February 6, 2006
Climate dynamics | Most national studies say Maine has a lousy business climate, but local observers debate whether those surveys measure the right factors
By Douglas Rooks
Mention the phrase "Maine's business climate," and many people immediately think of taxes and regulations. After all, those are the factors that most national business climate studies analyze ˆ and the reasons cited for why Maine has fared poorly on such studies in recent years. Case in point: the Small Business Survival Index from the Washington, D.C.-based Small Business & Entrepreneurship Council, which again in October rated Maine third from the bottom among all states.
It's an impression, however, the Maine Center for Economic Policy would like to change, and its recent annual state policy forum focused squarely on the topic. The Jan. 13 event, called "Maine's Business Climate: What Really Matters," featured speakers discussing a variety of issues that they believe also matter to business, including the environment, health care and education. The tone was set early by Robert Tannenwald, a governor of the Federal Reserve Bank of Boston and director of the New England Public Policy Center, who provided an extensive analysis of economic studies on competitiveness among states. His conclusion: "Taxes matter, but in most cases not much."
As a cost factor, Tannenwald said, taxes amount to only four percent of total expenses for a manufacturing business and five percent for a back-office operation. Meanwhile, labor costs represent 36% of a manufacturer's expenses and 72% of a back-office operation's.
Taxes also rank behind utilities and rent or mortgage costs for the typical business, he said.
This unorthodox assessment, which places taxes far down the list of important factors to business success, is closer to the view of the business climate that Christopher St. John, executive director of MECEP, is hoping to encourage among business leaders and policy makers. St. John says that many of the forces driving economic vitality ˆ such as proximity to the Boston area ˆ benefit neighboring states like New Hampshire far more than Maine, and the state needs to be realistic about what it can and cannot do in improving its economy. Taking on the business climate seemed like a natural. "If we can change the terms of debate, then we have a chance to talk about what our strengths are, as well as our weaknesses," St. John said.
But it's a view that many in the Maine business community and policy world find tough to endorse. For observers like Bill Becker, CEO of the Maine Heritage Policy Center, Maine's poor showing on multiple business-climate surveys and its relatively sluggish economy compared to other states is evidence that's too hard to ignore. Becker says Maine has now fallen behind other New England states in income and job growth, with no immediate turnaround in sight. Any effort to define business climate in other ways "ignores the elephant in the room ˆ our high tax burden," he said.
Despite obvious disagreements over how to measure the business climate ˆ and how to weigh the various factors ˆ both state and business leaders agree it's important to make the effort. After all, before you can identify potential areas of improvement, you have to first decide how to assess your current condition.
Investment pays dividends
Speaking at the Jan. 13 forum, St. John laid out his opinion on "what really matters" in the Maine business climate by focusing on a state's investments in key areas that support both businesses and their employees. Public investment in transportation, education and health care is "at least as important" and probably "more important" to creating and sustaining businesses, St. John said. Without sound infrastructure and community assets, even fast-growing businesses will not be able to sustain themselves over time, he argued.
While it costs states money to build and maintain highways, grant college degrees and provide high-quality health care, for most businesses it's well worth the investment in the form of higher taxes, he said.
In an interview following the event, St. John pointed to long-term business investment in the Portland area as defying the notion that Maine's comparatively high tax burden discourages startups. Some national studies echo St. John's assessment: Portland ranked 14th on the California-based Milken Institute's 2004 survey of the country's "best performing cities" for job creation and retention, and Maine's largest city in 2005 was named the top market in the country for "small-business vitality" in a study by American City Business Journals.
The strong business climate extends to larger businesses and beyond Portland, St. John added. "Look at Freeport," he said. "L.L. Bean could expand anywhere, but they choose to do it here."
In fact, John Oliver, director of government relations for L.L. Bean, was one of MECEP's featured speakers at the Jan. 13 event. He discussed the benefits to his company of operating in Maine, with its reputation for a clean environment and its considerable investments in conservation, such as multi million-dollar forestland purchases and easements in recent years.
Yet in a follow-up interview, Oliver declined to take sides in the contest between taxes and public investment as critical business climate factors. "They're both important," he said. "You can't ignore one and just focus on the other."
Oliver cited LD1, the property tax reform measure passed by the Legislature last year, as setting the right goal in aiming to put Maine "in the middle of the pack" among the 50 states for tax burden as a proportion of personal income. (According to a U.S. Census Bureau survey, Maine currently ranks second to New York for the highest combined state and local tax burden.)
