Jon Margolis is VTDigger’s political columnist.
The minority Republicans in the Vermont Legislature have a new issue for the year, or at least for the nonce, to add to their condemnation of Gov. Peter Shumlin’s health care plan and their enduring criticism of school costs — and this one has been inspired by a Democrat.
Vermont should “follow (New York Gov. Andrew) Cuomo’s aggressive plan of economic development,” said Rep. Brian Savage of Swanton.
House Minority Leader Don Turner of Milton agreed that the state should provide targeted aid, “for small- and medium-sized businesses … in the form of tax credits,” in part to respond to the generous tax breaks New York is offering companies to move into the state.
“Economic development” does not always mean the same thing to politicians as it does to academic economists. It doesn’t even always mean the same thing to Republican and Democratic politicians. But Savage, Turner and other Republicans left little doubt about what the term means to them: bribery.
Needless to say, neither of those honorable gentlemen use that term. And the “bribery” here is legal and respectable, so legal and respectable that it is common policy in every state, including Vermont.
But consider the actual proposal, which calls for reducing taxes for certain businesses. No, not reducing business taxes in general. The lower taxes would go only to those specific businesses who promise in return to move their operations to Vermont.
Or perhaps to expand their operations in Vermont.
Or maybe even just not to move their businesses out of Vermont.
The targeted tax reduction, then, is “something serving to influence or persuade,” a definition of “bribe” in the dictionary (American Heritage, Third Edition).
That definition does not prove that the tax cuts are bad policy. To begin with, “everybody else does it, or in this case New York does it,” as University of Vermont economics professor Art Woolf said. “It’s a zero sum game. If you don’t play it, somebody else is going to grab some business.”
Turner said the Husky Injection Molding plant, attracted to his home town of Milton by millions of dollars in state and local tax breaks, provides almost 400 good jobs and has been a boon to the entire area.
Perhaps so. But in pressing for more of these targeted tax breaks – and acknowledging, as both Savage and Turner did, that they are using Cuomo’s New York plan as a model – the Republicans might be forgetting that:
• New York is in a very peculiar if not unique position to pursue such a policy right now;
• Vermont is already providing millions of dollars a year in these “economic development” tax breaks, which might or might not be doing any good;
• Cutting taxes for these targeted businesses means raising taxes for everyone else, and;
• The evidence that these tax subsidies really attract businesses and create jobs is anecdotal and sketchy.
More than almost any other state not sitting atop huge fossil fuel reserves, New York’s treasury is awash with cash. Burgeoning income inequality is not a boon to all mankind. But it is a boon to the state in which the super-rich reside. The best way to get into the top 1 percent – or, even better, the top 10th or 100th of 1 percent – is to toil in the world of high finance. All that income produces a lot of income tax revenue, so Cuomo can propose an additional $1.5 billion for pre-kindergarten education without unbalancing his budget. New York has money to spare, in this case to give away. Vermont does not.
More than almost any other state not sitting atop huge fossil fuel reserves, New York’s treasury is awash with cash.
But Vermont has been giving it away for years, and still is. That Husky plant received about $10.5 million in tax credits through the Vermont Economic Progress Council, which clears projects for the Vermont Employment Growth Initiative (VEGI) and the Tax Increment Financing District (TIF), a complex arrangement that subsidizes both businesses and localities. The subsidy, in effect, comes out of the hide of the Education Fund, which gets less revenue.
Meaning, of course, that it comes out of the hide of taxpayers statewide, who have to make up that shortfall, cut school spending, or some of each.
Vermont has five “economic development” agencies: the Vermont Economic Development Authority, the Economic Advancement Tax Incentive, VEGI, the Vermont Training Program and the Workforce Education and Training Fund.
According to an analysis of three of the programs by Good Jobs First, a Washington-based advocacy group, VEGI cost $15 million in 2011 and loans by the Vermont Economic Development Authority cost the state about $19 million a year. (Bias alert: Good Jobs First is a leftish outfit that opposes these tax subsidies, but it is transparent about how it compiles its information and its data seem accurate.)
Most of these costs come in the form of taxes forgone rather than funds appropriated by the Legislature. But that makes no difference. Either way, it is money not in the state or local treasuries, meaning other taxpayers have to make up the difference.
“Given that this is going to cost something, somebody has got to pay that bill,” Woolf said, rendering other businesses “less able to buy goods, invest and create jobs,” and individuals “less able to buy bagels at the local bagel store.”
Turner, who was already worrying that Shumlin’s budget envisions “spending above and beyond the state’s current projected revenue capacity,” acknowledged that “there must be some way of paying for” additional tax subsidies. “But we have to keep the economy growing,” he said.
The question is whether seducing businesses via tax subsidies keeps the economy growing. As Woolf said, if it does, it does so only at the cost of less growth (or shrinkage) somewhere else, the place the seduced business abandoned or rejected.
But most studies of these subsidies conclude that their “impacts are modest at best,” in the words of a report by economist Jeffrey Thompson of the University of Massachusetts. After examining more than 100 economic analyses of the policy, Thompson concluded that “as much as 96 percent of the jobs … would have been created without the incentives.”
Turner is convinced that Husky would not have opened its Milton plant without the tax subsidies. But he acknowledged that the company was also attracted by other factors, including the quality of Vermont’s work force. Even Milton Town Manager Brian M. Palaia, who said Husky and its good jobs have provided far more to the town and state treasuries than the subsidies cost, agreed that lower taxes are “not usually the first thing a company is looking for.”
In fact, companies rarely move from one state to another (Husky moved from Canada), and there seem to be “economic development” tools more effective than the current strategy of legal bribery.
UMass’ Thompson, coming from the left side of the political spectrum, would use the money instead for “real public investments” in education, transportation and other infrastructure. The data he has collected, he said, show that these policies would lead to real economic development.
The more conservative Woolf would simply cut taxes on businesses and individuals rather than spending it to woo specific firms.
That’s an old political disagreement, perhaps the oldest, and one in which both sides can point to actual data to support their arguments. The same can’t be said for the advocates of legal bribery.
