Pine Tree Zones: Do Tax Incentives Work?

from Maine Townsman, July 2004)
By Lee Burnett, Freelance Writer

    In May,  a Pennsylvania company in the final stages of a worldwide search for the best location to invest $60 million in a state-of-the-art sawmill was offered a package of tax breaks to build the sawmill in Greenville. The goodies included an 80 percent rebate on all employees’ state income tax withholdings, an exemption from paying sales tax to build and equip a plant, and a full refund of corporate income taxes for the first five years and a 50 percent refund for the next five years. Total value of the tax breaks is unknown outside the company but the rebate on the payroll tax alone is worth at least $10.5 million over ten years if the company fulfills its pledge to hire 100 employees at an average wage of $16 per hour.

       The deal was available because parts of Greenville are designated Pine Tree Development Zones, virtual tax-free zones established by the Baldacci administration and touted as essential to bringing jobs to the neediest parts of Maine.

       What happened next might make you wonder if the tail is wagging the dog.

       Despite the enticements, SMIS Group of West Chester, Pa. decided against Greenville. Instead, it landed in a place with no industrial recruiters, no Pine Tree Zone, not much of anything but trees: Sapling Township, ten miles away on the west shore of Moosehead Lake. The Sapling site has access to rail transportation and to three-phase power — same as in Greenville, but it’s big draw is elbow room  — a necessity for a sprawling 90-acre mill complex. In this case, location trumped tax incentives. But there’s more. After the location was announced, the state created a Pine Tree Zone just for SMIS Group. This was reported in the Bangor Daily News as no big deal.

       “It worked out for everybody,” said Jim Batey, economic development director for Somerset County.

       Except aren’t tax incentives supposed to be the catalyst for job creation not freebies handed out by the welcome wagon after the fact?

       Using tax incentives to lure business to economically distressed communities is a well-worn idea that harkens back more than 20 years to U.S. Rep. Jack Kemp, who later became Bob Dole’s vice presidential running mate in 1996. Though their effectiveness has been shown to be dubious, states feel left behind if they don’t have them in their economic development tool kit. At least 36 states have jumped on the “enterprise zone” bandwagon and recent estimates have pegged the overall value of tax incentives at $15 to $16 billion at the state level (nationwide) and as big or bigger at the local level (nationwide). The price tag of so-called “trophy projects” has increased exponentially.

       With large automobile plants, for instance, states have upped the ante substantially. In 1980, Tennessee offered Nissan $11,000 per job created, a large sum at the time. Just 13 years later, Alabama offered between $150,000 and $200,000 per job for a new Mercedes-Benz plant, according to Corporate for Enterprise Development, an incentives reform advocacy group.

       Do they work and are taxpayers getting their money’s worth?

       First, let’s revisit Greenville.

       The Baldacci administration maintains that the tax incentive package was always crucial to SMIS Group’s decision to come to Maine. Early on, SMIS shared with Maine the incentives that New York and Vermont were offering to court the company, explained Jack Cashman, Maine’s commissioner of economic development. “We matched what New York offered, what we had was better,” Cashman said. “Then they asked us to create a Pine Tree Zone in Sapling Township and we said, ‘sure.’ ... Did Pine Tree Zones put us over the edge? I believe they did.”

       Cashman said he did not mind doing SMIS’s bidding because the deadline for amending the location of zones had not yet arrived and because the location was essentially the same as Greenville. “It’s only six or eight miles up the road. We wanted jobs up in that area and the jobs will be filled by the same people. It’s not like they moved halfway across the state.”

       A different view comes from John Simko, Greenville’s town manager, who put together Greenville’s package and is probably as close to SMIS’s decision making as any outsider.

       When asked which was a bigger draw — the Maine woods or the Pine Tree Zones, Simko responded without hesitation.”Absolutely, the first.” It was his impression that SMIS “had narrowed down to this part of Maine” before they started talking tax breaks.

       “In this particular case, it’s my personal opinion, the most important factor was the place, the location... Whether Pine Tree Zones was important or not, let me say they had three different sites. The first two, we made sure were located in Pine Tree Zones. They jumped to the other site that didn’t have that. At the same time, people moved quickly to add that [Pine Tree Zone designation].”

       Don’t count Simko as a disgruntled loser. Sure, he’s disappointed the town is missing out on $1.2 million in property tax payments had the sawmill been built in Greenville. But Simko notes “we’ll have payroll flowing through here” and he remains hopeful about luring a spin-off business, such as a wood composites company. SMIS’s investment is  a strong vote of confidence in the economic future of the Maine woods, no small thing on the heels of so many paper mill closings and downsizings, he said.

       “At the end of the day, that’s what’s important,” said Simko.

Do they work?

       Since April, 18 companies pledging to hire a total of at least 1,255 full-time and 29 part-time employees have been certified through June to receive tax breaks under the Pine Tree Development Zones program, according to the Department of Economic and Community Development.

       Another 72 companies have applied for tax breaks.

       In some people’s minds, the growing sign-up sheet is all the proof they need that the program works.

