Tax Credits to the Rescue!

Vermont's "Economic Advancement Tax Incentive" program continues to make news. On September 20 a Wall Street Journal investigation by Jeff Krasner examined the way in which the Vermont Economic Progress Council (VEPC) has interpreted its "but-for" criterion.

VEPC is a nine-member board of Gov. Howard Dean's appointees who decide whether to approve a wide range of valuable tax credits to firms promising to locate or expand in Vermont. The applying firms must jump through a number of hoops to qualify. One is a cost-benefit analysis. After meetings with legislative committees concerned about subsidizing activity that would have happened anyway, VEPC decided to include as a key component of that test whether the promised investment and job creation would not have been undertaken "but for" the tax credits.

Last June Auditor Edward Flanagan released a scathing report claiming that VEPC was mismanaging the program, and in particular approving credits for firms that didn't meet the "but for" test. Flanagan's report cited examples of firms that he believed shouldn't have qualified for credits, but did not release the names of those firms.

Reporter Krasner sniffed out and contacted 13 of the firms involved. Only two of the firms contacted said the credits were the deciding factor. One said the firm would have expanded anyway. Krasner found that compliance with the "but-for" test was "murky at best" for the other ten firms. His conclusion: "Vermont has granted millions of dollars of tax credits to companies that say they would have made investments in the state regardless of whether they received government assistance."

Particularly instructive - though not mentioned by name in Krasner's story - is the way the tax credits were used to subsidize Husky Injection Molding in Milton. Husky was and is a wonderful company to have in Vermont. Once Gov. Dean saw a possibility of luring Husky away from locating in New York or Indiana, he mounted a crash program to sell the firm on Vermont.

In June 1996 Husky, the state and the town of Milton entered into a Memorandum of Understanding. A key provision was that the state and local governments would make their best efforts to deliver a $6 million dollar bridge to the site. But in November 1997 the state embarrassingly conceded that Vermont's congressional delegation had failed to extract the bridge dollars from Washington, the state didn't have the money, and Husky would have to build its own bridge At the time of this admission Husky already had the steelwork up for its new Milton plant.

At the same time Husky was expressing concern about the status of its property tax stabilization agreement with Milton, with the state taking control of such town agreements as part of the newly enacted Act 60. So in January of 1998 Gov. Dean proposed and the legislature enacted the VEPC program. By December VEPC was ready to do business. On December 3, Husky filed its application for three kinds of tax credits. Within four weeks VEPC had approved a $10.6 million award, the largest ever made.

But wait! What about the "but for" test? Husky's plant had been under construction for over a year by the time VEPC approved Husky's tax credits. Was it reasonable to believe that without the tax credits, Husky would have abandoned Milton and moved to New York or Indiana? Not likely. (VEPC says the credits were for future expansions, but they were part of Husky's long range plan.)

The truth of the matter is this: Husky was given to believe in 1996 that the state would pay for the $6 million dollar bridge. A year later the State told Husky that, sorry, but Husky would have to pay for its own bridge.

The Governor then pushed through his VEPC program, and Husky was invited to come in for the credits. Instead of getting the one-time gift of a $6 million bridge from the taxpayers, Husky got $10.6 million in tax credits. To make this happen, the VEPC board simply threw any meaningful version of its "but for" test in the trash can.

Vermont has Husky, and Husky will save more than enough in tax credits to pay for its bridge. One might consider that a happy outcome. But it's hard to avoid another conclusion: the VEPC tax credit program offered a highly convenient - and costly - way for the State to bail itself out of an embarrassing failure to deliver on, if not a hard promise, at least a good faith pledge made to a favored corporation.. Whether VEPC approved Husky's credits at the bidding of the governor who made but couldn't keep the state's part of the 1996 "understanding" has never been publicly disclosed. VEPC's critics claim that no matter how well-meaning a governor's appointees on the VEPC board may be, the program will sooner or later become "crony capitalism" and used for political advantage. After the Husky experience, they certainly deserve a more respectful hearing.

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October 2000