Auditor can’t quantify benefit of economic incentives

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Auditor can’t quantify benefit of economic incentives

Thu, 07/19/2018 - 3:04pm -- tim

The new Winooski skyline and associated developments is one of the beneficiaries of the Tax Increment Financing (TIF) program. VBM photo

by Timothy McQuiston, Vermont Business Magazine An investigative piece on economic development policies conducted by Vermont Auditor Doug Hoffer calls into question the efficacy of incentives undertaken by Vermont (and indeed any state). In short, Hoffer is not sure that the money they bring in exceeds the cost of the program or whether using that same money for some other program might be better spent.

Hoffer and his team also called out several well-held myths about Vermont taxes, demographics and the local business climate.

But mostly Hoffer discusses five economic incentive programs, such as the VEGI or TIF, the state engages in. Hoffer points out that this report is not an audit, which is how he usually interacts with government.

In this report released Wednesday to Governor Phil Scott and the Legislature, he says that neither he nor anyone else can quantify the value of these incentives. What he can do, however, is tell us how much they cost.

“Together, these five programs cost the State almost $14 million per year,” Hoffer says in the report. “The question is whether we know or can reasonably estimate the State’s return on such investments and if there are alternative strategies that may hold more promise.”

VEGI incentives averaged $3.6 million per year from 2012 – 2015 (latest available). In recent years, Tourism & Marketing appropriations averaged about $3.2 million per year. The VTP and RDCs average $1.3 million and $1.2 million per year, respectively. A recent JFO report found that TIF is expected to cost about $4.5 million per year going forward. 

Five Incentive Programs

• The VEGI business incentive program is predicated on the applicant’s “but for” statement that reflects corporate decisions that cannot be independently verified. Therefore, it is impossible to substantiate claims about job creation by the Economic Progress Council.

• Efforts to measure the impact of Tourism and Marketing spending are hindered by the fact that public marketing expenditures are dwarfed by private sector spending and there is no way to assess the relative impacts of each. The Department’s primary performance measure is Rooms and Meals tax revenues, but there is no correlation between public expenditures and state revenues.

Vermont Training Program (VTP) grants are based on unsubstantiated claims by applicants that the trainings are supplemental and not replacement (i.e., taxpayers should not pay for trainings that would have occurred anyway). VTP’s main performance measure is the increase in wages for trainees, but the methodology is flawed so the data is unreliable.

• It is difficult to measure the effectiveness of grants to Regional Development Corporations because they are only required to report on outputs reflecting their day to day activities (e.g., business visits, meetings, maintenance of a data base, etc.).

Tax Increment Financing (TIF) also has a “but-for” condition requiring towns to state that development would not happen as anticipated in the proposed TIF district if not for the incentive.6 This is impossible to prove.

“Incentives for businesses to invest and create jobs likely have some economic impacts,” Hoffer says, “but there is no consensus regarding whether public benefits exceed the costs for such programs. There is growing evidence that such incentives are not as effective as claimed. Recent research finds no strong correlation between incentives and state’s economic outcomes. Some estimates indicate that the average incentive would only impact incented firms’ investment decisions six percent of the time.

“Businesses consider a wide range of factors before making new investments and evidence indicates that factors outside of government control may be more important than cash or tax incentives. These include the availability of suitable labor, access to regional markets and suppliers, and the costs of a variety of other business inputs.”

Hoffer says, “Some research suggests that 80 to 90 percent of incentivized jobs would have been created without incentives.” He says other research suggests that incentives “may simply reward or subsidize behavior that likely would have occurred anyway.”

Governor Phil Scott, who supports the incentive programs, addressed the report at his weekly press conference Thursday. For the TIF program in particular, he said, "The transformation of St Albans in the last 5-10 years has been remarkable."

He said the positive effects are evident in Springfield, Burlington's waterfront and even in Bennington with the redevelopment of the Putnam Block. He said Millennials want to live downtown and the redevelopment of the state's downtowns is vital to Vermont's economic future.

"It might be difficult to measure," Scott said, "but from my standpoint these projects would not have happened without that incentive."

Hoffer has a more positive view of workforce development programs, saying, “The public benefits of many workforce development programs appear to far surpass the initial costs.”

The benefits of these programs can be seen in skills and earnings growth of the individual, benefit to the employers and a reduction in public assistance obligations.

Tourism marketing is a trickier business, Hoffer says. The existing research suggests that the states with otherwise low tourism expectation benefit the most from tourism marketing, while states with a strong existing tourism industry benefit the least, he says.

Other government programs that can fill in the gaps for certain businesses that otherwise would have difficulty getting financed appear positive.

Several studies have found, Hoffer said, that Small Business Administration (SBA) lending programs positively impact local economies.

Hoffer also is relatively high on housing programs, saying, “Recent national research suggests that housing supply is a contributing factor in employment growth. That is, if labor demand cannot be met because of low housing supply, the full employment potential of a locality or region may not be achieved. Furthermore, the construction industry has one of the highest economic multipliers.”

But he’s down on “Sales Tax Holidays,” saying, “Short-term sales tax holidays are unlikely to generate substantial economic impacts. Instead, they shift the timing of purchases for those with the financial means to do so and result in lower sales tax revenue. “

Along with legitimate reports on this issue, Hoffer saves a full broadside in the report for entities like ALEC and Forbes who regularly publish “business climate” rankings.

