, or home-rental. A new norm is evolving in which to afford a home, one needs more than earned income, one also needs a passive stream of income and former affordable single-family homes are being replaced with grid housing complexes on smaller plots of land maintained by central management.
In 2017, a section was added to the Pine tree Zones refundable tax credits to include a refund on taxes paid when someone sells personal property to a qualified Pine Tree Zone business, giving Pine Tree Zone businesses an advantage over other potential buyers of the property, Another refund on taxes is given when the transmission or distribution of electricity goes to a qualified Pine Tree Zone business. In times past that was called the state picking and choosing winners and losers, a phrase that has gone out of style.
2. Reimbursement allowed. A reimbursement is allowed as provided in this section for a tax paid pursuant to this Part with respect to:
A. The sale or use of tangible personal property that is physically incorporated in and becomes a permanent part of real property that is owned by or sold to a qualified Pine Tree Development Zone business and that is used directly and primarily by that business in one or more qualified business activities; or [PL 2017, c. 440, §8 (NEW).]
B. The sale or use of tangible personal property and the transmission and distribution of electricity to a qualified Pine Tree Development Zone business that is used directly and primarily in one or more qualified business activities. [PL 2017, c. 440, §8 (NEW).]
What company benefiting from this generosity wouldn’t testify favorably for the continuation of this program? It is from this category of beneficiaries that the data in the Comprehensive Evaluation of Maine’s Research & Development and Economic Development and Incentive Programs, is drawn.
The testimony of Investment Consulting Associates claims to have worked with the Maine Legislature and to have drawn from a much more inclusive body of stakeholders than the OPEGA report, and yet makes no mention of stakeholders outside of the government and the private beneficiaries of the Pine Tree Zone tax incentives, such as the taxpayers who fund the benefits without receiving them.
Some would argue that the rest of the populous receives general welfare benefits but general welfare benefits do not equate with funding economic opportunities and in fact are arguably designed to suppress economic growth, especially of an entrepreneurial nature, in the below the medium income sector.
The ICA testimony continues to say “ The program has helped to bring businesses to Maine, resulting in a net improvement to the economic conditions of the State.“ That is one way of putting it if one believes that a continually increasing wealth divide is what Maine needs. The Pine Tree Zone is used to create corporate welfare cities wherein the tax-payer subsidized income of PTZ employees far exceeds that of the free enterprise economy of surrounding areas, driving up housing costs, which in turn drives existing populations out.
On March 19, 2013, Douglas Ray, Development Program Manager for the Department of Economic and Community Development testified before The Joint Standing Committee on Labor, Commerce, Research, and Economic Development, saying this:
Of the 390 or so businesses participating in the Pine Tree Development Zone Program a vast majority, more than 300 are manufacturers, that’s roughly 80%. These businesses have pledged almost a billion dollars in investment and anticipated payroll of nearly $850 million and 74 hundred jobs.
Taking the figure of $159000 as the costs of incentives per job, as reported in A 2014 Portland Press Herald article by Jessica Hall, and 74 hundred jobs with a payroll of nearly 850 million pertaining to Pine Tree Zone Tax Incentive employees costs the state more than a billion dollars, $1,176,600,000.00 to be exact. Mr. Ray tells that the companies have pledged to invest almost a billion dollars. The average wage calculated on Mr. Ray’s figures is $114,864 annually, more than three times the median income in Maine in 2013.
Following the testimony from Investment Consulting Associates is a testimony from Maine AFL-CIO. This is a testimony in support of the OPEGA report. The AFL-CIO testimony makes the point that businesses are required to hire at least one employee within two years of certification to receive a full package of corporate welfare benefits including discounted utility rates, reimbursements for purchases, sales tax exemptions, and income tax credits. If the business fails to hire one employee, its certification is revoked but it does not have to repay any of the benefits it collected.
The same section has information on how businesses that are in the program that fail to create at least one job and are not a part of the employee tax increment financing (ETIF) expansion can receive assistance that is not proportionate to the number of jobs created. This creates a scenario where Maine is at risk of spending money in the form of forgone tax revenue through sales tax exemption and reimbursement benefits that is not fully offset by positive economic impacts resulting from new jobs. AFL-CIO Testimony
In the light of the above testimony, it raises the question, Are any of the reimbursed purchases used for investments in automation, considering that automation is the direction that “advanced technology” is headed? This would increase the bottom line for a business by reducing the need for expensive human labor. The money saved by the application of corporate welfare benefits could go toward capitalizing on automation and when the corporate welfare benefits end, the company will not need to hire as many employees due to its advanced automation technology,
An alternate scenario is that automation will create new jobs, and learning new skills and updating technology will be a continuous process throughout life, requiring continual capital reinvestments in both technology and skills as the older technology and skills become obsolete. That sounds like a problem for quantum computing to solve, but our question is should the general taxpayer be financing the ownership class in this brave new world, using economic development ideas from the twentieth century?