But Oliver resists the idea that there is an unavoidable tradeoff between lower taxes and sound public investment. "We can do both. It requires us to be disciplined and stay on course, but it is possible," he said.
The key is controlling the cost of government services, he said, but added that local government spending is probably more important than state spending in determining the tax burden. That's because so much of the state budget represents direct aid to schools and municipalities. To find efficiencies in that area, he said he looks forward to results from a recently commissioned Brookings Institution study of the Maine economy, along with Yarmouth-based GrowSmart Maine's work on controlling sprawl. "Sprawl is usually seen as a quality of life and community development issue," he said. "But sprawl creates increased costs at all levels, and we haven't been attentive to that in Maine."
The eye of the beholder
Chris Hall, executive director of the Maine State Chamber of Commerce, has sat in on numerous business location decisions involving chamber members, and said that the factors influencing those decisions can be as different as the businesses themselves. "The business climate is really in the eye of the business person involved," Hall said. "Different things are important to different people."
He tries to see things from the business owner's perspective by asking three questions: Is there a place for me? Do I fit into this community? And can I compete here? Depending on which question is most important, businesses can reach very different conclusions about whether to remain in Maine, move here, or expand or contract their operations, Hall said.
The answer to the first question can place a premium on site concerns, transportation links and other infrastructure issues. But it isn't just proximity to highways or developable acreage that contributes to decision-making, Hall said. Relations with communities and regulators can be just as important.
One example: MBNA began its Maine operations in Camden, but in now-famous public meetings in 1998 involving co-founder Charles Cawley, the credit card giant discovered significant resistance from town planners to its ambitious expansion plans. MBNA ended up taking its main operations up Route 1 to a more-hospitable Belfast, and has since closed its Camden offices entirely.
Concerns about "Do I fit into this community?" are illustrated by the concept of "clusters," where business people seek a critical mass of like-minded peers to support their operations. "If you're starting up a new video production facility, it may be all about the people who are around you," Hall said. "You say, 'I'll pay the taxes' because that's not your first concern."
Hall pointed to the recent decision by Idexx to expand in Westbrook as an example of the importance of community and cultural concerns. "They've become part of that community," he said, "and it clearly influences where they want to expand."
Only in answering the third question ˆ can I compete here? ˆ do questions about taxes and regulations become central, he said. He offers the example of National Semiconductor's 1995 decision to undertake a major expansion in South Portland rather than elsewhere. Then-Gov. Angus King had just convinced the Legislature to create the Business Equipment Tax Reimbursement program, which refunded all personal property taxes on qualifying new investment. "Maine had that program and Texas didn't, and that was why [National Semiconductor] expanded here," Hall said.
Even Robert Tannenwald of the New England Public Policy Center, who discounts the role of taxes in business costs, agrees that taxes matter more than they used to because of competition between states to offer larger tax breaks. Maine is no exception, with BETR, Tax Increment Financing deals and Gov. John Baldacci's Pine Tree Zones, which forgive both state sales and income taxes for qualifying new businesses in designated areas.
A question of competition
If the Maine Center for Economic Policy in Augusta occupies a progressive position on these issues, then the Maine Heritage Policy Center in Portland is its politically conservative sparring partner. And CEO Bill Becker is happy enough to take the other side of MECEP's recent conference thesis.
Becker cites surveys of business leaders and small-business owners in Maine that say companies are "challenged by the business climate," and he specifies taxes, regulations and the high cost of health care as the biggest concerns. He also said the state's personal tax rates can be just as problematic for small businesses. "Most small business owners pay taxes through the individual income tax," he said. "And we have one of the highest rates at one of the lowest thresholds of any state in the country."
Still, Becker doesn't want to be pigeonholed on the subject of business climate. Becker agrees with St. John that public investment can enhance the business climate, but he says he isn't sure Maine is investing in the right places. Take education. The state, he said, is spending increasing amounts on a K-12 educational system for a declining number of students. Meanwhile, state support for public colleges and universities isn't growing enough to handle increased enrollment. The community colleges' appropriation has increased three percent while enrollment has increased nearly 10%, forcing cutbacks in some programs. "This isn't a good message for those who know that college degrees are our ticket to success," he said.
