Red Alert | A new report makes it official: The cost of doing business in Maine is going up. Is there any hope of reversing the trend?

Last month, Maine companies struggling with high health insurance costs and other business burdens got more evidence showing just how tough the state's business climate may be. The Maine Development Foundation's Measures of Growth report ˆ— an annual checkup on several factors indicating Maine's economic and community health ˆ— marked the state's cost of doing business measurement with a red flag, an icon signifying that a particular benchmark desperately needs attention.

According to the report, in 2002 Maine's cost of doing business, an index made up of the combined impact of labor costs, energy costs and tax burden, rose to 110.1 points ˆ— 10.1 points higher than the national average and enough to make Maine the eighth most expensive state in the country to operate a business.

State Economist Laurie Lachance has been seeing red flags and other warning signs about Maine's business climate for years, though. Her 2002 report, "Maine's Investment Imperative," noted among other troubling trends that Maine's economic productivity ˆ— a reflection not of workers' skills but of the efficiency of the state's factories and other infrastructure ˆ— was only 80% of the national average. Over the last several months she's taken an admittedly grim message on the road, arguing in speeches to business groups and legislators that the dampening effect of business costs on Maine's economy may be more serious than even pessimistic business owners think.

Her object lesson: Maine's paper industry woes. "I think we've seen this issue come to a head in the past 18 months with mill after mill after mill closing down. The viability of those institutions was hurt because they did not receive appropriate investment," says Lachance. "Maine has not been able to attract those capital investments because our cost structure is out of line compared to the rest of the country on electricity prices, workers' comp costs, health care and taxes. It's not just a coincidence that Maine mills are going out of business, and it's not completely out of our control."

Besides limiting outside investment, the stack of higher costs hurts existing businesses' profit margins and makes the state a less attractive destination for out-of-state businesses looking for new locations, Lachance argues. She stops short of calling the current situation a crisis, saying instead that the recent recession and subsequent sluggish recovery have only exacerbated a long-simmering problem.

Some business owners, though, liken the current climate to the mood preceding the workers' compensation crisis in the early 1990s, which forced the Legislature to develop a comprehensive reform plan that created the Maine Employers' Mutual Insurance Company. And with a number of potential fixes aimed at lowering business costs already in the works ˆ— from the recently designated Pine Tree Development Zones to various tax reform proposals before the Legislature ˆ— those business owners hope this year's warning signs will produce similar results. "It seems to me Maine only reacts in a crisis," says Bruce Tisdale, owner of Mountain Machine Works, a metal machine shop in Auburn. "You can continue to argue that Maine is in an uncompetitive situation, but you never know what will be the straw that breaks the camel's back."

Not everyone agrees that the situation is dire, however. Kit St. John, executive director of the Maine Center for Economic Policy in Augusta, questions the accuracy of studies attempting to quantify Maine's tax burden. Representatives of Maine's paper industry, while agreeing with Lachance's argument that high taxes and other business costs have hindered investment in Maine mills, also say a global paper industry downturn has contributed to Maine's recent mill shutdowns. And some business owners believe that taxes, energy costs and productivity measurements only tell part of the story: Some lower costs, such as wages and real estate, combined with qualitative factors like shorter commute times, offset higher costs and make Maine a good place to do business.

Such disagreement over the scope of the problem helps explain why, even after years of measuring benchmarks and analyzing results, business owners, economic development experts and politicians are still debating what ˆ— if anything ˆ— Maine must do to address its business climate. It also highlights a bigger hurdle for the Legislature: When dealing with controversial subjects such as tax reform and business incentives, there's no solution that will make everyone happy.

The cost equation
It's easy to find statistics showing business costs in Maine that exceed regional or national averages. Although the gaps between Maine and the national average are often small, Lachance argues that it's the cumulative effect of each higher cost that's putting Maine's business climate at a significant disadvantage.

Electricity prices in the state continue to surpass the national average, with Maine industrial users paying an average of six cents per kilowatt-hour for electricity, versus a national average cost of just under five cents per kilowatt-hour. Maine's costs have come down in recent years, though, dropping from a high of more than eight cents per kilowatt-hour in 2001, thanks in part to lower electricity delivery costs as Maine utilities continue to remove so-called stranded costs ˆ— mostly debt incurred from capital investments in the 1980s ˆ— from their books.

