Crony Capitalism Starting To Get Bad Reviews

The "Economic Advancement Tax Incentive" (EATI) program enacted by the legislature in 1998 now has a year under its belt, and already the legislature has taken steps to rein it in.

The EATI program, Vermont's version of "crony capitalism", was rushed into existence last year as the Dean Administration's way of allowing certain politically favored corporations to escape the economic penalties of Act 60's statewide property tax. The act created a Vermont Economic Progress Council composed of nine appointees of the Governor. This elite body is authorized to grant worthy applicants an amazing range of benefits: payroll tax credits, R & D tax credits, workforce development credits, export incentive credits, small business credits, training assistance and property tax stabilization.

To get these goodies an applying firm must show that it will locate where the state says, hire Vermont residents, pay high wages, offer extensive benefits, use Vermont resources, comply with state plans, and "strengthen the quality of life". Since the Governor does not want any assisted firm to fail and give the program a bad name, he can send pointed messages to the regulatory bureaucracy (at least those that he nominally controls) to see that applications move. Husky Injection Molding in Milton is the classic example of a project advanced at breathtaking speed by intense gubernatorial interest.

From all accounts the current VEPC Board is trying to be very conscientious about its work. Nonetheless, the program brings to mind the classic political question: what is the difference between Reform and the Machine? About three years.

Earlier this year the Joint Fiscal Office hired analyst Tom Kavet to review the workings of the EATI. Here are some of his findings:

* Much of what VEPC subsidized would have happened anyway. The tax subsidies may have made some projects larger (by the amount of the credits), but in some cases the subsidies were simply a cash payment to the favored corporation.

* More than 70 percent of the awards have been made to Chittenden County, with the lowest unemployment rate in the state. Total subsidies approved for the five counties with the highest unemployment rates (Caledonia, Orleans, Essex, Franklin, Grand Isle): zero.

* Well over half of the new jobs created will be filled by new in-migrants to Vermont. * Direct subsidies like EATI "are generally considered to be the most expensive way for a state to achieve [economic] benefits."

* There is no upper limit to the potential cost to the state of this program. Kavet might also have noted that contrary to the statute, the VEPC board members do not represent the "various geographical areas of the state." Four are from commuting distance of downtown Burlington, and only one, from Brattleboro, is from the east side of the mountains.

The report the Council was required to give to the legislature in January contained almost none of the information the legislature told it to present. Rep. Terry Bouricius (P-Burlington) observed that "apparently the Council was so busy giving away tax breaks that they didn't take the time to analyze alternative economic development strategies other than tax credits." Bouricius also noted the complaint of one small business person that VEPC handed out valuable tax credits to its competitor.Thanks largely to his efforts, the 1999 legislature put a dollar cap on VEPC's handouts, and mandated more detailed reporting starting in January 2000.

But annually attempting to rein in a runaway crony capitalism program is not the real solution. The real solution was contained in a policy statement adopted in 1993 by the National Governors Association: "The Governors believe that the public and private sectors should undertake cooperative efforts that result in improvements to the general economic climate rather than focus on subsidies for individual projects and companies."

That statement was adopted with the support of NGA Vice Chairman Gov. Howard Dean (D-VT). Apparently he wasn't very serious about it.

####

June 1999