Myths of Economic Development & Taxation in Vermont

Before I get down to economic development, let me make a few general remarks that may unsettle your thinking:

All too often, economic development is defined not by its opportunities but by its impediments. The current administration’s eight year drumbeat that Vermont is not a good place to do business because of high taxes and regulations is a good example of a negative definition.  This is a bit like the coach telling his athletes they’re going to lose. Every state I visit has complaints about its business environment, but they don’t trumpet them from their statehouses.  We need to understand our limitations and our opportunities like smart business people do and make the best of both. I’m sad to say that such negative definitions often arise from the failure to envision a positive one and enjoy success at its implementation.

  1. Vermont’s economic crisis is manageable. With improved budgeting and better executive management at all levels in Montpelier, we can meet our challenges.  Our unemployment rate is the fifth best in the nation at 5.8%. Our banks are sound and lending money to the etent they are allowed to.

The intractable problem that is going to require sacrifice and open mindedness on all sides are the three state pension problems: teachers, state employees and post-employment benefits. They amount to a $2.7B problem that leadership and Vermonters will ultimately have to address, hopefully sooner rather than later, as the liabilities are metastasizing. Compared to most other states, however, Vermont’s budgetary woes are a walk in the park.

  1. Since tax rates are always linked to economic development, let me correct some misperceptions about Vermont and taxes. In spite of what many politicians and businesspeople tell you, we are not the most highly taxed people in the Galaxy. I serve on the Blue Ribbon Tax Commission. Depending on what ranking is most convenient for your own ideology, I can get you a report telling you what you want to hear.

For several years, Vermont was being ranked inordinately high (5th-7th)by the most objective, non-partisan tax study group because, as an outlier state with our unique income sensitivity program, the ranking methodology simply couldn’t manage the math and took into account unreconciled income and property burdens though they did not comprise the actual tax paid. That calculus was corrected last year and an accurate analysis tied Vermont with two other States for twelfth highest tax burden among the States.

Other factors play in as well. Vermont is the only New England state that computes tax on your “taxable income.” Every other New England state that levies a tax does so on “adjusted gross income” and severely limits the deductions. The total AGI for Vermont tax payers is $15B, but we tax on taxable income which is $10.2B. So if you simply tax on the same basis as our competitor states, you can produce the same income with a 35% lower rate. Vermont’s “effective personal income tax rate” has been remarkably stable over the years averaging just over 3%.

Alaska, one of the most conservative States has almost no taxation. Did you ever wonder how they balance their budget? They charge oil companies enough in natural resource extraction taxes not only to eliminate taxes, but to give away the extra largesse to their citizens.  This is true to a lesser degree of several other states.  We are considering a similar tax in Vermont for non-renewable resources, but it will produce nothing like the states sitting on vast oil reserves.

Also, consider the staggering deficits of many States who have avoided taxes. California ($18B) and Florida ($4.7B) are staring down bankruptcy. Our no-tax, pot hole neighbor is looking at ($115M). Consider the role of the vaunted Bush tax cuts in our current national budgetary deficit.

These matters are infinitely more complex than our politicians would have us believe. And, finally on tax rates, Vermont will always be a relatively high-tax state with our 630,000 people, our 306,000 tax filers and the 161,000 people who actually pay any income tax at all. Our goal should be to be competitive, in or as near as we can be to the middle of the pack. Our rural infrastructure will always be expensive to maintain.

During our dialogue, I would be happy to answer other questions about our commission’s work, especially economic development tax incentives, reported tax flight by the wealthy to Florida and the $1B tax expenditure list in VT. More than you may want to know about taxes!

Having grown up in a small town in Vermont, I learned early like most of you, that nothing was as easy as it seems. I worry that we are becoming a nation that expects instant gratification and, when we don’t get it, we become victims and our leaders become scapegoats.

Solving an economic crisis, 30 years in the making, doesn’t occur in two or three years. At best, it will be 8-10 years to significantly recover.  I have little patience for the bullhorn people who see themselves as victims of their leaders rather than an intrinsically difficult world, and feel entitled to all the foolish promises their leaders made to get elected. Try living in real poverty with no prospects. There are many in the world with less than we have.