Health insurance costs, however, show no signs of a similar retreat. The average individual premium paid in Maine reached $3,062.19 in 2001 (the last year for which nationwide statistics are available), about six percent higher than the national average of $2,889.19, according to a study by the Kaiser Family Foundation in Menlo Park, Calif.

Taxes remain most business owners' constant complaint, even if Maine's top income tax rate of 8.5% is not, as some frustrated taxpayers believe, the highest in the country: Montana leads the country with an 11% rate, according to the Tax Policy Center, a Washington, D.C.-based joint venture of the Urban Institute and the Brookings Institution. Maine's total local and state tax burden, though, exceeds the New England regional average, according to Measures of Growth. In 2000, Mainers paid taxes averaging $130 for every $1,000 of income, compared to an average tax burden of $104 per $1,000 of income for New England ˆ— and the state's lack of significant improvement on this benchmark also merited a red flag.

But not everyone trusts the tax numbers used by Measures of Growth and other surveys. Kit St. John says that most tax burden comparisons are misleading because they base their analysis on census figures, which divide Maine's total tax collections by the total income of Maine residents. That method fails to take into account the fact that non-residents pay about 20% of the state's property tax, says St. John, meaning that simple tax/income comparisons assign Maine residents a larger tax bill than they actually pay. "We have a much higher proportion of land owned by people from away than other states [do]," says St. John. "Comparing property taxes on those assets to Mainers' personal income leads to a ridiculous result."

BETR or worse?
Despite debate over statistics, many business owners and economic development experts trust such indicators because of what they consider the real-world effects. Since energy costs make up between eight percent and 10% of a paper mill's total operation costs, Maine's electricity prices have been implicated in more than one mill shutdown.

Georgia-Pacific closed its Old Town tissue mill in 2003, citing among other factors its $20 million annual energy costs ˆ— the highest of any of the company's mills. G-P agreed to reopen part of the mill only after Gov. John Baldacci brokered a deal to help the company purchase a biomass boiler that would generate lower-cost electricity on site.

With electricity costs dropping and most large users turning to co-generation or negotiating special rates with Maine's utility companies, taxes ˆ— in particular the personal property tax on business equipment ˆ— remain many business owners' top complaint. Critics argue that taxing a company's capital improvements provides a strong disincentive for Maine businesses to invest in the new equipment they need to stay competitive ˆ— and as evidence they cite the results of the Business Equipment Tax Reimbursement program, enacted in 1995 to refund that tax. Between 1995 and 2001, for example, Maine paper mills made about $1.1 billion in capital investments, with Nexfor Fraser Papers doubling investment in its Madawaska mill to $125 million from about $62 million in the previous five years.

Small businesses like Mountain Machine Works also cite the benefits of the BETR program. Tisdale borrowed money this year to buy a new $100,000 lathe he needed to keep up-to-date making custom parts and repairing industrial machinery for customers such as paper mills and power plants. He doubts whether he could make such purchases if he could not count on the property tax reimbursement. "If [the state] were to eliminate the BETR program, I'd start to think seriously that I may not be able to succeed any longer," says Tisdale.

But Tisdale also says that, as a native Mainer and 20-year veteran of Maine's business climate, he's willing to work around increasing costs in order to stay in business here. Out-of-state corporations, he says, have no such compulsion, and he speculates that even seeing the Legislature discussing proposed changes to the BETR program every year is enough to cause them to hold back investment dollars.

That assessment is right on, says Joe Wischerath, executive vice president of Portland-based Maine & Company, an industry-funded nonprofit that helps bring new businesses to Maine. Large corporations choose new locations almost entirely based on cost criteria such as taxes and labor costs, Wischerath says, citing a 2003 survey by Area Development magazine that includes labor costs, tax exemptions, corporate tax rates and energy costs in the top 10 most important site selection factors. "In some companies' minds, [the BETR] program is not a positive, it's a neutral," says Wischerath. "Many states don't have the tax in the first place."