“Some of the entities are biased and many of the methodologies are deeply flawed. Most importantly, the rankings have almost no predictive value,” Hoffer says.

Hoffer’s look into reports from national organizations that rank “rich states versus poor states,” reputedly using objective data, ignores what are the actual outcomes, he said.

Vermont, typically cast near the bottom of these rankings as a “poor” state, generally falls into the top ten of such rankings, however, when Hoffer plotted actual outcomes against those reports’ supposed “top ten,” such as per capita income and state GDP growth. Other “poor” states would see a similar outcome.

For instance, if Vermont taxes are driving the oldest and youngest out of Vermont, why does New Hampshire, without an income or sales tax, have similar outcomes?

Claim: Vermont is anti-business

Frequently cited rankings consistently rate Vermont as bad for business. If the rankings accurately reflect actual economic conditions, the top 10 states in each ranking would surpass Vermont in standard indicators. We tested that assumption for these rankings.

• Forbes: Best and Worst States for Business, 2018 (VT ranked 48th)

• ALEC:301 Rich States, Poor States, 2018 (VT ranked 49th)

• Tax Foundation: State Business Tax Climate Index, 2018 (VT ranked 47th)

As the graphs below show, Vermont performed better on two key measures302 than many of the top ten in all three rankings. This is not surprising since “scholarly studies have…found little relationship between rankings and economic performance.”303 Therefore, public officials should use caution in relying on such rankings when defining problems and considering policy options.

Claim: Vermont is a high tax state

If we measure total state and local taxes paid as a percent of total income Vermont is a comparatively high tax state. But using aggregate or per capita data is misleading because it ignores the distribution of the “tax burden” (see Graphs 7 – 10 below).304

Vermont is often ranked poorly because our top marginal income tax rate is high (8.95%), but

1. It only impacts the top 1%,

2. It only applies to income over $415,600, and

3. It is applied to federal taxable income rather than AGI.

Because of Vermont’s graduated income tax, effective rates305 are lower than the marginal rates. This is evident when state income taxes are estimated for families with different characteristics, including Adjusted Gross Income (AGI), number of filers, marital and housing status, etc.306

We make no judgment about whether Vermont taxes are too high, only that claims about the “burden” of Vermont taxes can be misleading. Finally, those that focus on taxes alone ignore the other side of the issue, which is how tax revenues are used and what that means in terms of the services provided and quality of life, which are important considerations for businesses and families.

Tax Equity

The Institute on Taxation and Economic Policy ranks Vermont’s tax system as one of the most progressive in the country because of the steeply graduated income tax, the State earned income tax credit, and the income-sensitized education property tax. But our reliance on regressive sales and municipal property taxes means that higher income Vermonters pay a smaller percentage of income for state and local taxes than low- and moderate-income taxpayers.

Claim: Vermont’s high taxes and cost of living are driving people away

IRS migration data does not support the view that Vermont is hemorrhaging people or is uniquely disadvantaged. For example:

• From 2014 – 2016, 27,925 people moved out of Vermont, while 26,940 moved in. The data shows that more people in their prime working years (35 to <55) moved in than moved out and there was a rough equivalence for the group just below (26 to <35; Chart 16).

• For those reporting incomes of $100,000 or more, the number of people coming and going was virtually identical from 2012 – 2016 (Chart 17).

• From 2005 – 2014 (latest available), more high-income filers ($300,000+) came to Vermont than left (Chart 18).

• Over the last five years, the number of senior citizens leaving NH is more than twice that of VT, which is reasonable since NH has twice our population. But it calls into question the assertion that the outflow of seniors from VT is a result of high taxes here since NH has no personal income tax but is losing seniors at the same rate (Chart 19).

• There is concern about the number of young people leaving Vermont. While the issue is important, context is too. For example, over the last five years, the average annual percent of tax filers under 26 leaving VT was 9.5%; the figure for NH was 9.3% (Chart 20).


Footnotes

301 American Legislative Exchange Council.

302 Percent change in inflation-adjusted per capita GDP (2010 – 2017) and per capita personal income (2010 – 2016). Both use the latest years available. Source: US Department of Commerce, Bureau of Economic Analysis.

We selected those years because it provides a longer perspective, which is helpful in avoiding short-term anomalies in the data. Having said that, we looked at recent data as well and Vermont fared even better on both measures for all three rankings (data will be provided upon request). Finally, Vermont’s absolute position on percent change in real per capita GDP was 25th for 2010 – 2017 and 16th for 2015 – 2017. For percent change in real per capita personal income Vermont was 30th for 2010 – 2016 and 15th for 2014 – 2016.

303 Motoyama, Yasuyuki, and Hui, Iris, “How Do Business Owners Perceive the State Business Climate? Using Hierarchical Models to Examine the Business Climate Perceptions, State Rankings, and Tax Rates.” Economic Development Quarterly, Vol. 29, No. 3, 2015.

304 “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” ITEP, January 2015.

305 Effective rates are the blended or average rate after applying all the of relevant marginal rates, credits and deductions. For example, in 2017 a single Vermonter with $75,000 in taxable income paid 3.55% on the first $37,900 and 6.8% on the next $37,100. The total tax paid = $3,868, which = 5.16% rather than the marginal rate for income of $75,000, which was 6.8%.

306 “The Vermont Tax Study 2005 – 2015,” Joint Fiscal Office.