Editor’s note: This commentary is by Doug Hoffer, Vermont state auditor.
A recent commentary in VTDigger discussed the Vermont Employment Growth Incentive (VEGI). Like so much of the discourse about economic development, there are misrepresentations that require context, correction and clarification.
VEGI is based entirely on the assumption that none of the promised job creation or investment would occur “but for” the incentive. In practice, those self-serving attestations are the result of decisions made in corporate boardrooms and cannot be audited and verified because auditors need tangible evidence.
Last year, a prominent economist reviewed 30 studies about the “but for.” He found that at least 75 percent of all company decisions about expansion or location would have occurred without incentives.
This research, and the lack of evidence to substantiate a clear return to Vermonters, raises serious questions about the effectiveness of these “incentives.” What investment adviser would recommend that her client invest millions of dollars in a venture with no clearly quantifiable return?
The VTDigger commentary also stated that VEGI “is only for those who pay a minimum threshold wage [and] offer at least three forms of benefits.”
That is true, but the Legislature has lowered the threshold wage over time and the Vermont Economic Progress Council (VEPC), which administers VEGI, reported that 30 percent of the jobs that were supposedly incentivized by this program paid less than $30,000. That is below a livable wage for many Vermonters as defined by Vermont’s Legislative Joint Fiscal Office.
Moreover, the Department of Vermont Health Access reports that more than 300 employees at companies receiving VEGI awards are Medicaid recipients and have received health care services of $3.2 million in fiscal years 2017 and 2018. That cost isn’t factored into VEPC’s econometric model for estimating the expected costs and benefits.
As for benefits, it is true that applicants must offer at least three types, but the details are troubling. VEPC reports that 20 percent of companies receiving VEGI awards do not offer health insurance, and 30 percent do not offer paid leave. The VTDigger commentary further stated that “employers must exceed their industry’s expected growth rate.” That is correct but misleading. In any industry, there are companies that are struggling, some holding their own, and a few doing very well. Not surprisingly, it is the growing firms that apply for incentives because they can’t claim the “incentive” awards unless they actually create the jobs.
Here is a hypothetical that illustrates the problem. Widget makers average 2 percent job growth per year. But one widget maker has been growing rapidly and has averaged 5 percent per year. The applicant widget maker has 200 employees and proposes to hire 30 more. VEPC would assume that the company would hire 16 people over the next four years and only incentivize 14 jobs. But with a 5 percent annual growth rate, the company would be expected to create 43 jobs during that period, and so these public incentives would have funded growth that would have occurred anyway.
This flaw in the program was pointed out almost 20 years ago and still has not been corrected. As a result, VEPC has paid millions to a few firms that were growing well beyond the industry average.
Ultimately, companies don’t expand because of incentives. They expand when the demand for their products or services exceeds their capacity.
Vermont has limited resources for economic development. As I pointed out in a report issued last year, numerous economic development programs cannot be audited to determine their effectiveness. VEGI is one of those.
Our report provided a summary of the literature on various economic development strategies. Many options are more likely to produce measurable returns on investment. I encourage legislators to consider these proven strategies when making decisions about how to allocate the scarce resources of Vermonters.