       “These are the first seeds, these are jobs that were not there earlier,” said State Rep. Nancy Sullivan, D-Biddeford, co-sponsor of the governor’s legislation. “There’s no guarantee it will work; but if people want it, they will sign up. If nobody comes to a Pine Tree Zone, then it doesn’t really cost us anything.”

       In other words, if you offer a tax break and businesses take it, that means they need it?

       To be eligible for the tax break, companies must certify in writing that “but for” the tax break they would not be expanding. But that’s a pretty easy pledge to make when no documentation is required. The overall upswing in the economy plays a big factor in all the decisions, and one shrewd business recruitment specialist observed, “if the Pine Tree Zones were rolled out two years ago, I don’t think we would be seeing the same level of activity.”

       Twelve hundred new jobs announced since April may sounds like a big deal. But consider this: overall, Maine’s economy added 13,400 non-farm jobs between April and May, according to Maine’s Department of Labor. That reflected improving conditions in the general economy as well as employers gearing up for the summer season. The employment gains were in leisure and hospitality services, construction, retail trade and professional and business services. Maine’s seasonally adjusted unemployment rate dipped from 4.2 to 4.1 during the month.

Do they work for the most job hungry parts of the state?

       Greenville Town Manager Simko says the program’s purpose to help the neediest parts of the state has been compromised by the sheer number of zones. “If you’ve got eight counties with these zones and each zone has up to 20 non-contiguous sites ... companies can go wherever they want... So, where’s the incentive to go to an under-served area?” he asks.

       “We’re ending up with so many zones that the actual incentive to invest in rural Maine is fairly limited,” said Simko.

       A state map with all the eligible zones looks like multi-colored chicken pox -— 104 zones in all.

       That point is echoed by Kit St. John of the Maine Center for Economic Policy. “The program is so broad that it permits tax advantages to go to companies ... whether or not the [host] community is disadvantaged and needs special incentives.” He was particularly critical of including Lewiston and Sanford, both of which may lag compared to their neighbors, but are well-positioned. “That may seem harsh and I don’t mean to condemn them to an economic backwater, but very likely they will do well without any specific incentives.”

Academic research

       Academics maintain that tax incentives discriminate against businesses outside targeted zones, they distort the tax structure and they waste precious state resources.

       “From a national point of view, they’re a total waste of money,” said Bill Schweke, research director for the Corporation for Enterprise Development. “These companies don’t need the money and the tax incentives usually subsidize decisions that have already been made,” he said. Research shows that companies would have come with or without the tax breaks in 70 percent of the cases, he said. “If the incentives work, they don’t work for long as other states match offers. And then the state has to ante up again.”

       “You’re hard pressed to find another area of economic literature that is more negative,” he said. “All economists hate them. Liberal, conservative, middle of the road, they hate them more than I do.”

       Schweke’s organization acknowledges the competitive atmosphere and political pressure driving states to adopt tax incentives. “There’s no doubt, states and local governments feel forced to do these things,” Schweke said. Bowing to that reality, his organization is pushing to reform tax breaks, requiring more accountability and public benefit. 

       He said Maine’s accountability mechanisms are “above average,” particularly at a time when many states are rolling back even modest accountability mechanisms.  Tax breaks are so lavish in some states that companies can’t use all the tax breaks they are awarded and have been allowed to “carry forward” tax credits to be used to offset other costs. It’s not unthinkable that companies will next begin lobbying to allow tax breaks to be sold and traded, he said.

       In contrast, Maine companies are eligible for Pine Tree Zone benefits only if they pay more than the prevailing wage in the region, offer health benefits and a retirement plan. Companies relocating from within the state are ineligible. (“We’re not trying to attract minimum-wage, no-benefit jobs,” said Cashman.) The companies must also be operating in one of four highest priority sectors of the economy — financial services, manufacturing, advanced technologies for forestry and agriculture, aquaculture and marine technology, biotechnology, composites materials technology, environmental technology, information technology, and precision manufacturing technology.

       Schweke is not willing to give Maine too much credit. If the goal is job creation why not subsidize wages, which he says is more efficient at creating jobs than subsidizing capital investments. Minnesota tried such an approach to get out of a recession in 1983, offering employers up to $4 an hour in wage subsidies and $1 an hour in benefits for 26 weeks for hiring people who have been state residents for at least one month, are unemployed, and are currently ineligible for unemployment insurance and workers compensation. It created over 18,000 permanent jobs (more than was projected) at a net cost per permanent job of around $3,100.

       The most thorough research on tax incentives is a book “Enterprise Zones: Have They Worked?” published in 2002 by the W.E. Upjohn Institute for Employment Research and co-authored by University of Iowa professors Peter Fisher and Alan Peters. They surveyed 75 enterprise zones in 13 states and concluded that tax incentives have been too small to effect siting decisions because labor typically costs 14 times more than taxes costs. Peters and Fisher found that the typical incentive package reduces taxes by 23 percent and in samples cities produced less than a 10 percent increase in flow of jobs to the state. That translates into a large price tag for every job. The authors found that government would reap $18,000 in new taxes over a 20-year period for each job that was induced by tax breaks to move to the state, but that government would lose $6,600 over the same period in tax breaks awarded unnecessarily to companies that would have come anyway. The net effect was a loss in state and local revenue of  $59,000 for each job induced by the incentives.

