Maine spends hundreds of millions of dollars each year in business tax incentives. Because allocating money for this purpose reduces potential investments in other priorities including education and health care, it is essential to ensure such programs deliver as intended. But a growing body of evidence suggests that may not be the case.
The State Legislature’s watchdog arm, the Office of Program Evaluation and Government Accountability (OPEGA), has conducted several reviews of spending through the tax code on businesses. A 2017 OPEGA review of Pine Tree Development Zones, indicated that program failed to provide the jobs Mainers were promised. A more recent review of the Maine Seed Capital Tax Credit Program offers similar findings.
Administered by the Finance Authority of Maine (FAME), the seed capital tax credit allows individuals or private venture capital firms who make qualifying investments in small businesses (those with less than $5 million in gross sales) to claim up to 40% of these investments as a tax credit. In its review, OPEGA found the design of the Maine Seed Capital Tax Credit Program is misaligned with the intended purpose1 of creating expanded job opportunities, boosting the municipal tax base, and increasing the availability of equity capital to businesses with the potential for rapid growth.
OPEGA identified several key deficiencies in data reporting and recommended greater oversight, accountability, and clarity of goals.2 Lawmakers should consider these suggestions and take action to ensure money is not wasted and that all initiatives supported by state revenues create maximum opportunity for Mainers.
Intention to target certain types of businesses and activities
To participate in the Maine Seed Capital Tax Credit Program, a business must be one of the following:
- a manufacturer
- a value-added natural resource enterprise
- a provider of a product or service that is sold or projected to be sold or rendered predominantly outside of the State
- engaged in development or application of advanced technologies
- certified as a visual media production company
Participants must also certify that the amount of the investment is necessary to allow the business to create or retain jobs in the state. The investment must be spent on property, equipment, research and development, working capital for the business or similar activity.
Deficiencies and inaccuracies in program reporting
OPEGA found that FAME was deficient in both information gathered from businesses and reported to the legislature. Some businesses receiving the credit had not met required reporting guidelines, while FAME had also not consistently met an annual reporting requirement to the legislature.
In addition, OPEGA found that inaccurate data was reported to the legislature on the program’s success. In 2020, FAME provided testimony to the Taxation Committee that the credit had allowed companies to raise $271 million using just under $35 million in credit, producing a leveraging ratio of 7.7 to 1. OPEGA did not find these figures reflected in the data it reviewed.3
OPEGA found that from 2010 to 2020 the program cost the state of Maine over $42 million in tax credits to investors making over $95 million in investments4, or about $2.24 of investment for every dollar in credit. FAME was unable to identify a source for the figures it provided to the legislature. Further, in its 10-year Economic Development Strategy for Maine, the Department of Economic and Community Development (DECD) claims every dollar of seed capital tax credit raises 10 dollars of private investment5.
According to OPEGA, the 10-year Economic Development Strategy for Maine plan was the impetus for the legislature tripling the total allowable credits in 2020 from $5 million to $15 million.6 There is no evidence as to the source of this figure, but it appears the impact of this tax credit — which led to the legislature’s decision to expand it — has been repeatedly overstated. This falls in line with MECEP’s finding that business tax incentives rarely produce the outcomes they promise or benefit people with low- and moderate-income.
Lack of alignment between program goals and design
OPEGA identified several areas of misalignment between the program’s goals and its design, including:
- the tax credit goes to businesses that do not fulfill the program goal of “potential for rapid growth” — tax credits were given for investment in the hospitality, tourism, and film industries;
- the goal of expanding investment was not always met because investments sometimes came from entities with an existing connection to a business;
- the credit is not well targeted to advance innovation, a stated reason for expanding the program as outlined in the report “Maine Economic Development Strategy 2020-2029: A Focus on Talent and Innovation7”; and
- there is a “lack of systematic program data” to reliably measure job creation. FAME’s metrics for counting jobs were also flawed — counting the same job multiple times over years when businesses reported employees.
To address these issues, OPEGA recommends the legislature and stakeholders from FAME and the DECD re-evaluate and clearly define the goals of the Seed Capital Tax Credit, ensure the program’s requirements align, and modify data collection for effective “monitoring, oversight and continuous assessment of the extent to which the program is achieving its goals.”8 Maine Revenue Services estimates the annual financial impact of the Seed Capital Tax Credit to be $6.9 million in 2022 and $8.4 million in 2023.9
A program of this scope that uses substantial public funds must be well designed to ensure that revenue raised through taxes is not lost and supports investments that help all Maine people, businesses, and communities thrive.
Notes:
[1] 10 MRSA §1100-T, http://legislature.maine.gov/legis/statutes/10/title10sec1100-T.html
[2] “Evaluation of the Maine Seed Capital Tax Credit.” Office of Program Evaluation and Government Accountability. August 2021. http://legislature.maine.gov/doc/6954
[3] “Evaluation of the Maine Seed Capital Tax Credit.” Office of Program Evaluation and Government Accountability. August 2021. http://legislature.maine.gov/doc/6954, p.13
[4] Ibid, p.7
[5] Maine Economic Development Strategy 2020-2029 A Focus on Talent and Innovation
https://www.maine.gov/decd/sites/maine.gov.decd/files/inline-files/DECD_120919_sm.pdf p.29
[6] “Evaluation of the Maine Seed Capital Tax Credit.” Office of Program Evaluation and Government Accountability. August 2021. http://legislature.maine.gov/doc/6954, p.23
[7] Maine Economic Development Strategy 2020-2029 A Focus on Talent and Innovation
https://www.maine.gov/decd/sites/maine.gov.decd/files/inline-files/DECD_120919_sm.pdf p.28
[8] “Evaluation of the Maine Seed Capital Tax Credit.” Office of Program Evaluation and Government Accountability. August 2021. http://legislature.maine.gov/doc/6954, p.2
[9] Maine State Tax Expenditure Report 2022 – 2023, p.23 https://www.maine.gov/revenue/sites/maine.gov.revenue/files/inline-files/tax_expenditure_21_0.pdf
