House Commerce Committee Testimony

Testimony on Vermont Employment Growth Incentive (VEGI) Program

State House; February 10, 2012; 10:45 AM

Mr. Chairman, members of the Committee

My name is Paul Cillo.  I’m the President of the Public Assets Institute here in Montpelier.  We’re an independent nonprofit that analyzes Vermont’s tax, budget, and economic policies from the perspective of ordinary Vermonters.  I’ve passed around some materials that I will be talking with you about today. I’ve also included a card with our contact information including our web address.  All of our published reports are available on our website.

I appreciate the opportunity to talk with the Committee this morning about the recent report from the Agency of Commerce and Community Development on the Vermont Employment Growth Incentive Program.

First of all, let me say that while I understand the basic purpose and mechanics of the program; I’m not an expert on it.  I’m interested in talking with you today because the Legislature is at a point where it needs to decide whether to continue the program beyond June 30, 2012.   While I know it’s hard with all of the legislative issues swirling around to think about the big picture, this is a good time on this issue to do just that.

So there are three things I would like to talk with you about:  the first is whether cash incentives to businesses are a good use of public money; second how do we determine how well we’re doing as a state, and third, what’s the alternative to cash incentives.

Cash incentives.

The idea behind the VEGI program and its predecessor programs is to give public money to businesses to do something they would not otherwise do: create jobs in Vermont. And compared to other places in the country, Vermont has worked to improve this program by making it more transparent and by more closely tying payments to results.  I think the Legislature and the administration should be congratulated for those efforts.

But making the program as good as it can be is not the same as a making the best use of public monies.

Stepping back for a minute—jobs are created by the private sector when there is a demand for goods or services, not because the state paid a business to hire someone.  An incentive of a few thousand dollars is not enough to justify spending $40,000, $50,000, or $70,000 on an employee you don’t need. And if a business does need more workers to meet increased demand, it doesn’t need the incentive.

In theory the “but for” provision in the program is supposed to address this.  There must be a finding that “but for” the incentive, the desired hiring would not have happened here. But as the agency’s report states: “There is no way around the fact that the But For is a subjective determination.”  In other words, no one can prove or disprove that the jobs would or would not have been created here without the incentive; at least not in individual cases.

But this is where broader research is useful because researchers can look at lot of cases to make an assessment. Economist Jeffrey Thompson at the University of Massachusetts wrote a report in August 2010 called “Prioritizing Approaches to Economic Development in New England” that discusses this issue.  I’ve handed out a brief summary of this paper.  The entire paper is available on our website and is worth reading.

In it, he points out that there has been a lot of work done all over the country to get at the question of whether incentives make any difference. He cites Economist Tim Bartik at the Upjohn Institute in Michigan whose survey of the literature on business incentives concluded: “in only 3.7% of the cases is the subsidy needed, and in the other 96.3% of cases, the subsidy simply benefits the subsidized business with no economic development benefits for the state economy.”  I don’t think the agency has persuasively made the case that Vermonters’ money spent on the VEGI program is doing anything but increasing the subsidized businesses’ bottom lines.

Thompson also points out that usually many of the new jobs don’t go to people from the target area, but to people who move in to take a job.  To the extent this is true in Vermont, it means that these programs would not be helping unemployed Vermonters.  I don’t know to what extent that’s happening with this program, and I didn’t see a discussion in the agency’s report about how many current residents are being hired as a result of this subsidy.

How are we doing?

There has been a lot of discussion about the details of the program over the years, and whether or not it’s working.  But I think the real questions we need to ask are How is Vermont doing? What’s happening to Vermonters?

In the end, that’s what we’re interested in.  Our recent report: Vermont’s Middle Class: the Facts points to several indicators that show that things have not been going well for many Vermonters.  I’ve included a copy of this two-page report in the materials I’ve handed out today.

Income disparity between those at the top and everyone else has been getting worse, most Vermonters have not shared in the state’s economic growth, and this past decade was the worst on record for job growth—even before the start of the recession.  Vermont has fewer jobs today than it did a decade ago.  Costs for essentials like college and health care have been rising sharply even as Vermonters’ incomes have stagnated, and 15,000 more Vermonters slipped into poverty in the past decade.

These are things we need to be monitoring to determine whether Vermont’s policies are succeeding in making life better for Vermonters. We’ve been doing some form of economic development incentives, just as most states have, for decades.  They have not and are not making Vermont a better place to live for most Vermonters.  So the question is, how do we do some real economic development that Vermonters can actually get a piece of?

An alternative approach.

I’d suggest we follow Jeff Thompson’s advice, who like many economists around the country, think we need to invest in infrastructure and education to turn things around.

Why invest in infrastructure and education?  Because both provide the immediate stimulative effect of creating jobs, and they both add to the foundation of sound and widely shared prosperity.  The result of these kinds of investments will be around and useful to everyone in our society for decades: railroads, bridges, broadband, energy efficient buildings, and education, which is the foundation of innovation.

Public money spent on incentives does not create anything lasting for society.  When a recession hits, jobs created a few years earlier can disappear.  Education and infrastructure improvements are much more durable investments through good times and bad.

In closing, I’d like to read from Jeff Thompson’s conclusion in the brief I handed around.

He says: “State policymakers will continue to face pressure to create jobs in New England for several more years. The available evidence suggests that the most effective approaches are to improve the region’s schools and infrastructure. Instead of trying to lure firms with deals and lower corporate taxes, an approach to economic development that builds the skills of the current and future workforce, improves the physical infrastructure of regions, and makes communities more attractive places for families and firms represents a more effective use of a state’s scarce resources.”

Thank you for inviting me to testify today.