Not every business cost in Maine is higher than average, though, say some local business owners. Fletcher Kittredge, CEO of Great Works Internet in Biddeford, lately has been touting Maine as having a good business climate ˆ— especially for newer, service-based companies such as his. Among other savings, he notes that he can hire skilled workers more cheaply than he could in Massachusetts, New Hampshire or Connecticut ˆ— even though he's still paying around $10 a hour for entry level positions. Even factoring in the state's high health insurance rates, Kittredge figures his labor cost savings nearly offset any increased costs from higher taxes or other factors. He also says simple cost comparisons fail to consider Maine's fabled quality of life ˆ— an often maligned topic in the wake of lost manufacturing jobs, but one that Kittredge says is still a significant draw to entrepreneurs like himself. "Good schools, lower real estate costs, a problem-free commute, the natural environmentˆ… those don't show up in statistics," says Kittredge.

Getting back on track
For business owners who believe Maine's business climate puts them at a competitive disadvantage, the next question is, what can the state do to fix it? Jack Cashman, commissioner of the Department of Economic and Community Development, notes that this year's Measures of Growth uses data from 2002 and earlier ˆ— before Gov. John Baldacci took office ˆ— but says the administration has made reducing the state's overall tax burden and improving its business climate a priority.

DECD already has tax reimbursement programs and other cost-reducing incentives in place (see "Getting help," this page), such as employment tax increment financing, which reimburses companies a percentage of their state income tax withholdings, and the Governor's Training Initiative, a program to pay for worker training related to a company's expansion or improvements. Many of those programs are now included in the new Pine Tree Zone program, approved last year, which also provides breaks on corporate income taxes as well as certain sales and use taxes.

In February, as part of his tax reform proposal, Baldacci also recommended eliminating the personal property tax for new business equipment purchases ˆ— and ultimately phasing out the BETR program. By eliminating any new reimbursements (the state would continue to pay reimbursements for equipment purchased between 1995 and 2004), Laurie Lachance estimates Maine will save $10 million in general fund revenues by 2008.

The municipalities that actually collect the personal property tax on business equipment, however, will lose tax revenues, even though Maine's constitution requires the state to replace 50% of lost funds when it takes away a revenue stream. That makes it likely that towns such as Jay, which relies on business taxes for 70% of its revenues, will fight a repeal. Likewise, business-related tax reforms and other incentives can't be considered outside the context of a complete tax reform effort, which this year is being driven by two citizen referendums: the Maine Municipal Association's plan to boost the state's share of school funding and the proposed residential property tax cap. And any potential changes would have to be made in the midst of continuing budget shortfalls that have sent Baldacci scrambling to cut expenditures.

Those competing pressures leave business lobbyists mystified as to what, if any, reform measures will make it through the Legislature this year. "It's like asking which way the chicken is going to run after its head gets cut off," says David Clough, director of the Maine chapter of the National Federation of Independent Business.

Even with Pine Tree Zones and any other reforms the state may ultimately deliver, critics question how big an impact such measures can really have, considering Maine is competing with states such as New Hampshire, Nevada and Florida that have no income tax at all, or bigger, richer states that can afford business incentives such as cash advances to offset corporate moving costs. But Cashman, Lachance and Wischerath insist that Maine doesn't need to become the lowest-taxed or cheapest state in the country on every business metric. Simply bringing a few key measures in line with national or regional averages, they say, may be enough to convince businesses to take a closer look at Maine, so that benefits such as skilled workers and, yes, quality of life have a chance to stand out. "A lot of this stuff is about sending signals," says Cashman. "Businesses need to know we're interested in having them here, and we're trying to send a clear message by holding the line on taxes while funding business incentives."

In her gloomy presentations on Maine's current cost of doing business, Laurie Lachance is also trying to send a message. By showing statistics from the past 15 years or longer, which trace the gradual climb of taxes, energy, health and other business costs, she hopes to remind Maine business owners that each of those measurements wasn't always so far out of line with the national averages. "There's no reason Maine couldn't enjoy very vital economic activity; we just need to get some of these costs in line ˆ— and they haven't always been out of line," says Lachance. "Maine can have a healthy economic future, but we're going to have to make some tough choices just to get ourselves back on track."