"Improved" Seed Capital Tax Credit Ramps Up Benefits For Maine's "Targeted Sector"

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Sales Tax Increase for Main Street but An Exemption for The Targeted Sector

As Previously reported, the entire retail sector is excluded from the services and redistributive benefits of The Maine Department of Economic and Community Development so why is Mr Douglas Ray, the legislative liaison for the DECD issuing a press release about a sales tax exemption for one of Maine's special interest industries- the aviation industry? Looks like it isn't the entire retail industry after all- merely Main Street that is excluded.

The extension of a sales-tax-free-ride for a favored special interest in the legislature's "targeted sector", comes after recently announcing a new tax hike on the general Maine economy.

Championing the sales tax relief for the Aviation Industry is Governor Paul LePage who says

"This exemption is absolutely critical to sustaining and building upon the success the industry has already experienced since 2011 when I signed the original exemption into law,” said Governor Paul R. LePage. “This is a great example of good public policy that not only makes Maine more competitive in the aviation industry, but leads to the generation of new revenue and creation of high-quality jobs.”- Governor LePage

Good policy? Then why isn't it extended across the board to all Maine businesses ? A sales tax hike will only result in raised revenues if the retail industry is thriving, but this summer might as well be called the season of the shrinking dollar from what I am hearing at street level. If the legislature wants to increase revenue perhaps it might have better results by taxing  growing business sectors such as the aviation industry - but  of course our state government selected the aviation industry for growth by exempting it from taxes imposed on the general retail sector.

While word of mouth reports a record slow retail season, in February of this year,Charles S. Colgan, professor of public policy and management for the Muskie School of Public Service at the University of Southern Maine in Portland, reported "Maine has exceeded U.S. in employment growth…in retail.”

This, of course is of no import to our legislature, having eyes only for "quality jobs" attractive to the upper classes. Retail jobs are not upper class jobs but despite all the legislative manipulations, the retail sector is where, in February, jobs were reported  to be growing while Maine's special interest sector was reported on be traveling on the slow track to job creation

The state’s unemployment rate, at 7.2 percent, is lower than the national average of 7.7 percent—thanks in part to the retail sector. .......
“(The state) has lagged in every other sector (besides retail), and particularly troubling are the performance of the manu­facturing and professional and business services sectors,” Colgan says in the report. “Manufacturing employment has grown by 1.9 percent in the U.S. relative to the trough, but in Maine after some quarters of modest growth, has dropped even below the worst quarter of the recession period by an ­additional 3.3 percent.” Shelby Report

Could that be because globalist interests occupy the heart of Maine State Inc's economic development polices? Global capitalists are only interested in manufacturing prototypes in Maine and that is accomplished inexpensively by student labor at Maine's State Inc's new Advanced Manufacturing Center at the University of Maine . The few jobs beng created in prototype manufacture are being done at the state owned manufacturing facility taking those jobs out of the private sector. The end goal of prototype design is general manufacturing- that's where the sustainable and quantity jobs are, but the culture at Maine State Inc is to follow the money - to China and Thailand and other reaches of the global low wage labor market place.


So now the legislature is going to pass LD 743 An Act To Extend and Improve the Maine Seed Capital Tax Credit Program, sold as bringing capital into the Maine economy- or so they tell us.- although the requirement that the eligible business bring capital to the state has been struck out in the new "improved' version of the Seed Capital Tax Credit statute, (see below for a complete list of changes)

The advantage for prospective investors is that they gain state income tax credits for up to 60% of the cash equity they provide to eligible Maine businesses, spread over four years. The advantage for a startup business, Davis says, is that the tax credit considerably reduces the risk for would-be investors."In fact, for a lot of investors, it was the tipping point that helped seal the deal with them," he says. "It made our job a lot easier: Investors know 60% of their investment was protected.  Maine Biz March 4, 2013

The proponents of the tax credit program also tell us that Maine gets only one ninth the capital investment of neighboring New Hampshire, failing to mention that New Hampshire's only seed capital tax credit program is administered by the municipalities rather than by the state. From what is reported on the New Hampshire website, New Hampshire's economic development is not as centralized as it is in Maine, shifting costs and decisions to the municpalites. At the  municipal level the people have a voice in whether or not they want to cover up to sixty percent of the risk for large capital investors. By managing tax payer subsidized investment risk at the local level, the burden of cost is on the community that will benefit the most from job creation.

