Buying Economic Growth

The Vermont Economic Progress Council recently awarded $5.8 million in grants to help foster economic growth. The  Council considered seventeen applications for the grant but only approved seven of them.  Only really deserving companies received grants, companies like Green Mountain Coffee Roasters, Burton, and Energizer. What's so telling about the council's choice to give grants to such prominent and successful companies is that doing so amounts to a tacit admission that without the grants these companies would have chosen to expand their businesses elsewhere.  And it's an admission that the companies would have expanded elsewhere for purely financial reasons. Alas, taxes do matter.  

     By  dividing the total grant amounts by the resulting expected economic growth, which the council has graciously guesstimated for us, we can now calculate the penalty for doing business in Vermont. Over the next five years, the program is expected to create $37MM in additional payroll and $68MM in capital investment. So, dividing 5.8 by 105 gives us a penalty of approximately 5.5%.
    While five percent may not sound like much, it's huge when you consider that 70% of the industries with publicly stated financials reported earnings of less than 5.5% last year. This means that without subsidies 70% of the industries in the US would not be able to survive in Vermont.
    What troubles me most about this is that we have a government council with the power to choose which businesses are permitted to survive in Vermont and which ones are not. While the ideologies behind this kind of central planning will always claim some noble purpose,  the fact is that even with the best intentions bureaucrats cannot be trusted to choose which businesses are truly deserving nor should they be permitted to speculate with public funds. Would the council have granted funds to Cars.com or Pixel Magic? Wouldn't a better solution be to make our business climate so attractive that people want to invest their own private capital here even without a return guaranteed by State funds? 
 

Comments

[Brattleboro_conservative]

The Vermont Economic Progress Council is nothing more than a backdoor effort to shower businesses with tax incentives to stay in Vermont. Maybe I should get a grant to buy more antiques to sell? If the state wants to be generous in keeping business in the state, maybe we could encourage them to subsidize ALL businesses in the state? Isn't socialism great! After all, we subsidize workers who could not get a job in private industry anyway (teacher unions, state employees).

[Jeffrey Pascoe]

I saw in the paper the other day that Vermont Pure Holdings, Ltd. is leaving the state. I don't follow the activity of VEPC much anymore, but I do recall that they awarded 100K in credits to Vermont Pure in the late 1990s.

[Karen L. Marshall]

There are apparently some significant misperceptions about the Vermont Economic Progress Council and the Vermont Employment Growth Incentive (VEGI) program that it administers in conjunction with the Tax Department.

These incentives are not grants. No money goes to these companies when they are authorized. Only AFTER the company creates jobs, meets or exceeds new job creation benchmarks, and makes capital investments in Vermont – thereby generating new tax revenues that the state would not have realized except for the incentives – are a fraction of the revenues paid back to the company as an incentive.

There were not only seven applications approved out of 17 in 2007. Seventeen applications were considered and 2 were denied, 15 were approved. However, after approval, 5 decided against the projects for which they were approved, decided to close, or to not file a claim for 2007. The other three have projects that begin in 2008.

The Council does not decide who gets the incentives and who does not. That is already decided by statute. The Council decides which applicants meet the statutory requirements to be approved for the opportunity to earn an incentive if payroll, job investment targets are met. One of the approval criteria is whether the activity would not occur, or occur in a materially different and less desirable way, in Vermont without the incentive.

The Council members are not bureaucrats. The Council consists of citizens of Vermont, most of whom are business owners and managers.

Council members would agree that a better business climate would be a better solution. This program is one of the few levers that we have as a state to do JUST that… improve the economic climate by creating jobs for Vermonters. Further, this is one of the few tools that the state has to attract businesses to Vermont and encourage Vermont businesses to stay here and grow jobs.

Regarding Vermont Pure, the company was approved in 1999 to receive tax credits under the program that predated VEGI, but when they sold the Randolph plant in 2003, which was the source of employment for the credits, all credits were disallowed and/or recaptured. Therefore, the company never utilized any of the tax credits.

Sincerely,

Karen L. Marshall
Chair

[Greg Decker]

So if I understand this correctly Karen, speaking on behalf of the State, is arguing that lowering corporate taxes via performance based tax credits fosters more economic activity. That's a novel idea. Perhaps we can make these tax credits permanent... and let all the businesses in the state have them. Really.

My issue with the program is that it politicizes the free markets. Why should one company get a preferential tax rate over another? Why should the government have the power to decide which businesses qualify for special treatment? And why should these businesses need to convince a government agent of the merits of their growth plans? Wouldn't a better solution be to simply lower the tax burden of all companies?

Or, would doing this jeopardize the State's ability to dole out special preference to spacial friends? Here's a bit from the 2004 audit of VEPC:

"The Tax Department and VEPC lack adequate controls to enforce key performance provisions of the Economic Advancement Tax Incentives (EATI) program, as required by statute."

"Due to the absence of these controls, we found that 21 companies promised to create a total of 3,478 permanent new jobs and were allowed $20,957,578 in tax credits in the time period reviewed. The companies created 226 new jobs – 6.5% of the promised total. Eight of the 21 companies reduced jobs in the time period reviewed, yet were allowed a total of $8,092,210 in tax credits."

"The average direct public expenditure for the 226 jobs created is $92,733 per job."

http://auditor.vermont.gov/uploads/1140205589.pdf

Sure looks like the board was handing out money wily nilly. You'll need to be a lot more convincing if you want me to believe none of those handouts where undeserving and given for political reasons.

I understand from the 2006 audit that the But-For test used to determine the likelihood of the development happening elsewhere was restructured to address the issues raised in the 2004 audit. This, however, still does not address the fundamental question of why the government thinks it is its responsibility to decide which companies will grow. ALL companies that invest their capital do so with the intent to grow and they all deserve equal treatment.