Yet Becker doesn't endorse a gloom-and-doom approach to Maine's problems. "This isn't a matter of just paying attention to the bad news," he said. "When we heard about the Idexx expansion, my first thought was, 'That's fantastic.' We wish them every success, and that's true for every new business. [But] for every success, we do have businesses closing or leaving."
He cited economist Charles Colgan's recent 2006 economic forecast predicting "sluggish growth," and said his particular concern is the continuing dearth of young workers, and young families, in the state. "We have a terrific quality of life here, one we can be proud of, but we're not very competitive," Becker said. "Increasingly, people are saying they'll trade that great quality of life for another place that has a good quality of life and a lot better jobs."
Given all the ways to assess the health of Maine's business climate, though, some observers wonder whether the constant criticism of certain factors in Maine's economy might constitute a self-fulfilling prophecy. Oliver of L.L. Bean suggested that national surveys ranking Maine low for competitiveness can themselves hurt Maine's efforts to develop a faster-growing economy. "You can debate the basis for each study that comes along, but overall, the perceptions they produce affect business decisions," he said. "Most businesses don't get down to that level of detail" in comparing each element that goes into a survey. That means changing people's perceptions of Maine may be as important as changing specific policies, he said.
In all, though, debate over the business climate seems less heated and less negative among business leaders and think-tank directors than it does at the Legislature or, sometimes, in chambers of commerce. Could it be that the differences are truly a matter of degree and emphasis, rather than just ideology?
Take, for example, debate over the BETR program. It has been a particular target for left-leaning Democrats in the Legislature, who last year succeeded in reducing reimbursement from the previous 100% to 90% percent. But Christopher St. John said he sees a role for BETR and even a repeal of the personal property tax on business equipment that's being discussed in the Legislature in encouraging future business investments.
His concern isn't with the tax break per se, but its effect on local budgets. "You can make a compelling economic case that lowering that barrier to investment produces good results for jobs and economic activity," St. John said. "My concern is that repeal not result in a shift to residential property taxpayers, and that we not ignore the service center communities" that would lose revenue.
It may seem unusual to hear St. John, whose organization is proposing an alternative to tax-based assessments of the Maine business climate, acknowledge the potential impact of a tax on local business growth. But these days, the various players in the debate seem to be putting a premium on reasonable discussion over confrontation. "Sometimes the volume levels get so high that the real question about business climate gets distorted on both sides," said John Oliver. "The news may be that in 2006, the volume is coming down."
It's an impression, however, the Maine Center for Economic Policy would like to change, and its recent annual state policy forum focused squarely on the topic. The Jan. 13 event, called "Maine's Business Climate: What Really Matters," featured speakers discussing a variety of issues that they believe also matter to business, including the environment, health care and education. The tone was set early by Robert Tannenwald, a governor of the Federal Reserve Bank of Boston and director of the New England Public Policy Center, who provided an extensive analysis of economic studies on competitiveness among states. His conclusion: "Taxes matter, but in most cases not much."
As a cost factor, Tannenwald said, taxes amount to only four percent of total expenses for a manufacturing business and five percent for a back-office operation. Meanwhile, labor costs represent 36% of a manufacturer's expenses and 72% of a back-office operation's.
Taxes also rank behind utilities and rent or mortgage costs for the typical business, he said.
This unorthodox assessment, which places taxes far down the list of important factors to business success, is closer to the view of the business climate that Christopher St. John, executive director of MECEP, is hoping to encourage among business leaders and policy makers. St. John says that many of the forces driving economic vitality ˆ such as proximity to the Boston area ˆ benefit neighboring states like New Hampshire far more than Maine, and the state needs to be realistic about what it can and cannot do in improving its economy. Taking on the business climate seemed like a natural. "If we can change the terms of debate, then we have a chance to talk about what our strengths are, as well as our weaknesses," St. John said.
But it's a view that many in the Maine business community and policy world find tough to endorse. For observers like Bill Becker, CEO of the Maine Heritage Policy Center, Maine's poor showing on multiple business-climate surveys and its relatively sluggish economy compared to other states is evidence that's too hard to ignore. Becker says Maine has now fallen behind other New England states in income and job growth, with no immediate turnaround in sight. Any effort to define business climate in other ways "ignores the elephant in the room ˆ our high tax burden," he said.