At street level common sense kicks in when measuring the costs of those jobs to the general public- a subject rarely, if at all, mentioned in the promotions for the program published by MaineBiz, The Bangor Daily News and the Portland Press Herald. Is cost to the general taxpayer an issue worthy of consideration? Is New Hampshire's greater success at attracting capital a story worthy of investigation? Not to Maine's media which serves as a PR service for Maine State Inc, while Maine State Inc serves the interests of a targeted sector- not the interests of all of the people in Maine- this is an undeniable fact as the words "targeted sector" are found consistently throughout the statutes that created the authority for the legislature to manage the Maine economy from above. This is a system of government imposed on top of the pre-existing system in a manner similar to government by tzars. Underneath the layer of tzar government, similar to New Hampshire, Maine provides for municipal economic development.

Although the Home Rule Amendment of the Maine State Constitution provides municipal authority for making economic development decisions, just eight short years after the Home Rule Amendment was added to the Maine State Constitution, the legislature chartered The Maine Development Foundation, with these incredible words:

The state's solitary burden to provide for development should lessen through involving the private sector in a leadership role. (emphasis mine)- quote from the statute instituting the Maine Development Foundation

The above words are a direct quote from the special act of legislation chartering The Maine Development Foundation - "a not-for-profit corporation with a public purpose", which I can never repeat too often, is a violation of Article IV Part Third Section 14 of the Maine State Constitution, which prohibits the legislature from chartering corporations by special act of legislation with an exception for municipal purposes- with no exception for public or non-profit purposes. In declaring that economic development has been until then the state's solitary burden, the legislature feigns ignorance of the Home Rule Amendment passed by the will of the people only eight short years previously:

Article VIII.
Part Second.
Municipal Home Rule. (1969)

Section 2.  Construction of buildings for industrial use.  For the purposes of fostering, encouraging and assisting the physical location, settlement and resettlement of industrial and manufacturing enterprises within the physical boundaries of any municipality, the registered voters of that municipality may, by majority vote, authorize the issuance of notes or bonds in the name of the municipality for the purpose of purchasing land and interests therein or constructing buildings for industrial use, to be leased or sold by the municipality to any responsible industrial firm or corporation.

As far as I have been able to determine, this 1977 statute exempting investment companies  from taxation has never been repealed. making the refundable tax credit into a direct cash payment/

In Maine, the new extension of the Seed Capital Tax Credit  will accelerate the transference of wealth to the wealthy in the following ways:

1.  In 2013 the Seed Cap[ital Tax Credit had reached its limit. The Legislature unanimously passed a bill to expand and improve the credit for investors in the following ways:
   
   
   1. ·Removing limits on the life of a capital fund. Previously there was a 15 year limit in which a tax credit can be applied
   2. The following sentence is added to the definition of a venture capital fund: An entity that otherwise qualifies as a private venture capital fund may elect not to be treated as a private venture capital fund for purposes of this section with respect to any proposed investment.
   3. The amount of annual gross sales for the business receiving the investment has been changed from $3,000,000 or less to $5,000,000 or less.
   4. The requirement that the eligible business bring capital to the state has been struck out.
   5. In section D the word "entity" is struck out and replaced with "private venture capital fund"
   6. Section D changes the aggregate limit for a private venture capital fund from $500,000 to $4,000,000 and strikes out the individual limit within the aggregate for entities treated as a flow-through entity for tax purposes.
   7. Changes the requirement that the operation of the business must be the full-time activity of the principal owner to substantial professional activity of one or more individuals who are not managers of the private venture capital fund, as determined by the authority.
   8. Changes the prohibition against a tax credit certificate being issued to a private venture capital fund if an investor in the fund is a principal owner of the eligible business or a family member of the investor has any existing ownership interest in the business. by striking out "investor" and replacing it with "manager of the fund".
   9. Increases the amount that the tax credit is not allowed to exceed which was $2,000,000 in 1996 and becomes $5,000,000 in 2015-
   
   
   
   The Expanded and Improved Seed Capital Tax Credit was unanimously supported in Maine Senate
   It was passed by the House- no roll call available.