       Fisher says he doesn’t buy the argument that tax incentives are necessary in a competitive world.

       “That argument works only if incentives work in the first place,” Fisher said in an interview.  “Let everyone else waste their money. Take your money and put it in education and infrastructure.”

       Even some national leaders in the tax incentive camp concede that the results to date have been lackluster.

       “Over time, cities and states that implemented enterprise zone policies realized that simply offering tax relief by itself does not result in significant new investment,” Richard Cowden, executive director of the American Association of Enterprise Zones, wrote on The Empowerment Network Website. TEN is a conservative policy group pushing for deeper tax breaks.

       Cashman of Maine’s Department of Economic and Community Development expresses ambivalence himself toward tax incentives, but he also disses the critical research to date.

       “You know as well as I do that results of research tend to follow what the philosophy of those doing the study,” he said.

       Cashman says tax incentives are less important than investments in education and infrastructure, but they are a necessary evil. “If nobody was doing them, would we be better off? Absolutely. ... But it’s part of the mix. You’ve got to be doing it all.”

       “Bottom line: you have to be investing in people. If you don’t, all the Pine Tree Zones won’t save you.”

       Maine’s program is too young to have a track record and Cashman is not willing to concede that the cost per job will prove excessive. “In the long run, that story has yet to be written,” he said. “When you talk about the last two and a half months, we’ve had over 90 companies interested and 40-45 applications approved. If it helps spread the wealth a little better, fine. It’s working out great.”

       Pine Tree Development zones don’t look like they’ll cost taxpayers too much  at least initially. Maine Revenue Services has projected the first year will cost Maine about $500,000 in lost revenue, and in exchange the state will gain $30 million in new investment and 223 new jobs.  That comes to $2,200 per job. But those projections are based almost entirely on tax breaks companies receive initially for building and equipping a plant. Over time, the costs ramp up as they take advantage of tax breaks for employee withholding and corporate income tax, said Michael Allen of Maine Revenue Services. “I’m sure it’s going to escalate,” he said.

CONCLUSION

       Pine Tree Zones look like they’re here to stay. If nothing else, they demonstrate a governor eager to roll up his sleeves and do something. The  Maine Heritage Policy Center, for example, far prefers strategies that improve the business climate for all rather than targeted tax incentives for some businesses. Yet, Roy Lenardson, the policy director for the conservative think tank and policy group, said he’s willing to cut the governor some slack because the governor is “trying to help business.”  Investments in the overall business climate, or education or infrastructure may matter the more, but they take time. Furthermore, it’s far more difficult to tie a business location decision to higher teacher salaries, for example. Politicians are elected to deliver and Pine Tree Zones provide a score sheet, however debatable the scoring system.

       As Cashman says: “you can’t walk into office January 1 and have these things  [investment in a better business climate] done January 15,” he said. “You’re not going to get a reduction in the overall tax burden done in a day.

 

Companies Taking Advantage of Pine Tree Development Zones Tax Incentives

       Eighteen companies pledging to hire a total of at least 1,255 full-time and 29 part-time employees have been certified through June to receive tax breaks under the Pine Tree Development Zones program, according to the office of Economic and Community Development.

       Another 78 companies have applied for tax breaks.

       The companies to receive tax breaks to date are:

Franklin ScoreHealth, Inc., Wilton - 14 full-time and 4 part-time employees

SBK Consulting, LLC, Orono- 2 full-time and 5 part-time employees

Knight-Celotex, fiberboard, Lisbon Falls - 30 full-time employees

Robbins Lumber, Inc., lumber, Searsmont - 4 full-time employees

Safe Handling, Inc., bulk loading, warehousing and transportation, Auburn- 50 full-time employees

Holo-Dek Gaming, Inc., video Sanford - 40 full-time and 5 part-time employees

Pleasant River Lumber Company, lumber, Dover Foxcroft- 6 full-time employees

Walpole Woodworkers, Inc., wood products, Pittsfield - 40 full-time employees

Sterilogic Waste Systems, Inc., environmental technology/medical waste,  Pittsfield - 15 full-time employees

Daaquam Maine, Inc., lumber, Milford- 120 full-time and 15 part-time employees

Stainless Food Service Manufacturing, commercial kitchen equipment, Caribou - 29 full-time employees

Tex Tech Industries, felt for tennis balls, Monmouth - 55 full-time employees

Waterford Homes, manufactured housing, Waterford - 35-40 full-time employees

Brims Ness Corporation, sensor technology for drinking water, Millinocket - 420 full-time employees

Rynel, Inc., foam products, Gardiner  5-8 full-time employees

Maine Mutual Group, insurance, Presque Isle- 10 full-time employees

Correct Building Products, composite decking, Biddeford - 30 full-time employees

Lincoln Paper and Tissue, paper products, Lincoln - 350 full-time employees