VEGI Burgher
This afternoon, a joint Executive-Legislative “Emergency Board” will be asked to consider whether to authorize spending another $15 million from the state’s General Fund.
That’s the largest of the several state funds that together face a $150 million deficit for the coming fiscal year (FY 2011, starting July 1), or $112 million if the state can really save $38 million via the government streamlining plan introduced with great fanfare last week.
Yes, that’s the same deficit that Gov. Jim Douglas says must be eliminated by spending less. The Democratic leaders of the legislature agree with the Republican governor here, but he’s the more resolute budget-cutter. When the Democrats said last week they hoped to “do more with less,” Douglas at one point interjected that he wanted the state government to do “less with less.”
So who wants to spend an additional 15 million smackeroos?
Yup, Mr. Budget-Cutter the Governor himself.
Meaning that the deficit would rise to $165 million (or $127 million if the state can….see above)?
Not a bit, says the Douglas Administration.
“It should reduce the deficit if the jobs are created, and that means an increase in income and payroll taxes, sales and use taxes, transportation taxes and fees, (all of which) results in more net revenue,” said David Mace, the Director of Communications of the Vermont Agency of Commerce & Community Development.
A plausible if debatable assertion, which will be considered in some detail below. Meanwhile, what is definite and not debatable is that if the Emergency Board (the Governor himself plus four legislators) does what Douglas asks, the State Treasury will pay up to $15 million to a bunch of companies which promise to expand their work force, or to move into the state from elsewhere, thereby employing more Vermonters, thereby culminating in the happy state of affairs described in the previous paragraph.
There’s nothing new about this. In one way or another, the state’s been doing it for years. It is now doing it through something known as VEGI, which even though it is pronounced (and sometimes spelled) “Veggie,” is not a pseudo-burger, but the acronym for the Vermont Economic Growth Incentive Program, which is in turn part of VEPC, the Vermont Economic Progress Council, which in turn is part of the Agency of Commerce and Community Development.
The Emergency Board meeting has been called because VEGI approved applications totaling $4.5 million late last year, but the “economic activity,” as Mace put it, by the subsidized companies didn’t begin until this year. So that $4.5 million counts against VEGI’s 2010 annual cap of $10 million.
But now VEGI has applications from four companies totaling $16 million. If they are all approved, the total will exceed the cap. So Douglas wants the Emergency Board to lift the cap from $10 million to $25 million. (And, later, he wants the Legislature to abolish the cap entirely)
And who are these four companies?
That’s a secret. The information is not being divulged, said Mace, citing an exemption to the State’s Open Records Law (From the statute establishing VEGI itself, he said. Title 2, Subtitle 2, Part 3, Chapter 151, Subchapter 11E, § 5930a (h)).
Even the legislators on the Emergency Board don’t know. One of them, Rep. Martha Heath, the Westford Democrat who chairs the House Appropriations Committee, said she understood that two of them were Vermont companies, two firms thinking of moving some or all of their operations into the state.
Heath said she thought the Board would put off its decision, recessing until a later date (but before January 28, when the VEGI board has to decide on the applications), “so we have time to get some information,” including “what (raising the cap) would do to revenues. We need to take a good look at it, and not take a chance about increasing the deficit.”
At this point, she said, she and the other lawmakers on the Emergency Board (the chairs of the four money committees, all Democrats) are not challenging the whole concept of pursuing “economic development” by offering subsidies to companies that agree to move in or expand. But she acknowledged that some in the Legislature have those questions.
As do many outside the Legislature, and outside Vermont. Paul O’Neill, President George W. Bush’s first Treasury Secretary, said that when he was head of ALCOA he never made a plant siting decision based on a state or local tax subsidy. He took the money, he said, because if someone is going to give you money, you take it. But he decided where to do business based on the quality of the work force, proximity to material and markets, and other traditional business considerations.
Not that VEGI and similar programs simply throw money willy-nilly at businesses which say they’re thinking of moving into the state or hiring more workers. On the contrary, VEGI has an elaborate set procedure that requires applicants to submit a great deal of statistical evidence to support their contention that they will add jobs. If they don’t, they don’t keep getting the money (these are usually multi-year obligations) or may even have to give some back.
According to a study by the Federal Reserve Bank of Boston, “to approve a firm’s application, the state must determine that the firm’s project (a) would not have occurred without the incentive (the “but-for”test) [that means ‘but for’ the subsidy, the business would not expand or move]; (b) will provide a net fiscal benefit to the state…and (c) will meet “quality-control” guidelines, such as minimum compensation requirements for new jobs.”
The experts make that determination, Mace said, based on “an economic model.”
Very professional. But this model, Mace said, is the “proprietary,” property of a consulting firm called the Remi Company, apparently meaning that it isn’t reviewable by citizens, lawmakers, or state economists.
Besides, economic models are…well, models, useful, but not always precise. In this case, some of their findings have to be based on information that is not just subjective, but hypothetical. That whole “but-for” business, for instance, rests in part on the assertion of a business official that his or her company will act differently with the subsidy than without it.
Even pro-business state Auditor Tom Salmon, in a report about VEGI, noted that that “a critical decision to award incentives is difficult to audit,” and that “the awards are not based on a company’s financial need and…companies are not required to furnish financial statements, business plans or tax returns with applications.”
That report by the Boston Fed found that in VEGI’s first year, “the state authorized $9.7 million…and projected that the recipient companies would create 1,310 new jobs from 2007 to 2012. This implies an average gross cost of around $7,400 per job.”
If those jobs paid about $50,000, the worker wouldn’t pay more than about $1,500 in state income taxes (assuming he/she was married with children, a homeowner itemizing deductions). That worker would have to buy a lot, stay in a lot of hotels, eat lots of restaurant meals and drive many miles to pay another $6,000 or so in state taxes.
Martha Heath said state officials were not claiming the subsidies would pay for themselves in one year, but in nine.
Maybe they will. But how would anyone ever know?
Tags: David Mace, Jim Douglas, Martha Heath, VEGI