Why would change #2, apply only to "this section" which is non-other than a self reference to the paragraph that we see which serves as a definition of a private capital fund and then concludes with the addition of a so-called "improvement" that states that an entity that otherwise qualifies as a private venture capital fund may to elect not to be treated as a private venture capital fund?

1-A. Private venture capital fund.  As used in this section, "private venture capital fund" means a professionally managed pool of capital organized for a limited life to make equity or equity-like investments in unrelated private companies using capital derived from multiple limited partners or members at least half of which, measured in dollar commitments, are unaffiliated and unrelated, and includes any venture capital fund licensed by the United States Small Business Administration. The authority may require such information as may be necessary or desirable for determining whether an entity qualifies as a private venture capital fund. An entity that otherwise qualifies as a private venture capital fund may elect not to be treated as a private venture capital fund for purposes of this section with respect to any proposed investment.

What utter double speak! The only reasonable conclusion is that what is referred to as "this section" is a definition that is to be applied to the entire statute - a self-negating definition. Why would the ability to negate ones qualification as a "private venture capital fund" be important? Perhaps because of this:

For investments made in tax years beginning on or after January 1, 2012, a tax credit certificate may be issued to an investor other than a private venture capital fund in an amount not more than 60% of the amount of cash actually invested in an eligible Maine business in any calendar year. For investments made in tax years beginning on or after January 1, 2014, a tax credit certificate may be issued to an investor other than a private venture capital fund in an amount not more than 50% of the amount of cash actually invested in an eligible Maine business in any calendar year. Rules adopted pursuant to this section are routine technical rules as defined in Title 5, chapter 375, subchapter 2-A.
Sec. 1.

Taking into consideration that money is transferred to private capitalists via the state chartered charity- The Maine Technology Institute -( chartered for "public and charitable purposes), on the basis of  an "equal matching fund"-it makes it possible for the business owner to provide half of the total investment in his own business and the state charity provides the other half . Does the total then become the amount on which the percentage in the Seed Capital Tax Credit is measured ?

Seeing return on investment

Agnew likens the seed capital tax credit to the third leg of a three-legged financial stool, with R&D spending and the Maine Technology Institute's Innovation Funding Program, along with the Small Enterprise Growth Fund, being the other essential legs of what he characterizes as the state's modest efforts to support early-stage businesses with high-growth potential but high risk of failure.Maine Biz March 4, 2013

Note: Since 2014 The Small Enterprise growth Fund is now known as The Maine Venture Fund

How does that math work out?

A private investment group, electing not to be treated as a private investment group, invests money into the business that is matched by public charity, MTI ( later sections of this bill are clearly tailored to benefit MTI ) . The Investment group then gets a tax credit of 50% of the investment meaning that the investor group makes a profit on 100% of the total investment although the taxpayer is actually covering 50% of the Investment- but the taxpayers contribution is not treated as an investment for which a return on investment is anticipated- but as a tax credit- for which the tax payer gets nothing except the collective benefit of jobs created. This is called 'socializing the risk and privatizing the gain" a new "innovative" tool of the global capitalist who uses political ideologies as a means to his own gain.

If the qualified matching investment submitted by the entrepreneur includes money derived from a matching grant from Maine's public charity, The Maine Technology Institute, that means the entrepreneur only contributes $2500,000 of a $5,000,000 investment for which he might receive a refund of 3,000,000 ( calculating tax credit at 60%)- Now who wouldn't want that? - answer: someone with a moral conscience

If the investment group happens to be the state chartered Small Enterprise Growth Fund (the Maine Venture Fund)- the taxpayer is already subsidizing this fund to the tune of 10% in a "roll over investment" which functions like a non profit investment in which all profits are reinvested in the fund. So if the same total investment of $5,000,000.00 is used as the starting point- and the SEGF matches that- what then? This is getting too much for me to fathom ! Could the culture of corruption in Augusta really go that deep? If all three "essential legs" are calculated on the same investment amount of $5,000,000.00 that means that the entrepreneur is not putting in a dime but receiving a possible total $3,000,000.00 of redistributed capital in exchange for absolutely nothing- with one exception - that the SEGF "high growth investors" demand an "exit strategy" (selling the business) to insure that they make their high growth profits. 

