Buying An Economy

In his well-received State of the State address, Gov. Dean offered what he called a "new way of looking at the future of our state". And in some respects - notably electric industry deregulation and public school choice - Dean opened the door to a society more nearly based on the free market principles of competition and consumer choice. But on the economic development side, the Dean prescription for Vermont's future is quite the opposite: increased government control of economic activity.

Responding to a plea from Commerce and Community Development Secretary William Shouldice IV, who is constantly confronted with the problem of high-wage manufacturers slipping away from Vermont (this month's threat: Simon Pearce), the Governor asked for more tools for the "economic development tool kit".

First, he asked that the "Economic Progress Payroll Tax Credit", be brought back from the dead. This scheme offered a credit of as much as $300 per year for ten years to companies which hired additional workers . Enacted with much fanfare as a centerpiece of the "Economic Progress Act "of 1993, this credit had never been claimed when the legislature cut off new applications in 1995. But Gov. Dean apparently remains hopeful that somewhere there must be some employer who can be induced to apply for such a credit, presumably when the amount is sharply increased .

Then there is a Research and Development Tax Program, which would offer ten percent of something (not specified) to "talented, small business entrepreneurs who want to establish or expand their businesses in Vermont." This is apparently a revival of the R&D tax credit, enacted in 1992.

Next comes a "Workforce Development Incentive Tax Credit", again ten percent of something unspecified. This is presumably a handout to companies to train their tax-subsidized new employees to operate the machinery whose costs are 100% subsidized under the original Economic Progress Act and the newly-proposed Small Business Investment Tax Credit. This latter proposal would offer 5-10% credits for plant and equipment investments exceeding $250,000.

"Materials used in certain manufacturing plant expansion and renovation projects" would be exempted from the sales tax, just in time to save Husky Injection Molding the money it needs to pay for the bridge over Arrowhead Lake that Husky was led to believe would be built at taxpayer expense. And there will be a sales tax exemption for "major telecommunications equipment purchases", which may soften the blow of Act 60's 4.36% telecommunications tax.

What this array of new tax credits and incentives means is that the Dean Administration is still trying to buy Vermont an economy for the future. The Governor has always viewed economic development as an intensely political matter, offering numerous opportunities for high-stakes, personal deal-making by the Governor. This kind of guided economic development has the enormous benefit not only of showing the Governor at plant ribbon cuttings, but also putting the Governor into face to face discussions with Powerful Businesspeople Who Can Raise Money, and allowing him or her to control the location of growth in ways agreeable to the politically powerful environmental lobbies. In fact, the original 1993 version of Gov. Dean's Economic Progress Act required that all of the tax credits be approved by the Governor himself, so the beneficiaries would have no doubt who to thank.

Contrast this policy with its opposite, a thoroughly non-political economic development policy. Such a policy would offer low and stable tax rates; a minimum of costly employment mandates; swift, fair, reasonable, and certain health, safety and environmental regulation; good public airports and highways; a state of the art telecommunications system; a tough-on-crime law enforcement and corrections regime; and an educational system producing highly skilled and dependable employees.

To implement that kind of economic development policy requires a political leader to undertake a lot of hard work, public education, and the expenditure of political capital. In return, he gains few conspicuous opportunities for short run political rewards. Nonetheless, that was the policy of the most notable contemporary economic development leaders: Ludwig Ehrhard in West Germany, Vaclav Klaus in the Czech Republic, Mart Laar in Estonia, Roger Douglas in New Zealand.

It is clearly not the policy either of Howard Dean or of his supposed opposition party. Senate Republican leader Robert Ide told reporters that Gov. Dean's speech was "a good , sound Republican sort of speech", perhaps recalling that every Republican in the Senate, and all but one in the House, voted for this same grab bag of stuff when Gov. Dean asked for it in 1993.

But in the long run - the 20 year vision suggested by the Governor - a politically managed economy, saddled with costly state mandates, dependent for growth upon carefully regulated, tax -subsidized businesses locating and operating where and how a Governor finds it to his political advantage to specify, can not become a vigorous, dynamic, prosperous, economy. It can only become a "crony capitalist" economy, where economic success is achieved by cozying up to the leaders of the government, and begging for their favors.

_{The Ethan Allen Institute is Vermont's free market public policy research and education organization.
Nothing in this brochure is intended to influence the passage or defeat of legislation.}

January 1998