Also, there is the consideration that for the two years that the company is permitted to be provisionally certified for PTZ tax exemptions, it can apply the exemptions to the Seed Capital Tax Credit, worth 40% of their capital investment.
Title 10: COMMERCE AND TRADE
Part 2: BUILDING AND DEVELOPMENT
Chapter 110: FINANCE AUTHORITY OF MAINE
Subchapter 9: MAINE SEED CAPITAL TAX CREDIT PROGRAM
B. As used in this subsection, unless the context otherwise indicates, an “eligible business” means a business located in the State that:
(1) Is a manufacturer;
(2) Is engaged in the development or application of advanced technologies;
(3) Provides a service that is sold or rendered, or is projected to be sold or rendered, predominantly outside of the State;
(4) Brings capital into the State, as determined by the authority; or
(5) Is certified as a visual media production company under Title 5, section 13090-L. [PL 2009, c. 470, §3 (AMD).] (emphasis mine)
6. Reports. Any business eligible to have investors receive a tax credit under this section must report to the authority, in a manner to be determined by the authority, the following information regarding its activities in the State over the calendar year in which the investment occurred and for such additional years as may be required by the authority:
A. The total amount of private investment received; [PL 2001, c. 642, §10 (NEW); PL 2001, c. 642, §12 (AFF).]
B. The total number of persons employed as of December 31st; [PL 2001, c. 642, §10 (NEW); PL 2001, c. 642, §12 (AFF).]
C. The total numbers of jobs created and retained; [PL 2001, c. 642, §10 (NEW); PL 2001, c. 642, §12 (AFF).]
D. Total annual payroll; and [PL 2001, c. 642, §10 (NEW); PL 2001, c. 642, §12 (AFF).]
The section on jobs requires a report, only.
In 1976, the first enactment under the newly centralized Maine economy was the charter of the Maine Capital Corporation. A review of the MCC’s consistency with its enabling legislation was required in 1984. All agreed that it did not meet the standards of its enabling legislation, but allowed it to continue. The Beldon Hull Daniels report strongly urged that the MCC be made accountable to the State with respect to minimum standards and goals being included in the law, such as the number of new jobs to be created, for investors to qualify for the tax credit, but the Daniels recommendations were ignored.
Like the MCC tax credit, the Maine Seed Capital Tax Credit is refundable. It is required that job data be reported but there is no required minimum to meet.
Following the testimony of the AFL-CIO is a testimony from Maine & Co protesting OPEGA”s claim that it did not have access to adequate data. Maine & Co asserts that OPEGA had adequate data, which means all the data pertaining to companies that directly benefit from the Pine Tree Zone tax exemptions. What else do we need to know?
OPEGA is very clear that they are not evaluating the performance of the program. Here is a list of items in the report that OPEGA reminds the reader that they did not do:
• They did not collect data.
• They did not speak to most of the stakeholders marketing the program.
• They did not speak to businesses that have used the program.
• They did not speak to people that have benefited from being hired by companies that use the program.
Even though OPEGA clearly and explicitly acknowledges these limitations in their analysis, it has not stopped people outside of the economic development community from inferring inaccurate conclusions. - Testimony of Maine & Co:
By “economic development community”, Maine and Company mean those who benefit from the tax exemptions, exclusively, failing to acknowledge that there is a much larger economic development community inclusive of those who pay taxes that are used for corporate welfare programs without themselves benefiting from those programs. Maine and Company then assert that it knows for a fact that the data is there because it worked with ICA and sat on the legislative steering committee, but the testimony from ICA states that it got its data solely from the insiders club of the public-private state- sending its survey only to those who received the benefits and so it is no surprise that the majority of testimonies in the congressional report are from the same demographic from which ICA derived its conclusions.
Rep Ryan Fecteau, the Maine AFL-CIO, and the Maine Center for Economic Policy all supported OPEGA’s conclusions but Maine’s Pine Tree Zone tax exemptions were extended three more years.
Governor LePage did not sign the Pine Tree Zone Extension Act because LePage wanted the tax exemptions to be extended for five years. The three-year extension places the end for new applications at December 31, 2021, during Governor Mill’s term, Five years would have put it in the next Governor’s term. LePage has announced that he is running as Maine’s first third term Governor.
The system never questions itself, it just keeps on rolling, adapting to its own wake to its own advantage and the wealth divide continues to expand. We do not need granular data to confirm the obvious.
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