D. The investment with respect to which any entity private venture capital fund is applying for a tax credit certificate may not be more than an aggregate of $500,000 $4,000,000 in any one eligible business invested in by a private venture capital fund in any 3 consecutive calendar years, except that this paragraph does not limit other investment by an applicant for which that applicant is not applying for a tax credit certificate and except that, if the entity applying for a tax credit certificate is a partnership, limited liability company, S corporation, nontaxable trust or any other entity that is treated as a flow-through entity for tax purposes under the federal Internal Revenue Code, the aggregate limit of $500,000 applies to each individual partner, member, stockholder, beneficiary or equity owner of the entity and not to the entity itself. This paragraph does not limit other investment by an applicant for which that applicant is not applying for a tax credit certificate. A private venture capital fund must certify to the authority that it will be in compliance with these limitations. The tax credit certificate issued to a private venture capital fund may be revoked and any credit taken recaptured pursuant to Title 36, section 5216-B, subsection 5 if the fund is not in compliance with this paragraph.

 The new improved Seed Capital Tax Credit is tailor made favoritism for the SEGF in the changes found in Sect 3 D, in which the word "entity" is struck out and replaced by "private venture capital fund". The word "entity" included both public and private capital funds. The new change in language insures that the restrictions in Section 3D fare not applicable to the SEGF -a public corporation chartered by special act of legislation- with these words :There is established as a body corporate and politic and a public instrumentality of the State the Small Enterprise Growth Board, which consists of 11 members appointed by the Governor

But here is the riddle and the enigma: If a private venture capital fund is defined as an entity  which, for the purposes of investment, can chose not to be treated as a private venture capital fund - AND if the language used in Section 3D has been changed from "entity" to "private venture capital fund" - Does that mean that Section 3 D does not apply to a private venture capital fund, if it  chooses not to be treated as a private venture capital fund ?- OR does the usage of "private venture capital fund" in Section D 3 derive its meaning from the entirety of the definition in Section 1-including the latest "improvement" recently added to that definition? If so. whether or not a private venture capital fund chooses to be treated as a private venture capital fund- the conditions of Section D 3 apply by definition ( section 1A)- OR is the private venture capital fund, by definition an entity, to which the conditions of Section D3 no longer apply, now that the word "entity" has been struck out? This "improvement"  is a legal interpretation nightmare!

However if the interpretation of the law takes into consideration the intent of the law-The "improvements" in this Act seem clearly intended to eliminate all restrictions on the venture capitalists, while creating the illusion of  doing the opposite to the casual observer. The irrational construct of letter of the law does not bode well for the people of Maine. The only perspective from which the changes in this Act can said to be an "improvement" is from the perspective of the venture capitalist. The legislature seems oblivious to the fact that they were elected by the people of Maine to serve the people.

Does the consortium that makes up the "three legged financial stool (MaineBiz)" explain improvement #5 ? -The requirement that the eligible business bring capital to the state has been struck out.

 It is likely that the tax payer roll over investment in the SEGF covers the overhead costs of the SEGF including the salaries of management- but that's just speculation.

The point being , that in order to realize the total cost and alleged benefit to the tax payer one has to factor in all of the pieces of the puzzle that make up Maine State Enterprises, which as a whole have an underlying design. I am speculating that the functioning role of the legislative liaison would be to help the legislature coordinate the connection between all the various "agencies" - the word used to identify the independent parts of Maine State Inc and its quasi extensions.

Additional details about the Seed Capital Tax Credit and it's complementary construction with the three legs of the Maine Economic Development package for the "targeted sector"

1-A. Private venture capital fund. As used in this section, "private venture capital fund" means a professionally managed pool of capital organized for a limited life to make equity or equity-like investments in unrelated private companies using capital derived from multiple limited partners or members at least half of which, measured in dollar commitments, are unaffiliated and unrelated, and includes any venture capital fund licensed by the United States Small Business Administration. The authority may require such information as may be necessary or desirable for determining whether an entity qualifies as a private venture capital fund. An entity that otherwise qualifies as a private venture capital fund may elect not to be treated as a private venture capital fund for purposes of this section with respect to any proposed investment Quote from new improved extension of the program

