Democrats on the Legislature’s labor committee successfully blocked a bill Thursday that would have expanded a controversial tax credit program, prevailing after a contentious debate that prompted lawmakers to take a cool-down break.

L.D. 297 would have expanded the Maine New Markets Capital Investment program, which offers tax credits to investors in businesses in low-income communities, by doubling the amount of available tax credits from $97.5 million to $195 million.

Sen. Nate Libby, D-Lewiston, talks about his proposed amendment to L.D. 297 during a labor committee work session Thursday.

Previously, the committee had voted unanimously to support expansion of the program, but never formally sent it to the full Legislature. The committee decided to reconsider the bill after a Portland Press Herald examination showed how sophisticated financiers had abused the program.

“A lot of times we get duped,” said John Patrick, D-Rumford, and a member of the Labor, Business, Research and Economic Development Committee. “It sounds good at the start and you want to … do good, especially for low-income communities, rural communities, and you expect that the programs are going to be transparent, they’re going to be straightforward, but when you find out there are the possibilities of the abuse of taxpayer money, it’s just not right.

“I’m glad for the articles that came out in the paper. It brought some light to this. I think from my standpoint being on the committee I learned a lesson: When in doubt, if it sounds too good to be true, don’t believe it and vote no.”

The Maine New Markets program was created in 2011 to provide investors with state tax credits worth 39 percent of their total investment in a business in a low-income community, payable over seven years. But unlike in the federal program on which it was modeled, the Maine tax credits are refundable, meaning the investors can redeem them for cash if they have no Maine income tax liability. The program is nearing its investment cap of $250 million. Not expanding the cap would effectively kill the program.

A Press Herald examination showed that nearly half of what has so far been invested in low-income communities – about $91 million on paper – never made it to the designated companies for new upgrades or expansions. Instead, the money was used to pay off old loans or stayed on the books for less than 24 hours through the use of a financial tool known as a one-day loan.

The program was tapped by Cate Street Capital, a New Hampshire private equity firm, to attract a $40 million investment in Great Northern Paper, a foundering mill it owned in East Millinocket. But of the $40 million, $32 million was in the form of one-day loans, $7 million was used to pay down high-interest debt and the rest went to brokers’ fees. None of the money was used to modernize the mill as described in the initial application to the program, yet taxpayers will pay $16 million to the out-of-state investors. The mill closed and filed for bankruptcy last year.

LOOKING FOR ACCOUNTABILITY

At the labor committee’s work session Thursday, co-chair Rep. Erin Herbig, a Democrat from Belfast, introduced an amendment that would effectively scuttle the bill’s original intent. The amendment provides a clawback measure to recoup or revoke tax credits if the investment deals are determined to be “sham transactions.” It would also prohibit the use of one-day loans.

“I think the big sentiment from this amendment is that we feel we need to press pause on this program and take a hard look at how this program has been conducted,” she said during the meeting.

Herbig’s amendment sparked heated debate, including a spat between Rep. James Campbell Sr., an independent from Newfield, and the committee co-chair, Sen. Amy Volk, a Republican from Scarborough, that required a break to let lawmakers cool off.

After they returned, the vote ran along party lines, with the six Democrats and Campbell voting the bill “ought to pass” with Herbig’s amendment. The measure still will go before the full House and Senate for consideration.

The six Republicans on the committee voted against the bill as amended, and plan to file a minority report to voice their disapproval of Herbig’s amendments. They supported a separate amendment introduced by the bill’s original sponsor, Sen. Nate Libby, D-Lewiston, that would still double the program’s cap, but over a period of five years rather than immediately, and also prohibit the use of one-day loans.

Volk said eliminating the one-day loan, “which is the biggest form of abuse,” addresses the major issues with the program. She supports raising the investment cap, which essentially replenishes the program’s funding.

“Maine has enough working against it without putting an end to programs like this,” she said. “We have very few economic development tools in our toolbox, and to end this program is taking yet another tool out of that toolbox.”

TRYING TO END ‘SHAM TRANSACTIONS’

Central to the Democrats’ initiative is preventing future “sham transactions,” which in Herbig’s amendment are defined as investments in which the investors receiving the tax credits did not have a corresponding amount of capital at risk, or the capital at risk was used to purchase ownership interests from existing investors rather than directly from the company, or to refinance existing loans rather than provide new capital to the business for its operations.

The Democrats’ amendment also makes the bill an emergency measure, which allows it to take effect immediately if passed by the House and Senate. It also directs the Legislature’s government oversight committee to investigate the program and report back to the labor and economic development committee by February 2016.

“There will be a study or recommendations from government oversight to look at the program and find out if these sham transactions were truly shams, and if so to look into what actions can be taken moving forward,” said Rep. Ryan Fecteau, a Democrat from Biddeford. “I think that’s an important step. We should be looking at whether this program is successful and has had more merit than bad before we start submitting to another $250 million in allocations.”

Sen. Andre Cushing, a Republican from Hampden, said that Democrats were taking advantage of the opportunity to “sensationalize” the topic in the wake of the media scrutiny surrounding the program and specifically the Great Northern Paper deal involving Cate Street Capital. He acknowledged the program needs to examined, but he said effectively killing it by not allocating more funds would send the wrong message to would-be investors in Maine.

“I’m concerned that we don’t throw the baby out with the bath water here,” he said. “Because we’re competing to bring new business and new jobs to Maine, and when we send a message to business owners and investors that Maine views this very harshly then we sometimes chase away some of the better-quality people we may want to invest in these programs.”