Opportunity or red herring?

The debate about the “Two Maines” – the economic gulf between north and south – has been renewed with the governor’s inaugural pledge to make bridging that gulf a top priority. Sadly, the debate often resembles a dialogue of the deaf.

On one side are voices from northern and eastern Maine proclaiming that Maine is a terrible place to do business. No sane enterprise would ever invest in this state; our business climate (read “taxes”) makes it too hard to earn a dollar here. These people appear never to have traveled to booming Belfast, let alone prosperous Portland.

At the other extreme are some who would blame northern Maine’s economic problems on northern Mainers, on those who cling to old and unprofitable ways of life in the woods, on farms or in mills and who constantly seek concessions (or casinos) from Augusta. Southern Mainers say, “Let them move to Portland, join the new economy and make way for a national park!” Such views are expressed by people who have spent little time appreciating Maine’s rural heritage in Millinocket, Dover- Foxcroft or Calais.

The Governor’s Pine Tree Zones proposal may be a new start for the “Other Maine,” or it may not.

The initial draft of March 21 contained a full package of exemptions for taxes on income, property, equipment, payroll and sales of materials used in construction. All such taxes would be waived for qualified investments that would not be made except for the inducement of Pine Tree tax shelters. However, the draft bill offered nothing beyond state tax breaks; and it was studiously vague on where these zones might be located. Rules would later be written, we were assured, that would take care of the unknowns.

There are two major problems with the “tax-only” approach. First, businesses in Portland and Millinocket both pay the same taxes now. It is clear that something other than taxes is responsible for the difference between their economies. Call it locational advantage. Portland can compete for new investment with low-tax New Hampshire, while Millinocket cannot. Even if we could give Millinocket the tax-free structure of the Cayman Islands, it would still have locational disadvantages, not least the fact that we expect all businesses to be good employers and environmentally compliant.

The second major drawback with a tax-only approach is that, without statutory standards for applying them, they quickly become the expectation for every expanding business in the state. Without standards, a good lawyer can get a tax-free zone anywhere, say, Portland’s outer Congress Street. If that happens, Millinocket is certainly no better off; and the state is much the worse because we lose tax revenue to pay for genuine needs and services. Seasoned legislators roll their eyes when they hear the familiar “slippery slope” argument, but a “race to the bottom” is just what we will have if the new zones lack objective criteria.

Proponents argue that the bill will cost nothing because of its “but for” clause, a condition that tax concessions in a Pine Tree Zone may be extended only to a business that would not come here without them. To satisfy this condition, presumably nothing more is required than the CEO’s statement to that effect. If Maine’s commissioner of Economic and Community Development accepts that evidence (and how could he not), that is the end of it. The standard is subjective, untrustworthy and self-serving.

Equally important is the question of whether the business might still agree to invest with the benefit of fewer than all concessions available. If the business would come anyway under an agreement to refund only, say, half the withholding taxes, then the state is losing out by extending additional concessions beyond those necessary to catalyze the new investment.

There is no provision in the bill to grant anything but all of the concessions. Any qualifying business that locates in the zone gets the full suit.

Every new business induced to invest also expands the BETR-TIF double-dip. Each use of the double-dip costs the state out-of-pocket money, sometimes quite a lot of money as we have seen with Bath Iron Works, National Semiconductor and Inter-national Paper.

As a practical matter, if these Pine Tree Zones become the new minimum standard for doing business in Maine, no one will come without expecting one. If our established businesses like L.L. Bean and MBNA don’t get these benefits, they would be justified, based on pique alone, in refusing to expand here.

In short, giveaways without standards earn us no points among business people. They will accept what we give but won’t respect us in the morning.

This does not mean that tax incentives are unimportant. But they must be applied with a scalpel, not an ax, or we will face the kind of embarrassment created by the BETR-TIF double-dip.

Aside from taxes, there are other things we should do to address the locational disadvantages of northern and eastern Maine. Here are some examples:

. New investors in Maine should not pay for the costs of our bad electric power decisions of past decades, the so-called “stranded costs” portion of our electric bills. For investments that are genuinely new, it would not be cost-shifting to exempt such businesses fully from such energy surcharges.

. New investors in many states are offered free or reduced costs for training skilled workers. The governor’s initiative to create community college centers offers a great opportunity to focus further education on business needs. We could offer free skills training for specified levels of investment and new hiring in Pine Tree Zones.

. Many states and cities offer buildings that are ready-built and tailor-made for the types of business they seek to attract. Perhaps the Finance Authority of Maine (FAME) or another state agency should enter the property development business in those regions where the degree of risk for a “spec” building (and therefore the cost to tenants) is higher than a for-profit developer might undertake.

The governor’s proposal to create Pine Tree Zones for troubled areas of Maine is an opportunity for a fresh start in economic development. Let’s begin with appropriate tax incentives; but well thought-out, nontax inducements may be more effective in attracting business with less risk to Maine’s fiscal stability. Let’s make Pine Tree Zones a big success, not for political reasons, but to prevent a failed initiative from becoming a cruel hoax on northern Maine.

Sen. Chris Hall, D-Bristol, serves on the Business and Economic Development Committee and chairs the Utilities and Energy Committee. Rep. Peter Mills, R-Cornville, a former four-term senator, is a Republican on the Appropriations Committee.