You don’t need a weatherman to know which way the money blows

[in light of the comments about GMCR and state tax “incentives”]

OK this is a bit wonky but it’s instructive and, as they say, the devil is in the details.

As you know, the VT Economic Progress Council (VEPC) gives away millions each year in business “incentives”.  The program has been criticized for years for a variety of reasons.  But even if we accept it on its face, it still has a serious problem.

The methodology used to calculate the award is based on a number of factors, especially the expected number of new jobs.  But the program is only supposed to reward new incremental jobs.  That is, jobs that wouldn’t have been created otherwise.  To ensure this, VEPC uses what’s called the “background growth rate” to discount jobs that would have been created in the normal course of business.

However, the background growth rate is an industry average rather than the applicant’s actual history.  This creates a problem.

more below

Here’s an example: If a widget maker applies for the incentives, VEPC uses the recent growth rate for all Vermont widget makers.  Assume there are ten widget makers in Vermont.  At any given time a few of them will be struggling (perhaps cutting jobs), a few will be stable (profitable but no new jobs), a few will be growing modestly, and one or two will be growing at a good clip.  Therefore, the overall annual industry growth rate may be 2% but one or two widget makers may have been growing at 5% or more per year.  And since the incentives are only paid if jobs are actually created, it stands to reason that the growing firms are the ones applying.  

To extend the example, let’s assume a widget maker with 100 workers promises to create 10 new jobs.  Using a 2% background growth rate, VEPC determines that the company is eligible for incentives based on eight jobs.  But if the firm’s growth rate has been 5%, history suggests that it would have created five jobs anyway and should only receive an award for the additional five.  

So by applying a 2% background growth rate to this hypothetical firm (which is actually growing at 5% per year), VEPC ends up paying for three jobs that would have been created anyway.  Obviously, this is not a fiscally sound practice.  

The problem was identified by the State Auditor in the very first review of the program in 2000 (I was the principal author of the report).  More recently, the Auditor’s 2008 review used a small sample of actual company data to illustrate the problem and recommended that the methodology be changed seepages 23 – 27.

VEPC’s response was predictable and – in my opinion – showed clearly that it is more interested in pushing money out the door than protecting taxpayers.  In its comments, VEPC said that using company-specific background growth rates would be inconsistent and unfair because some applicants are too new to have much history (see Appendix V of the Auditor’s report, pages 72 – 74).  But the change would not penalize newer firms (the industry average would still be used for them), only serve the intent of the statute, which is to not incent normal growth.  Moreover, the Legislature’s desire for consistency in implementation should not be read as a justification for wasting money.  

The statute says that all such methodological issues are within the purview of the Joint Fiscal Committee (JFC) rather than the full Legislature.  The JFC will meet at least twice before the next full session (once just before the newsletter was published) so there is an opportunity to correct the error made years ago.

And the timing is right.  The Administration and the Legislature have both indicated a desire to cut costs.  One would think they would want to fix a problem that has cost taxpayers millions over the years.  This is not a frontal assault on VEPC.  Even if you like the program (I don’t), you should want it to be run responsibly.  

But notwithstanding his supposed commitment to cutting waste, Jim Douglas has not responded to the Auditor’s recommendation (although he doesn’t seem to have a problem cutting programs for the poor).  Let’s hope the Joint Fiscal Committee has more courage.

[this first appeared in the August Peace & Justice Newsletter]