•  "at least half of which, measured in dollar commitments, are unaffiliated and unrelated, and includes any venture capital fund licensed by the United States Small Business Administration." Inversely stated this says that half of the total amount of dollars committed can be from an affiliated and related sources.
•  The phrase :"Any venture capital fund licensed in the United States" is inclusive of the . The Small Enterprise Growth Fund submits its annual report to the Maine legislature. The Maine legislature chartered the SEGF. Beyond the 10% invested by the taxpayers, it is difficult to discover the identity of  the other 90% of the investors .  It is probable that a Freedom of Access request would be answered with a prohibition provided by a legal non-disclosure agreement. If so, it is just another reason why such investment corporations belong in the private sector and not in the government  sector- as provided by The Maine State Constitution, Article IV Part Third Section 14.
• Since the SEGf is chartered by the legislature, it qualifies as a public investment fund and so the recent change in the letter of the law regulating the Seed Capital Tax Credit, Section D no longer applies to the SEGF, as the SEGF is not a "private venture capital fund"

Note: Since 2014 The Small Enterprise growth Fund is now known as The Maine Venture Fund

10 §384. BOARD (SEGF)
.
Establishment; membership.
There is established as a body corporate and politic and a public
instrumentality of the State the Small Enterprise Growth Board, which consists of 11 members appointed bythe Governor as follows (emphasis mine)

Notice of Speculation: I am pointing out the loopholes in the statutes that allow for the government sector to become investors. I am not saying that members of our government sector are investors, just pointing out that the statutes are written in such a way to allow it, and if it is allowed, it is reasonably probable that it is also assures that investments can be made behind a veil of secrecy even from others in government service.

The following is not a new change in the extended Seed Capital Tax Credit Program but is a juicy little loophole and deserves a mention here: ( noting that the words "qualified investment" parse out into "at the time the investment qualified - OK if it's afterwards!)

H. A private venture capital fund is not entitled to the credit if it owns in excess of 50% of the an eligible business, except that, if the private venture capital fund is issued a tax credit certificate and later makes an additional investment that increases its ownership to more than 50%, the existing tax credit certificate remains valid and is not subject to revocation due to the ownership percentage as long as there was no intent to take controlling ownership at the time of the initial qualified investment.

And what bureocratic agency determins whether the intent existed in the first place? -The Maine Department of Mind Readers?-ie- the thought police!

Also worth noting

• The tax credits are "refundable", meaning that that if the investor does not owe the Maine state Taxpayers, then the Maine State Taxpayers owes the investor and will write a check to cover 40 -60% of the investors risk at the rate of 25%  the payment owned to the investor per year. 
• The investor does not owe the Maine taxpayer a return on the investment. The risk has been socialized and the gain privatized as a new "innovation" of global capitalism in which political ideologues are mere tools in the hands of the global investors to deliver the fruit of the labor of the people into the hands of the "targeted sector"
•  Definition of 'Refundable Credit'(Investopedia)

A tax credit that is not limited by the amount of an individual's tax liability. Typically a tax credit only reduces an individual's tax liability to zero. Refundable credits go beyond this and so really can be considered the same as a payment.

 LePage is declining to sign the bill not because he doesn’t support the program, Butera said, but because he believes the bill could have been “more impactful. Bangor Daily News

Really ?!!

(note-to date I have not located any restrictions related to investments of money received from other Maine Economic Development programs in the current or previous versions of the tax credit- that does not exclude the possibility that I missed it. If I learn of such a restriction- I will publish the information )

Fiscal Note for the Maine Seed Capital Tax Credit

"Amending the Maine Seed Capital Tax Credit Program as proposed in this legislation would reduce General Fund revenue by approximately $455,000 in FY 2013-14, $1,300,000 in FY 2014-15 and $2,200,000 in FY 2015-16. Municipal Revenue Sharing would experience a slight reduction as well. Additional administrative costs incurred by Maine Revenue Services can be absorbed with in existing budgeted resources."

In her testimony to the joint standing committee on taxation,
Beth Bordowitz.the Chief Executive Officer at the Finance Authority of Maine said this:

One suggestion we would offer concerns private venture funds in Section 3 of the bill.The proposed language would modify existing I0 M.R.S.A.§1100-T(2—C)paragraph(D)to increase the limit on tax credits for private venture capital funds from $500,000 to $4 million. This is a rather larger increase from the current limit. We think a more modest increase of $1 million is preferable and would better limit the fiscal impact of the bill.
 
The suggestion went unheeded- The fiscal impact decreases state revenues by exactly 60% of 4 million in 2015-1016.

2012 Version of the Seed Capital Tax Credit