When I hear a politician say, “I’m going to create jobs, deregulate business and lower taxes,” I wish I had a hearing aid with an on-off switch. First, as you well know, politicians don’t create jobs in the private sector. They create them in the government sector. You create them in the private sector.

Second, like people, business needs rules by which to play. The rules need to be understandable, enforceable, competitive, and consistent. They can’t change in every two-year political cycle.  And, regarding the two- year election cycle, how many of you would be willing to become the CEO of a $4B company with 90000 tenured employees and deliver on all the employment interview commitments you made in two years? Hard enough in 4!

As to taxes, I can only ask, “How are we going to lower them?  What are we going to forgo?” If we want to lower taxes, lower the budget and improve efficiencies, transparency and accountability first. Otherwise, we will simply add to the deficit we’re complaining about.

The real problem with taxes in Vermont is that Vermonters have become disconnected from the value they are supposed to produce. It’s partly our own fault as we take more and more for granted. But generally, we are less and less convinced that they are being spent efficiently and strategically. A strategic tax code could dissuade bad behavior and encourage good social and economic behavior. Give people the opportunity to control the amount of taxes they pay by behaving in a way that supports shared social and economic goals and you have a strategic tax code. We must not lose our belief that taxes spent wisely are a good social and economic investment. They sustain and support community. It is foolhardy to simply cut taxes. It would make more sense to design a tax code that is aligned with the State’s strategic plan, if we had one. I’m sorry I’m sounding like the curmudgeon; my children and wife tell me I’m becoming.

Let’s get serious about the topic at hand, economic development. It’s not and never has been a panacea science that can quickly create economic activity, tax base and jobs. It is a difficult amalgam of art and science. Economic development is a long term strategy framed by a clear vision that must have the support and patience of the community to make it happen. So many of our economic and political woes in this country are the result of our short attention spans and our need for instant gratification –the quarter-ended view, as opposed to the long-term growth view.

Economic development takes time, commitment, patience and leadership. It must be based on a realistic assessment of what community and natural assets are at hand to ensure its success. If we can dispense with the idea that we are going to either attract to Vermont or pay to relocate a Fortune 500 company, we’ll start focusing on what might really pay off. We must, of course, remain alert to the rare opportunities to respond to such a possibility, but hurling millions of dollars at such a strategy is doomed to failure.  You might as well burn the cash to heat the State House.

Much work has been done and more is underway to understand what human, economic and natural assets Vermont enjoys that could provide a basis for a sound economic strategy.  A private venture fund is building towards its $125M goal to address the capital needs of growth businesses in Vermont. Work is underway and will be made public in early December, linking Vermont’s natural and working landscape to a realistic strategy for growth in the farm, forest and tourism areas work,  very similar to the successful work done in Switzerland and France.

You are a regional development authority. The strategy is the same, however. What’s working right now? Where are your current jobs? Where are new jobs coming from? Where are you losing jobs? What local businesses or farms are you monitoring that are essentially sound, but that might need specific short term help to bridge a weakness?

Are you thinking broadly? Towns often overlook arts and cultural heritage, but Vermont has the highest population of artists per capita in the country and visitor interest in Vermont historical towns and their history are growing. What are you doing to articulate this to visitors? The Chandler is a jewel in your crown. Ask any restaurant owner in downtown Burlington what happens when the Flynn Theater has a major show. Kimball House is becoming another jewel. You have Vermont Tech with its 600 students. It is becoming an increasingly vital asset to the State and to Randolph. A leadership change is underway. Will this be the time to join together plot a long term development strategy that serves both the college and the Town?  Is it some unique mix of advance agriculture, food science, an incubator, artisan foods and fine restaurant?

Might it be a partnership with the Vermont Telecommunication Authority, which is getting serious about delivering exemplary broadband to Vermont communities, VT Tech’s Technology Extension Service and Randolph’s Chamber?

Speaking of VT Tech…we’ve lost a lot of dairy in Vermont, but dairy still imports $200M in capital into the state and preserves the working landscapes we and our visitors love.  We’ve lost 4000 farms since the 50s, but still milk roughly the same number of cows. Some farms are making the transition from commodity liquid milk to value-added artisan dairy products or simply to organic milk production. Most farmers are learning that a significant portion of their cost mitigation or additional income lies in energy, and energy is becoming an intrinsic part of the agricultural portfolio, whether it’s a methane digester, switch grass production, firewood or using an untillable meadow for solar. The work that Chris Dutton and his team are doing with Vermont farmers and future farmers is vital to the whole State. Can more be done with Bob White Systems, Randolph & VT Tech? Is that already in place? Always try and look for synergies or a confluence of interests.

