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Pine Tree Zones

By Tom Bell
Portland Press Herald | June 11, 2006

Earlier this year, New Hampshire officials were trying to lure Jim Horowitz to bring his growing airplane refurbishing company, Oxford Aviation, to Pease Airport.

At a meeting in Portsmouth, as the Granite State officials bragged about their business-friendly tax structure, Horowitz mentioned that he had the chance to build a facility at a Pine Tree Zone in Sanford. The officials immediately gave up their pursuit.

"They said, 'If you are in a Pine Tree Zone, that neutralizes all the benefits we just mentioned,' " said Horowitz, president of Oxford Aviation.

This October, the company will begin building a facility at Sanford Regional Airport that will employ as many as 200 people.

Pine Tree Zones, which offer businesses a package of tax benefits for every new job created, have been a key component of Gov. Baldacci's economic development strategy since the program began in 2004. Several business leaders, such as Horowitz, say the zones "level the playing field" between Maine and other states.

Nationally, the idea of using "enterprise zones" to attract business investment has been around since the early 1980s, and many states have embraced them. While championed by politicians, academics view them with skepticism. Studies show they have little, if any, effect on where businesses decide to locate, said Peter Fisher, a University of Iowa economics professor and co-author of the book, "State Enterprise Zone Programs: Have They Worked?".

Typically, the programs are created to help depressed areas, but then political pressure causes them to spread over an entire state, he said.

"Everyone wants a piece of the pie," he said.

Maine appears to be following the same trend.

Originally sold as a way to spur development in the poor regions of northern and eastern Maine, Pine Tree Zones have expanded to include economically healthy communities in southern Maine, such as Wells and Kennebunk. The program started out with a focus on manufacturing sectors, but the Legislature recently expanded it to include a resort in Washington County.

The Portland area is one of the few places where the zones are prohibited because of the region's healthy income and unemployment data. Still, Westbrook officials and legislators were recently able to win an exemption for the Sappi paper plant to qualify, and midcoast lawmakers got a special Pine Tree Zone for Brunswick and 16 towns in the Brunswick labor market, including Topsham and Wiscasset.

Critics say the program is growing out of control and will evolve into a broad, new tax break for businesses that will over time shift the tax burden on to homeowners.

"It's part of the race to the bottom," said Chris Hall, a former Democratic senator from Bristol. "It shifts the burden on to those least able to afford to pay the taxes."

In 2003, when the Pine Tree Zone bill was being debated in the Legislature, Hall had warned that the zone would expand to every part of the state because lawmakers want to please the business interests in their home districts.

Rep. Eddie DuGay, D-Cherryfield, who pushed hard for special legislation that gave Pine Tree Zone benefits for a resort development at the former Cutler Navy base, said politics plays a role in deciding which parcels and businesses get tax benefits.

"That's what it's all about," he said. "I brought home a lot of things to Washington County."

Critics of the Pine Tree Zones include two of the candidates running for the Republican nomination for governor. David Emory calls them a "gimmick," and Sen. Peter Mills, R-Cornville, said the zones give some businesses an unfair advantage over those that lack the political pull to get into a zone.

"It makes everybody else pay higher taxes while a select few pay less," Mills said.

Mills said the original bill called for the zones to be in areas with higher-than-average unemployment rates and lower-than-average incomes. But the Legislature loosened the requirements so more legislative districts would qualify.

Sen. Chandler Woodcock, R-Farmington, also a candidate for governor, submitted a bill that would have expanded the Pine Tree Zone to the entire state. While the bill died in committee last session, Baldacci is now pitching the idea to expand the zone statewide for certain sectors, such as manufacturing and research and development firms.

"We want every place to prosper," Baldacci said.

Citing written statements from many of the 65 companies now in Pine Tree Zones, Baldacci said the initiative has created about 3,000 jobs.

Mills doubts that claim. He said the program encourages companies to be dishonest because they don't get benefits unless the sign the statements.

It's too early to figure out exactly how much the Pine Tree Zone program is costing the state. When the issue was being debated in the Legislature in 2003, state finance officials estimated the price tag would be $520,000 in fiscal year 2006 and $746,000 in 2007. The annual cost is expected to grow to $1 million in 2009.

Regional planning agencies working with local governments select which parcels in a region or county qualify for Pine Tree Zone benefits. Each of the state's eight regions can designate up to 5,000 acres. In addition, Maine's four Indian tribes are allowed to design parcels for Pine Tree benefits.

The major benefit to being in a Pine Tree Zone, according to companies in the program, is that they receive payments from the state equal to 80 percent of the amount of money that new employees have held for their state income taxes, for up to 10 years. Companies are also exempted from paying a sales tax on new personal property purchases and building materials used on the site.

In turn, companies qualify only if they offer health insurance and retirement plans and pay good wages. For Cumberland County, the minimum wage is $35,962. For Aroostook County, it's $24,742.

Companies get benefits only for the portion of their business that brings jobs to the state, said Matt McHatten, an executive with Maine Mutual Group. The Presque Isle insurance company is located in a Pine Tree Zone and plans an expansion that will almost double its size.

McHatten said Pine Tree benefits will help the company compete with firms in other states.

"We have to create jobs and invest in the zone in order to achieve benefits," he said. "This is not an entitlement. We want to earn what we receive."

Sean Tarpey, vice president of Rumery's Boatyard in Biddeford, said the Pine Tree Zone benefits allowed the boatyard to buy a new tractor and $40,000 floats without paying any sales tax.

Last November, when Baldacci visited the boatyard for a ceremony announcing the company's certification for Pine Tree Zone, the company hired a boat painter who showed up at the ceremony.

The Pine Tree Zone benefits make it easier to "go out on a limb and hire people and pay a good wage and hope the business will expand the way we want," Tarpey said.

Pine Tree Zones may give Maine's business community a psychological boost, but when it comes to locating business, the biggest factors are not taxes but access to skilled labor and energy costs, said Michael Hillard, an economist at the University of Southern Maine. He contends that most of the business expansion that occurs in Pine Tree Zones would have happened anyway.

For businesses, a stable tax climate is more crucial than low taxes, said Robert Tannenwald, an economist at the Federal Reserve Bank of Boston.

Speaking last year at an Augusta forum sponsored by the Maine Center for Economic Policy, Tannenwald said local and state taxes aren't significant enough to make much of a difference for where a business chooses to locate.

He said state, local and federal taxes combined amount to 4 to 5 percent of a company's cost.

"If you are trying to sway the location decision of an industry or a business through the use of a state or local tax incentive," he told lawmakers, "it appears that you are trying to wag a dog using a small tail."