Maine's Economy -- For BETR or For Worse

By Peter G. Vigue, President-Cianbro Corporation

…unfortunately, the 122nd Maine State Legislature and the Governor chose the latter during the first regular session of the 122nd Maine State Legislature.

Employers strongly believe that an inconsistent regulatory environment and high state and local taxes are the most serious roadblocks to economic development and job creation. The first regular session further contributed to what many businesses already consider to be Maine's unpredictable regulatory environment and unacceptable tax environment by changing the rules for the Business Equipment Tax Reimbursement Program (BETR) midcourse.

BETR is an important tax-relief tool that many employers were depending on to justify investments prior to this session's changes. Unfortunately, the Legislature and the Governor cut the BETR Program by millions for all participants and also excluded an entire sector of the economy from any participation by changing the rules to exclude many retail operations from the program. Ironically, at the beginning of the session there was an apparent agreement between the Governor, many legislators, and Maine employers to eliminate the tax on business equipment altogether, a sound, long-term strategy to encourage economic growth. In the end, however, our policymakers chose the short term expediency of reducing BETR and raising taxes-thus adding to our inconsistent regulatory environment and unacceptable tax burden.

Most states have long realized that when employers invest in new equipment, they are investing in jobs. Many states do not tax these investments at all; others tax them at much lower rates than Maine. Maine employers have used the BETR Program to reduce the cost of investing in their ability to compete regionally, nationally, and globally. All employers must invest in their ability to compete; those that do not make these investments eventually fail and the associated jobs disappear.

In the report "Maine's Investment Imperative" authored by former Maine State Economist, Laurie G. Lachance, taxing these investments is described this way: "The fact that most states either do not tax production machinery and equipment or tax it at much lower levels than does Maine puts Maine businesses, particularly manufacturing entities that tend to have much higher capital expenditures, at a distinct disadvantage."

In truth, Maine should not tax capital investment at all. BETR, an imperfect fix for poor tax policy, nonetheless helped offset the burden of high taxes and made investment in job creation more palatable for business. By making it less valuable our policymakers have taken a significant economic step backwards.

Since the inception of BETR in 1995, many Maine employers have successfully participated in the program. For the state's fiscal year ending June 30, 2005, 647 investments in Maine's economy were reimbursed at less than $1,000 each. Clearly, while the larger reimbursements make the news, many participants in the BETR program are small businesses. While small businesses are critical to Maine's economy, larger employers are just as important-all these investments, large and small, support jobs. The top 20 participants in the BETR program for 2004-2005 represent approximately 39,000 jobs and when you use standard economic multipliers for the impact those jobs have on the economy, more than 100,000 Maine jobs are supported by those 20 participants. The BETR Program also cuts across a broad spectrum of Maine's economy. More than 340 different industry groups participated in 2004-2005 alone, from aquaculture to computer chips. Clearly the BETR Program had a positive impact on Maine's economy.

Although the BETR Program is good for jobs and a strong economy, some state legislators continually attack BETR creating an ongoing economic environment of uncertainty in Maine. Former Governor King in his last State of the State address recognized the problem and made these insightful comments:

"By and large, our businesses are making it, but it's close; and this is the message it's close, it's fragile; it's close because the central economic reality of our times -- the globalization of the economy -- carries with it great opportunity but also great peril. Great opportunity because markets around the nation and the world are open to us for the first time, an antidote to the disadvantage dealt us by our geography; but great peril as well because the competition is so intense, competition coming from corners of the globe we'd barely heard of a dozen or so years ago. …And let me tell you about government support of business. In Maine, we have provided the business equipment tax reimbursement program to level the playing field with other states that had the sense to repeal personal property taxes on machinery and equipment years ago (emphasis added). Unfortunately funding this program is often contentious with lots of grumbling about corporate welfare and the like. I've already started to hear it this session. Meanwhile, places like China and the Czech Republic are directly underwriting a substantial part of the capital cost of new factories and taking aim at some of our most important and best paying jobs, like paper, computer chips, and software.

"…we can argue forever the niceties of government support of business, but sooner or later, we have to face the reality of the world we live in -- and decide whether we want to have a diverse economy which includes manufacturing or whether we want to be a one-season Bermuda.

"…it's not just about having the right policies for a few years. Consistency and predictability matter too. ...One risk no one likes to take in this life is that the rules are going to change in the middle of the game." (State of the State Address January 22, 2002)

Former Governor Angus King is not the only Governor to speak out against taxes on capital investment and to support the BETR program. In the same year after taking over the reigns of state government from King, Governor John Baldacci stated:

"Maine is one of only a few states in the northeast that imposes a personal-property tax on machinery and equipment. This puts us at a serious disadvantage in attracting new business or new investment. BETR was designed to level the playing field, and it works." (Governor John Baldacci-Budget Address, February 5, 2002)

"We must...eliminate the personal-property tax on business equipment." (Portland Phoenix, November 1, 2002)

Maine employers are clearly aware of these long-standing problems with the state's economic polices; they are also acutely aware of the need to improve Maine's economic policies and to have consistent regulations. In MERI's 2005 Senior Management Survey (see www.fixmaine.com for all the Survey results), when asked:

"Do you believe that Maine's economic policies provide competitive advantages to Maine businesses relative to other states?" 85% said no. "When it comes to state laws and programs affecting business, would you describe these laws and programs as:" 83% answered "Somewhat or Very Inconsistent & Unfair"

And employers don't see the Legislature or the Governor helping them or focused on improving Maine's business climate. When asked: "In your experience, how responsive are Maine state legislators to the needs of business people like yourself?" 75% answered "Unresponsive" "Do you agree or disagree: Maine state legislature understands the role of business in Maine's economy?" 79% "Disagreed" and of that group 40% "Strongly Disagreed" "How well do you believe Maine's state legislators understand your company's needs when it comes to state policies?" 83% said "Barely Knowledgeable" or "No Idea"

The Executive Branch did not fare much better. When asked: "In your experience, how responsive is the current Administration (Governor and Governor's Staff)?" 67% said "Unresponsive" and of those 31% said "Very Unresponsive" "How responsive have state agencies been to the needs of your business?" 58% reported "Unresponsive"

Changing the BETR Program midcourse and reducing its value was not a good economic choice for the state to make. However, the more serious issues facing Maine are the lack of a clearly articulated vision for Maine's economic future, and a long-term economic plan that businesses understand and can depend on being executed with consistency.

If Maine is to turn its economic ship-of-state around and set a course for better economic waters, it certainly won't be by doing the same things and expecting different results. It won't be achieved by complaining about government. Nor will real change come from leaving the challenge to politicians. There are lots of data, years of data-results, clearly showing that what we have been doing isn't working. Fixing the economy will require that Maine employers become engaged in economic policymaking like never before. We can't simply say we are too busy and we can't merely hire someone else to fix things. Real change will take making participation in economic policymaking part of our business plans; part of what we do in our busy lives. Maine's employers must be full partners in creating a clear vision and plan for Maine's economic future. The results could be revolutionary. The alternative is more of the same.

A Maine reporter once responded to a question about Maine's long history of poor economic performance by saying: "…what is-is." Our failure as a business community to seize the moment may make that reporter prophetic, what is-is simply what will always be. Your choice.