Agriculture produces food, and plans are underway to lay formal claim to the leadership we have already shown in artisan food production with the planning of a major international event in Vermont to celebrate our “taste of place,” or “terroir,” as the French call it, similar to the Slow Food movement’s Terra Madre in Milan, Italy.

Ironically, Vermont is better known in Europe for the quality of its food production than it is in Montpelier, although this is changing very fast.

My wife and I were driving home a few weeks ago through the middle of nowhere between Glens Falls, NY and Vergennes on a Saturday night. As you may have guessed, I like good food. We stopped at five places in the middle of nowhere between Glens Falls, Queensbury, White Hall, Bridport, Shoreham, and Vergennes, there was not a single quality restaurant that could seat us. We’re not talking fast-food, dinner for two for $20. We looked at each other and said in stereo, “What economic recession?” We made sandwiches when we finally got home at 11.

Artisan food production, processing, retail sales and restaurant service is enjoying a renaissance in Vermont. Might that be your brand? A lot of what you will see coming out of Montpelier will be focused on the working landscape, Vermont’s farm and forest outputs. How can Randolph tie into this?

Does this area have a defining identity? Is it Chandler? Is it agriculture? Is it Vermont Tech? Could it become your eight non-franchise restaurants in town? Might it become Kimball House?  Kimball house is planning a commercial kitchen. Might this become the incubator for new artisan food businesses? Food hubs are taking shape in communities around the state: Hardwick, Shoreham, Rutland, Middlebury, Montpelier and Brattleboro are among them. If you don’t yet have an identity or brand, define and cultivate one.

In Randolph, you’re making needed progress in housing which continues to be a problem throughout Vermont. Stay the course, this will serve you well. Build density into your downtown, the wealthy will continue to build up your rural areas. Focus too on the beauty and historical integrity of your historic downtown. It is a jewel and will serve you well as new economic strategies come into place with tourism.

I am waiting for some town in Vermont to declare itself “the best place to retire.” Retirees bring their lifetime savings and use local services. They like things to do, history. They volunteer and many of them donate to local causes. Many of them are choosing secondary, lighter careers. You have your own fine college, VT Tech. You are near Dartmouth and the VT College of Fine Arts and all their cultural events. You have a bookstore, a beautiful library, a fine hospital. You will need more high-end restaurants beyond Gifford. Retirees seek community. Randolph is a coherent community.

Vermont’s fourteen community hospitals and two tertiary care hospitals (I include Dartmouth) are very significant economic drivers and will only become more so as healthcare usage increases with new technologies and our ageing population increases as it has. Fletcher Allen is the largest non-government employer in Vermont, ahead of IBM. Its budget is ¼ of the VT State budget. This is not a bad thing. It’s reality. Even if we end up with a national health care system, the existing community hospitals and health centers will be critical to the lower cost of distributed health care.

Fletcher Allen is also the largest restaurateur in Vermont serving 1.3M meals a year. Gifford, like FAHC pioneered in using and preparing local food for its nutrition & food service and brought its purchases into the local economic loop wherever possible. It is this kind of small scale, incremental innovation that builds a healthy community.

Any strategy will have detractors and cynics. It is critical though that a community have unified leadership that is open-minded, listens to new ideas, and is willing to model and test new long-term economic development strategies. Some will always find it easier to play the cynic or to be a detractor. What’s easier than sitting back and opposing without suggesting alternative strategies?  I call them the “harrumphers.” They sit there with a disapproving look, arms crossed defiantly as if to say, “You’ll never convince me!” It is generally the harder longer path that leads us to durable success. I welcome reasoned dissent, but have lost patience with naysayers without alternatives.

Finally, economic development is incremental work requiring patience and endurance, especially with limited resources everywhere.  You can’t produce a steady stream of economic wins. You can only strengthen and grow your community’s economy incrementally. Foregoing ten years of property tax or a massive cash inducement to a would-be employer to move to Randolph is, I’m afraid, a disproven strategy and ultimately a zero-sum game.

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