AUGUSTA – One of the state’s leading business advocates told a legislative panel Monday the future of Maine’s paper industry could hinge on the adoption of Gov. John E. Baldacci’s tax reform plan.

Town officials countered that lost tax revenues from exempting business equipment could place “unreasonable burdens” on already strapped communities.

Jack Cashman, commissioner of the state Department of Economic and Community Development, cut through the complexities of the administration’s tax relief proposal during a presentation to the Taxation Committee. Cashman’s message was clear: If businesses such as Maine’s paper companies are forced to cope with state tax policies that discourage investment, they will invest elsewhere.

“We have been perceived for many years by people who make the decisions on where money is invested as a state where money shouldn’t be spent,” he said. “There haven’t been enough investments in the pulp and paper industry to keep that industry strong. We have four paper companies looking at major investments in this state right now. If we get two of them to make those investments, it will be two more than we’ve had in the last 10 years.”

As paper companies weigh the investment of as much as $500 million for a state-of-the-art papermaking machine, Cashman said the prospect of “paying a 20 mill or 25 mill tax on their investment can make the difference over where a company chooses to place its assets.”

“Elimination of the [business equipment] tax is the next logical step,” he said. “If heavy industries don’t have to pay it in another state, it makes a big difference over where they put their money.”

The panel spent the entire afternoon conducting a public hearing on LD 1660, the governor’s plan to reduce income taxes for all Mainers by 2006 and to remove 40,000 low-income residents from the tax rolls for tax year 2005. Although reducing the maximum percentage rates for the state’s four tax brackets represents half of the governor’s proposal, nearly all of the discussion at Monday’s hearing focused on the long-term elimination of the Business Equipment Tax Reimbursement program.

The state now has about $160 million set aside to reimburse businesses for taxes assessed by municipalities on items ranging from office equipment to papermaking machines. Businesses now are reimbursed for those taxes at 100 percent, but the program continually comes under fire by some groups that feel it is too costly and provides a disproportionate advantage to big businesses.

In an effort to end the disputes over BETR funding, which sends tremors of uncertainty throughout the business community every two years, Baldacci wants the state to eliminate the tax, which is also perceived as an anti-business policy outside Maine. Under the governor’s plan, business equipment that would qualify for BETR would be tax-exempt if it were put into service on or after April 1, 2007.

Martha Freeman, executive director of the Maine State Planning Office, told lawmakers that the state would reimburse municipalities for 75 percent of the revenues lost through the exemption for the first two years after 2007 and then 50 percent thereafter.

According to Jim Good, a tax attorney for the Maine Pulp and Paper Association, the BETR tax would be eliminated over time as taxable equipment would be replaced by newer tax-exempt equipment.

“It will be quite a number of years out, but we will have had a complete replacement of current taxable equipment with exempt equipment as companies reinvest,” Good said. “For heavy industries like a paper mill, it will probably be 30 years before the existing taxable investment gets replaced with new tax-exempt investment, giving the municipality plenty of time to slowly adjust to this phase-in.”

Numerous representatives of the paper industry were on hand to support the bill, as was Dana Connors, president of the Maine State Chamber of Commerce, who said Maine faces competition in the business and manufacturing sector from other states and other countries.

“In a word, it is critical that we win new capital investment for existing businesses and for the emerging economy of tomorrow,” he said. “If we miss out on investment dollars, we diminish our economic prospects. It’s a competition we can’t afford to lose.”

But opponents such as Bill Bridgeo said LD 1660’s impact on the BETR program would harm the state’s larger cities and surrounding communities. Bridgeo, Augusta’s city manager and chairman of the Maine Service Center Coalition, said the bill would drain communities that rely heavily on business taxes and ignite spin-off effects on county and school district budgets that would “ultimately impact even the most rural of Maine’s communities.”

“Few in our coalition would argue that Maine would likely be better off without this tax,” he said. “Repealing the tax now, however – even with the impact phased in – would have a devastating effect on Maine’s communities.”

Jay Town Manager Ruth Marden said 74 percent of her town’s tax base is derived from personal property taxes, the majority of which are paid by the International Paper Co. She said even the prospective elimination of the business equipment tax through the proposed exemption would place an “unreasonable burden” on surrounding towns.

“The town of Jay pays 30 percent of the Franklin County tax,” she said. “If our values drop, the other towns in the county are going to have to absorb those costs. Franklin County has already seen the loss of jobs and businesses. To put another burden on those towns is going to be very difficult.”

Lawmakers on the panel plan to continue their review of the governor’s tax bill next week.