The Maine Legislature is forming a working group to evaluate the State’s process for reviewing tax expenditures – a broad set of policies and programs that have a tax impact, such as exemptions, credits, and incentives. These range from sales tax exemptions on grocery staples and services like haircuts, to business tax incentives like the Pine Tree Development Zone program. Maine Revenue Services estimates that each year the state loses at least $4.5 billion dollars in revenue to more than 250 of these expenditures,1 an amount greater than the entirety of the state’s current budget spending.
Senator Nate Libby, co-chair of the Government Oversight Committee, introduced legislation to form the working group2 with the goal of making recommendations to improve the tax expenditure review process and the turnaround time for reviews to be completed. Consisting of a bipartisan group of members of the House and Senate, the group will operate this summer and fall and release a report by December 1. The recommended improvements could lead to key changes in the tax expenditure review process, helping to ensure legislators have the information they need to decide whether these programs are effective and fulfill their intended purpose.
Why is the review process important?
It is crucial for lawmakers to understand the efficacy of these programs, which divert funds that could be used to make other important investments in the state budget. Proper oversight and accountability are necessary to evaluate whether tax expenditures meet their intended goals and are a better investment than other alternative uses of the money.
Unlike education, health care, and other spending programs, lawmakers do not decide on specific amounts of funding to dedicate to tax expenditures. Instead, the various deductions, exemptions, and credits come off the top of the resources Maine takes in each year, leaving less in state coffers to fund programs. As a result, individual tax expenditures often do not face the same level of scrutiny as other budget items and limited data and research on their impact is available to help lawmakers make more informed budget decisions.
What is the current review process?
The legislature established a tax expenditure review process in 20153 with the goal of evaluating the effectiveness of state tax expenditures and creating a framework for suggested improvements. Reviews are led by the Office of Program Evaluation and Government Accountability (OPEGA) with oversight by the Legislature’s Taxation Committee and the Government Oversight Committee.
Currently OPEGA conducts reviews based on a classification system:
- Full evaluations — longer, more in-depth reviews — cover higher cost expenditure programs that target specific behavior (e.g. business tax incentives such as the Employment Tax Increment Financing program).
- Expedited reviews cover expenditures with broader policy goals that cannot easily be measured (e.g. tax exemptions for charitable organizations).
- No review is conducted primarily for expenditures under $50,000 or that the committees have otherwise determined do not warrant review (e.g. the tax exemption on fuel oil for burning blueberry fields).
Since the process was established, OPEGA has conducted full reviews of six programs and supported the Taxation committee in conducting expedited reviews of four categories of expenditures, each of which includes several programs within that category.4
In addition, Maine Revenue Services estimates the fiscal impact of tax expenditures every two years. However, this report does not include recommendations on the continuation or enhancement of programs. The Maine Department of Economic and Community Development (DECD) is also slated to conduct a review of business tax incentives.
Improving and potentially streamlining the current tax expenditure review process will help lawmakers make critical decisions about tax expenditure programs including whether they are operating as intended and create worthwhile investments for the State. Maine has one of the most robust tax expenditure review processes in the nation, and the proposed working group could create even more assurance that funds have the greatest impact.
 Maine Center for Economic Policy analysis of MRS data: https://www.maine.gov/revenue/sites/maine.gov.revenue/files/inline-files/tax_expenditure_21_0.pdf