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By EDWARD D. MURPHY
Blethen Maine Newspapers 02/21/2008

Blethen Maine Newspapers

The federal government, trying to avoid a recession, is encouraging businesses to spend money by allowing them to write off investments faster than normal. But officials in Maine say they can't afford to give businesses the same break on state taxes.

Maine is struggling with a budget shortfall and doesn't want to add an estimated $2.5 million to it this fiscal year and $20 million next year by giving businesses the accelerated write-off that federal tax rules will allow.

"The cost of that would be extensive," said David Farmer, a spokesman for Gov. John Baldacci.

Farmer said that an economic forecasting team will report a new estimate for the budget shortfall next week. The expectation is that it will be nearly $200 million, not including the revenue that would be lost with the business tax break.

Even so, businesses note that if the break isn't extended to state taxes, investments will be less enticing in Maine at a time when the economy is slipping.

Lisa Martin, executive director of the Manufacturers Association of Maine, said state officials need to consider not only decreased tax receipts, but also the jobs that could be created by a tax break that encourages businesses to invest.

"Instead of losing revenue, what would we be gaining by more investment?" she asked. Farmer said that a package of fixes to plug the budget deficit, which is expected to be sent to the Legislature in a few weeks, will include language to "decouple" Maine tax rules from the federal stimulus package and its depreciation rule, which was adopted this month.

The situation is similar to a post-Sept. 11 economic stimulus bill that encouraged business investment through a "bonus depreciation" allowance. Along with about 30 other states, Maine broke from federal tax rules on that provision.

Businesses write off investments in equipment through depreciation, which represents the declining value of machinery or other equipment over time.

A certain percentage of the equipment's value can be claimed as a tax deduction for each year of its estimated life. That figure can be used to offset earnings, and lower taxes.

There are different ways to calculate depreciation, but the simplest is to divide the cost of the equipment by its expected life span.

For instance, if a piece of equipment is expected to last 10 years, a business could claim depreciation of 10 percent of the cost for each year over that decade.

Worries that the economy is on the edge of a recession prompted the federal government to offer a bonus depreciation this year.

Businesses will be able to write off half the value of an investment in the first year equipment is placed in service. That's a huge incentive for businesses to buy equipment now rather than wait for the economy to turn around, and that increased investment could help strengthen the economy.

As with personal taxes, Maine's business taxes are usually calculated on figures from the federal return, including depreciation. Most businesses can claim the same amount of depreciation on their Maine tax returns as they do on their federal returns.

If Maine decouples from federal rules on depreciation, businesses will have to delete the bonus depreciation from state returns.

That would increase a company's earnings that are subject to Maine business taxes this year. It would also create an accounting headache for this and subsequent years, as businesses adjust federal and state depreciation calculations.

"Maine is moving away from business incentives that the federal government is putting in place," said Peter Dufour, senior manager for Macdonald Page, an accounting and management consulting firm with offices in South Portland and Augusta. "Maine is essentially saying, 'We're not concerned about businesses making these investments.' "

Maine won't be alone in decoupling, said Nick Johnson, director of the state fiscal project at the Center on Budget and Policy Priorities, a research organization in Washington, D.C.

Johnson said about 26 states are expected to join Maine in fully or partially decoupling. In New England, tax laws in New Hampshire, Connecticut, Massachusetts and Vermont automatically exclude federal bonus depreciations, he said.

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