Hoffer: Governor wants to raise cap for business incentives by $15 million

Editor’s note: There will be an Emergency Board meeting in the governor’s ceremonial office at 1 p.m., Jan. 13 to discuss the annual cap for the Vermont Employment Growth Incentive, which is a economic development incentive program. The Vermont Economic Progress Council “offers incentives for business recruitment, growth, and expansion” through VEGI, which can provide cash payments to companies that create jobs, according to information from VEPC.

Vermont Employment Growth Incentive summary

The following is an open letter from policy analyst Douglas Hoffer to Rep. Martha Heath, Rep. Michael Obuchowski,Sen. Ann Cummings and Sen. Susan Bartlett:

I understand that the Emergency Board has been asked by the governor to raise the annual cap for VEPC / VEGI from $10 million to $25 million.  I urge you strongly not to do so without further analysis and deliberation.

The Economic Development section of “Challenges for Change” calls for the creation of a data driven strategy before deciding how to allocate resources.  In this case, there appears to be an assumption that VEGI is a cost-effective program.  In fact, three State Auditors, the Joint Fiscal Office, and others have raised very serious questions about the efficacy of the old EATI and now VEGI (which are very similar in many ways).

•    The Auditor has found that the background growth rate methodology is deeply flawed.  In my opinion, it has probably cost the state millions for jobs that would have been created without the “incentives.”  The Joint Fiscal Committee asked the House Commerce Committee to look into this further.  It seems imprudent to act before the issue is resolved.

•    The “but for” test, upon which the entire program’s purported fiscal benefits are predicated, is not auditable and is suspect.  For example, in the midst of this deep recession, it seems unlikely that a business would expand significantly unless there were sound business reasons to do so.  Thus, the businesses applying for VEGI “incentives” right now are probably those that are lucky enough to be largely unharmed by the recession or those that have shed jobs and now expect to rehire.  If so, the “incentives” are not needed.

The Auditor has found that the background growth rate methodology is deeply flawed.  In my opinion, it has probably cost the state millions for jobs that would have been created without the incentives.”

•    VEPC has argued that there is no cost to these “incentives” because the “but for” ensures that they are always net positive.  This is demonstrably false even if we set aside the legitimate questions noted above.  For example, it is well known that many recipients of EATI and VEGI “incentives” have cut jobs during this recession.  That’s not surprising but it raises serious questions.  First, it illustrates how such “incentives” are not long-term investments because the business cycle can overwhelm the purported benefits (see my earlier memos on the ill-fated Financial Services tax program for a good example of this).  [And note that VEPC has never conducted the relatively simple analysis necessary to inform the legislature about this.  Thankfully, Chairman Kitzmiller has expressed interest in this issue.]  Second, the same companies can return after the recession to obtain “incentives” to recreate the same jobs (if so, we pay twice for one job).  The Boston Federal Reserve Bank recently completed a study of regional business tax incentive programs, including VEGI, and concluded that they virtually all represent a net fiscal cost to the states.

•    The repeated claims about the risk of businesses leaving the state are not supported by the evidence.  Notwithstanding occasional headlines, net job impacts from domestic relocation are negligible here and in other states.  [Note that the Peace & Justice Center will soon publish a new Job Gap Study report that I am preparing with extensive data on this subject.]

Everyone wants to help create good jobs for Vermont.  But there is simply no objective data to support the assertion that VEGI is what it’s cracked up to be.  If you take seriously the call for a data driven strategy, it is essential to answer the important outstanding questions about this program.  In the meantime, VEPC should slow down and use the available resources carefully – as all other agencies and departments have been asked to do.

Finally, I understand that the Emergency Board has the statutory authority to approve this request.  But in my view this is not an “emergency.”  Therefore, a decision of this magnitude should be referred to the committees of jurisdiction and debated by your colleagues.

Respectfully,

Doug Hoffer