Despite obvious disagreements over how to measure the business climate ˆ and how to weigh the various factors ˆ both state and business leaders agree it's important to make the effort. After all, before you can identify potential areas of improvement, you have to first decide how to assess your current condition.
Investment pays dividends
Speaking at the Jan. 13 forum, St. John laid out his opinion on "what really matters" in the Maine business climate by focusing on a state's investments in key areas that support both businesses and their employees. Public investment in transportation, education and health care is "at least as important" and probably "more important" to creating and sustaining businesses, St. John said. Without sound infrastructure and community assets, even fast-growing businesses will not be able to sustain themselves over time, he argued.
While it costs states money to build and maintain highways, grant college degrees and provide high-quality health care, for most businesses it's well worth the investment in the form of higher taxes, he said.
In an interview following the event, St. John pointed to long-term business investment in the Portland area as defying the notion that Maine's comparatively high tax burden discourages startups. Some national studies echo St. John's assessment: Portland ranked 14th on the California-based Milken Institute's 2004 survey of the country's "best performing cities" for job creation and retention, and Maine's largest city in 2005 was named the top market in the country for "small-business vitality" in a study by American City Business Journals.
The strong business climate extends to larger businesses and beyond Portland, St. John added. "Look at Freeport," he said. "L.L. Bean could expand anywhere, but they choose to do it here."
In fact, John Oliver, director of government relations for L.L. Bean, was one of MECEP's featured speakers at the Jan. 13 event. He discussed the benefits to his company of operating in Maine, with its reputation for a clean environment and its considerable investments in conservation, such as multi million-dollar forestland purchases and easements in recent years.
Yet in a follow-up interview, Oliver declined to take sides in the contest between taxes and public investment as critical business climate factors. "They're both important," he said. "You can't ignore one and just focus on the other."
Oliver cited LD1, the property tax reform measure passed by the Legislature last year, as setting the right goal in aiming to put Maine "in the middle of the pack" among the 50 states for tax burden as a proportion of personal income. (According to a U.S. Census Bureau survey, Maine currently ranks second to New York for the highest combined state and local tax burden.)
But Oliver resists the idea that there is an unavoidable tradeoff between lower taxes and sound public investment. "We can do both. It requires us to be disciplined and stay on course, but it is possible," he said.
The key is controlling the cost of government services, he said, but added that local government spending is probably more important than state spending in determining the tax burden. That's because so much of the state budget represents direct aid to schools and municipalities. To find efficiencies in that area, he said he looks forward to results from a recently commissioned Brookings Institution study of the Maine economy, along with Yarmouth-based GrowSmart Maine's work on controlling sprawl. "Sprawl is usually seen as a quality of life and community development issue," he said. "But sprawl creates increased costs at all levels, and we haven't been attentive to that in Maine."
The eye of the beholder
Chris Hall, executive director of the Maine State Chamber of Commerce, has sat in on numerous business location decisions involving chamber members, and said that the factors influencing those decisions can be as different as the businesses themselves. "The business climate is really in the eye of the business person involved," Hall said. "Different things are important to different people."
He tries to see things from the business owner's perspective by asking three questions: Is there a place for me? Do I fit into this community? And can I compete here? Depending on which question is most important, businesses can reach very different conclusions about whether to remain in Maine, move here, or expand or contract their operations, Hall said.
The answer to the first question can place a premium on site concerns, transportation links and other infrastructure issues. But it isn't just proximity to highways or developable acreage that contributes to decision-making, Hall said. Relations with communities and regulators can be just as important.
One example: MBNA began its Maine operations in Camden, but in now-famous public meetings in 1998 involving co-founder Charles Cawley, the credit card giant discovered significant resistance from town planners to its ambitious expansion plans. MBNA ended up taking its main operations up Route 1 to a more-hospitable Belfast, and has since closed its Camden offices entirely.
Concerns about "Do I fit into this community?" are illustrated by the concept of "clusters," where business people seek a critical mass of like-minded peers to support their operations. "If you're starting up a new video production facility, it may be all about the people who are around you," Hall said. "You say, 'I'll pay the taxes' because that's not your first concern."
Hall pointed to the recent decision by Idexx to expand in Westbrook as an example of the importance of community and cultural concerns. "They've become part of that community," he said, "and it clearly influences where they want to expand."
