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MAINE COMPASS: Immediate expensing would spur investments

Commercial-sector growth needed for state fiscal balance

Maine’s employment is divided into two sectors — commercial or for-profit establishments and noncommercial establishments, such as government, not-for-profits and religious organizations.

This distinction is important because only commercial, for-profit establishments can create new jobs, income and wealth. Noncommercial establishments exist from the fruits of the commercial sector via taxes or charitable contributions.

The Maine Heritage Policy Center has drawn on a powerful new database of Maine’s businesses called the National Establishment Time-Series database for a new analysis of Maine’s commercial and noncommercial sectors.

The database has been culled from a Duns & Bradstreet Marketing Information file that has tracked 161,351 commercial, not-for-profit and government establishments that existed in Maine between 1989 and 2007. As such, the database is the most comprehensive establishment-level census available.

Maine’s commercial sector has been faring badly during the 15-year span between 1993 and 2007. The overall share of commercial jobs as a percentage of total jobs ranks the 10th-worst in the country and continues to fall further behind with a growth rate that ranks eighth-worst and well below the national average.

Maine’s commercial sector has undergone a shift from manufacturing to services. Among the largest job losers are ship and boat building and repairing, down 60 percent, and paper mills, down 37 percent. The largest job gainers are men’s and boys’ clothing stores, up almost 10-fold and individual and family services, up more than double.

Regionally, the commercial sector in the rim counties (Penobscot and Piscataquis counties and those that border Canada) has fared worse than those in the core counties. In fact, since 2001, commercial jobs in the rim counties have fallen every year except one (2006).

This decline in manufacturing has been a major drag on the growth in Maine’s commercial sector. Overall, finding ways to encourage manufacturing in the rim counties would help solve many of the ills in Maine’s commercial sector.

On the other side of the coin, as a percent of total jobs in the country, Maine has the 11th-largest noncommercial sector (government, not-for-profits, religious organizations).

 The key industry to ensuring a balanced noncommercial sector is elementary and secondary schools, whose 39,968 jobs in 2007 were nearly three times that of next largest noncommercial industry. Of course, one unanswered question is whether current policies, such as school consolidation, will result in growth or shrinkage of the state’s noncommercial sector.

What can policymakers do to help remedy the problems being faced by Maine’s commercial sector?

One simple solution would be to change the income tax code to allow businesses to immediately expense all capital purchases as opposed to the arbitrary and inefficient depreciation timetables that allow for write-offs that can take decades.

This change would encourage businesses to invest in new capital, which would increase worker productivity, especially in Maine’s troubled manufacturing sector. Higher productivity would mean higher wages and salaries because businesses can produce and sell more goods and services.

As an added bonus, immediate expensing would save businesses a tremendous amount of time and money in tax compliance costs. Depreciation timetables create a large amount of paper shuffling. In fact, it is not unusual for businesses to keep two sets of accounting books — one for tax purposes, based on depreciation, and another for business purposes, based on cash flow.

Overall, Maine must become friendlier toward business capital investment. Data from the IRS strongly suggest that Maine is experiencing “capital flight” out of the state. Simply put, people are taking their money and investing in other states.

In 2002, Mainers claimed capital income (interest, dividends and capital gains) per taxpayer that was 86 percent of the national average. By 2008, that ratio had fallen to 64 percent of the national average.

Had this capital income stayed in Maine, the current budget crisis would be much less severe than the estimated $1.1 billion shortfall in the next two-year budget cycle.

The ultimate source of capital income is a strong and vibrant commercial, for-profit sector. Without serious efforts to boost the commercial sector, state government had better get used to large, perennial budget deficits.



J. Scott Moody is the chief economist at The Maine Heritage Policy Center, a research and educational organization whose mission is to formulate and promote conservative public policies based on the principles of free enterprise. He can be reached at jsmoody@mainepolicy.org.