Business climate deception

Every other week, one can find another news article arguing that Maine has a highly unfavorable business climate. The data to support this claim are often based almost entirely on statistics from the Tax Foundation and other anti-tax organizations. They typically define a state’s economic well-being primarily on the basis of a state’s “business climate,” especially as measured by the state’s “tax burden.”

Advocates of this narrow, tax-oriented business climate perspective often use misleading data to support their agenda. The Tax Foundation’s problematic methods and data have also been sharply criticized by other competent analysts, such as the Maine Center for Economic Policy (MECEP). Unfortunately, such continual but questionable claims about Maine’s tax burden are ultimately damaging to the state and our economy, by perpetuating an image of a highly burdensome tax climate for businesses which is not well supported.

Indeed, while some state government policy statements also bemoan Maine’s tax burden as a major obstacle, it is interesting to note that both Maine’s own Department of Economic and Community Development and a private pro-business Web site, Maine & Company, emphasize the positive economic environment in Maine for business.

At a recent (Jan. 13) MECEP conference on Maine’s business climate, noted Boston economist Robert Tannenwald pointed out that business climate analyses of a state’s “tax burden” tend to greatly overstate the importance of taxes in business decisions. In his analysis of what factors drive business location decisions, he said that while taxes do matter more than they used to, in most cases they don’t matter very much. There is “no credible consistent empirical evidence that they matter a lot,” he argued. Other elements are also very critical factors for business decisions, including “spending on public services of interest to business,” (e.g., public safety and infrastructure), a highly educated skilled labor force, and the costs of labor, energy and transportation.

Furthermore, the obsession with tax burdens by anti-tax organizations often leaves out many of the other critical dimensions relevant to economic well-being, such as adequate wages, decent benefits, entrepreneurial and infrastructure support for small businesses, and the cost of health care.

Even more importantly, the tax burden concept itself is intrinsically a loaded term, implying that taxes are inherently negative. This way of thinking conveniently ignores the fundamental fact that taxes, although sometimes onerous and sometimes unfair, are also the primary source of revenue which governments must have in order to provide necessary services and infrastructure if an economy is to function at all. Whether a given tax structure is fair or not is a different, although critically important, question.

In an alternative analysis of Maine’s economy, the Corporation for Enterprise Development (CFED) includes a broad array of 68 critical factors in its annual Development Report Card on the States. (See their most recent report, released Jan. 26.) The CFED’s consistent findings on economic development emphasize the need for states to invest in their development capacity (e.g., education, training and infrastructure) rather than offering incentives for corporate location in state “bidding wars.” The Maine Center for Economic Policy also provides extensive information on issues affecting Maine’s economy, such as the need for tax reform, livable wages, and the crisis in health care costs, which is hurting the state’s small business sector.

It is also important to take a closer look at the benefits and outcomes of taxpayer-funded incentive programs for state and local economic development programs in Maine. For example, the 2004 outcomes data on Maine’s Tax Increment Financing (TIF) and Employment Tax Increment Financing (ETIF) programs are quite revealing. One crucial question concerning corporate tax breaks and economic development is this: to what extent have the largest recipients of TIF and ETIF programs shown results that clearly benefit the public, such as job creation and training investments?

The “2004 Agency Report” from Maine’s Department of Economic and Community Development shows that some of the state’s largest employers are the primary recipients of such economic incentives. Out of the 18 companies receiving a collective total of $1,480,628 in state ETIF’s, only eight companies showed a net gain of jobs, with a total of 313 jobs gained and 126 jobs lost among all 18 firms.

Even more provocative are the results from the top 10 companies receiving more than $1 million in municipal TIF money in 2004. Out of these 10 companies, receiving collectively nearly $20 million in public tax incentives, only ONE company reported any jobs created at all.

Another company did not report its data as required by state law. And six companies showed a net job loss, ranging from a loss of 18 jobs to a huge loss of almost 450 jobs at the state’s largest private manufacturing employer, which was also the recipient of the largest TIF – $4.97 million. While these data may reflect in part the challenges faced by the manufacturing sector in Maine, these findings do raise the issue of whether such incentives are the wisest use of taxpayer money.

To conclude, it is critical to have a wide range of valid indicators or measures of economic well-being, because sound policy must be based on sound analysis. There is an urgent need for state policymakers and the public to become familiar with more broadly based information about the state’s economy, rather than simply accepting the “tax burden” analyses of discredited sources such as the Tax Foundation.

If the primary problem in Maine’s economy is framed as that of an “unfriendly” business climate or a large “tax burden,” the solutions offered are likely to be in the form of reduced taxes and more questionable corporate incentives. Who will be the primary beneficiaries of such policies? Experience has shown that what benefits the largest corporations does not always benefit the rest of us. Instead, our focus should be on having a highly skilled and educated workforce, well-paying jobs that can support families, and an adequately funded infrastructure, as a solid foundation for our continued economic well-being and for effective, sustainable economic development.

For more information on Maine’s Business Climate, see the recent BLE briefing paper, “What Counts and Who’s Counting”, at: http://dll.umaine.edu/ble/

The CFED’s most recent report can be accessed from: http://www.cfed.org/home.m

Valerie J. Carter, Ph.D., research associate, and William C. Murphy, interim director, are staff members of the University of Maine’s Bureau of Labor Education. BLE staff Jane Crouch and Gary McGrane also assisted in writing this commentary. These views do not

necessarily reflect the position of the University of Maine or the University of Maine System.