Only in answering the third question ˆ can I compete here? ˆ do questions about taxes and regulations become central, he said. He offers the example of National Semiconductor's 1995 decision to undertake a major expansion in South Portland rather than elsewhere. Then-Gov. Angus King had just convinced the Legislature to create the Business Equipment Tax Reimbursement program, which refunded all personal property taxes on qualifying new investment. "Maine had that program and Texas didn't, and that was why [National Semiconductor] expanded here," Hall said.
Even Robert Tannenwald of the New England Public Policy Center, who discounts the role of taxes in business costs, agrees that taxes matter more than they used to because of competition between states to offer larger tax breaks. Maine is no exception, with BETR, Tax Increment Financing deals and Gov. John Baldacci's Pine Tree Zones, which forgive both state sales and income taxes for qualifying new businesses in designated areas.
A question of competition
If the Maine Center for Economic Policy in Augusta occupies a progressive position on these issues, then the Maine Heritage Policy Center in Portland is its politically conservative sparring partner. And CEO Bill Becker is happy enough to take the other side of MECEP's recent conference thesis.
Becker cites surveys of business leaders and small-business owners in Maine that say companies are "challenged by the business climate," and he specifies taxes, regulations and the high cost of health care as the biggest concerns. He also said the state's personal tax rates can be just as problematic for small businesses. "Most small business owners pay taxes through the individual income tax," he said. "And we have one of the highest rates at one of the lowest thresholds of any state in the country."
Still, Becker doesn't want to be pigeonholed on the subject of business climate. Becker agrees with St. John that public investment can enhance the business climate, but he says he isn't sure Maine is investing in the right places. Take education. The state, he said, is spending increasing amounts on a K-12 educational system for a declining number of students. Meanwhile, state support for public colleges and universities isn't growing enough to handle increased enrollment. The community colleges' appropriation has increased three percent while enrollment has increased nearly 10%, forcing cutbacks in some programs. "This isn't a good message for those who know that college degrees are our ticket to success," he said.
Yet Becker doesn't endorse a gloom-and-doom approach to Maine's problems. "This isn't a matter of just paying attention to the bad news," he said. "When we heard about the Idexx expansion, my first thought was, 'That's fantastic.' We wish them every success, and that's true for every new business. [But] for every success, we do have businesses closing or leaving."
He cited economist Charles Colgan's recent 2006 economic forecast predicting "sluggish growth," and said his particular concern is the continuing dearth of young workers, and young families, in the state. "We have a terrific quality of life here, one we can be proud of, but we're not very competitive," Becker said. "Increasingly, people are saying they'll trade that great quality of life for another place that has a good quality of life and a lot better jobs."
Given all the ways to assess the health of Maine's business climate, though, some observers wonder whether the constant criticism of certain factors in Maine's economy might constitute a self-fulfilling prophecy. Oliver of L.L. Bean suggested that national surveys ranking Maine low for competitiveness can themselves hurt Maine's efforts to develop a faster-growing economy. "You can debate the basis for each study that comes along, but overall, the perceptions they produce affect business decisions," he said. "Most businesses don't get down to that level of detail" in comparing each element that goes into a survey. That means changing people's perceptions of Maine may be as important as changing specific policies, he said.
In all, though, debate over the business climate seems less heated and less negative among business leaders and think-tank directors than it does at the Legislature or, sometimes, in chambers of commerce. Could it be that the differences are truly a matter of degree and emphasis, rather than just ideology?
Take, for example, debate over the BETR program. It has been a particular target for left-leaning Democrats in the Legislature, who last year succeeded in reducing reimbursement from the previous 100% to 90% percent. But Christopher St. John said he sees a role for BETR and even a repeal of the personal property tax on business equipment that's being discussed in the Legislature in encouraging future business investments.
His concern isn't with the tax break per se, but its effect on local budgets. "You can make a compelling economic case that lowering that barrier to investment produces good results for jobs and economic activity," St. John said. "My concern is that repeal not result in a shift to residential property taxpayers, and that we not ignore the service center communities" that would lose revenue.
It may seem unusual to hear St. John, whose organization is proposing an alternative to tax-based assessments of the Maine business climate, acknowledge the potential impact of a tax on local business growth. But these days, the various players in the debate seem to be putting a premium on reasonable discussion over confrontation. "Sometimes the volume levels get so high that the real question about business climate gets distorted on both sides," said John Oliver. "The news may be that in 2006, the volume is coming down."
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