ELLSWORTH — Several municipalities in Hancock County, including Ellsworth, are up for consideration as Opportunity Zones, designated areas eligible for significant tax breaks under the recently-passed federal tax overhaul.
The designation is intended to encourage investment in low-income areas.
Maine has 128 eligible tracts of land, up to 31 of which can be chosen under the program, which targets capital gains. Normally, capital gains profits from the sale of stock or other assets are taxed within normal brackets, up to 23.8 percent for corporations (including 3.8 percent surtax).
Under the new program, those who use their capital gains to invest in designated areas will see a 10 percent reduction in the tax on the money if they hold the asset for five years, a 15 percent reduction after seven years and will pay no capital gains tax on proceeds from the investment if they hold it for 10 years.
The authority to nominate the zones rests with the governor of each state. The deadline for designation was March 21; Governor Paul LePage asked for a three-week extension, putting the new deadline at April 11. The treasury secretary will certify the choices.
The Maine Department of Economic and Community Development (DECD), which will submit a list of recommended zones to the Governor, solicited comments in a press release in February. The criteria for evaluation are “broad” said Doug Ray, a spokesman for the department.
“We’re trying to find the ones that have the most realistic chance of success,” Ray said. “How can we get the best return for these tracts?”
“There are investors that are waiting to see these funds get set up so they can invest in these projects,” Ray added.
Proponents of the tax breaks say they will attract long-term investment in areas where developers might normally be reluctant to invest.
“In many Maine communities, this could be the catalyst to moving development projects forward by attracting much needed capital,” said DECD Commissioner George Gervais in the February press release.
“Opportunity Zones will help attract otherwise wary investors to underserved communities through the creation of Opportunity Funds. With an estimated $2.3 trillion in underutilized capital gains, certain investments will no longer be subject to capital gains tax to incentivize long-term investor commitment,” the release stated.
Investors with unrealized capital gains would roll the money into an Opportunity Fund, which could then be used to invest in real estate or businesses in Opportunity Zones.
“There are communities across Maine with vacant industrial sites and an available workforce. This program could be the catalyst to really move the needle in areas of our state that need it the most,” Gervais said in the release.
The federal government determined which parcels of land are eligible based on federal census data published between 2011 and 2015. Critics say the data behind the federal designation is out of date, not reflecting communities that may have since recovered from the recession and where developers already have incentive to invest.
James Myall, a policy analyst at the nonprofit Maine Center for Economic Policy, points to Bucksport, which lost its Verso paper mill in 2014, as an example. Under the program, certain areas in Portland are eligible, while Bucksport is not, Myall said.
The city of Ellsworth submitted a pitch and was also included on the list of areas recommended to DECD by the Maine Center for Economic Policy.
The center looked at areas with consistently high rates of unemployment where retail sales were struggling to recover, limiting them to tracts in urban centers “because we believe investment in these areas would have the most impact on the wider economic areas in which they are located,” according to the letter.
Belfast, Millinocket and Lewiston also were among the center’s recommendations to the DECD.
Myall said he is concerned with the “lack of transparency in the way this is being handled,” as it is not a legislative process, and said it’s more effective to encourage development with loans to Maine-based businesses.
“The research shows that many more jobs are created by new businesses starting out rather than enticing manufacturers,” said Myall, adding that out-of-state businesses “often pick up and leave when a better opportunity comes along.”
Myall said he is worried these funds could be used to subsidized projects already in the pipeline, particularly in the area of real estate development.
Results of similar programs, such as Maine’s Pine Tree Development Zones and the Obama-era Empowerment Zones, have been mixed, Myall said.
“There’s not a lot of evidence to show that companies or individuals invest because of these programs,” he added.
Nationwide job growth over the past few years has been largely limited to cities. Rural areas accounted for just 3 percent of that growth between 2011 and 2015, according to research from the Metropolitan Policy Program at the Brookings Institution.
The nation’s largest metro areas (those with over a million residents) accounted for 73 percent of job growth between 2010 and 2016, according to the report.