Not unexpectedly, Keurig Green Mountain has received initial approval for yet another Vermont Employment Growth Initiative (VEGI) — its fourth in the VEGI program’s seven-year history. This time, KGM is set to receive up to a million dollars in incentives. (Its four successful grants total nearly $7 million.)
In itself, this is not cause for outrage. VEGI is aimed at producing good-paying jobs, not necessarily green-friendly ones. The incentive grants are targeted at specific firms, and companies must meet job-creation targets to receive the payments. KGM may act like a corporate shark in the marketplace, and its core product (non-recyclable, non-biodegradable K-Cups) is bad for the environment, but the jobs are a good thing. If I lived in Waterbury, where KGM is headquartered, I’d be rooting for the company to succeed.
(Of course, I don’t live in Waterbury. And K-Cups are not only environmentally unfriendly, they’re also seriously overpriced and make “painfully mediocre coffee.” So no, I don’t have a Keurig machine and never will.)
Which is not to say that there aren’t problems with the VEGI program — both in the details and in the basic concept.
Details: The “but for” test, and a possibly unbalanced playing field.
Basic concept: Do incentives like VEGI actually work?
The “but for” test. VEGI grants are supposed to help create jobs that would not be created “but for” the VEGI funds. A company only qualifies if its growth would not occur without the incentive. It’s a sound idea, but it’s inherently subjective. How can you really know?
There’s also a flaw in the current formulation of “but for.” Judgments are based not on a single company’s growth projections, but on its entire industry’s. This is sensible in the case of, say, Commonwealth Yogurt (recipient of two VEGIs), which operates in the fast-growing Greek yogurt marketplace; state incentives would help it keep pace with larger competitors. It arguably makes a lot less sense in the case of KGM, which is the dominant force in its core market — single-serving brew technology. KGM may well continue to grow, but its prospects have little to do with a state incentive.
This isn’t the fault of the Vermont Economic Progress Council (VEPC) which awards VEGI funds; it’s only following the standards in the law. It has been argued that the law needs to be tightened, which is a matter for the legislature. Then-state auditor Tom Salmon argued as such in a 2008 report; his successor Doug Hoffer is currently taking a fresh look at the program.
Unbalanced playing field. So why is it that KGM has gotten four grants, while no other Vermont company has received more than two (Dealer.com and Commonwealth Yogurt, by my count)?
Well, it’s been a fast-growing firm for several years, and it’s created a whole lot of good jobs (along with a whole lot of mediocre, overpriced coffee in earth-unfriendly packaging). But I see two other advantages that have nothing to do with job creation or intrinsic merit.
First, as a sizable company, KGM has the resources to pursue every possible dime in VEGI money. It has the staff and experience to write grant proposals and see them through. A relatively new company at the beginning of its growth curve would have a harder time allocating time and expertise to a grant proposal.
Second, again as a sizable company, KGM has options. Such as the unspoken threat of moving to another state — not really an option for, say, fellow VEGI recipient Westminster Cracker Company. And don’t think the VEPC is unaware of that.
“It’s a fast growing company and the issue is do we want some of that growth to occur here,” says Fred Kenney, executive director of VEPC.
Which is the nice way of saying, “We don’t want KGM moving out of state.” I’m sure the good folks at KGM didn’t even have to hint at a possible move; everybody knows it could be an option.
The basic concept. The bigger question is, do programs like VEGI actually accomplish anything? Do they spur job growth, or are they just giveaways? Let’s turn to University of Massachusetts economist Jeffrey Thompson, who studied economic development incentive programs across New England:
Rigorous studies of these incentives and subsidies, however, suggest that their impacts are modest at best. As much as 96% of the jobs and most of the investments used to claim these tax credits would have been created without the incentives. Some studies do find an impact on economic growth, but much of that activity, is simply employment and investment that would have otherwise occurred in a neighboring city or state, mak-ing the investment a wash for the region as a whole.
… The real harm done by corporate tax incentives and subsidies is that they deplete resources that could be spent on real public investments. For example, one analysis finds that a long-term $875 million annual incentive program in New England would produce just 9,000 jobs, compared to over 130,000 jobs if that same amount of money was invested instead in high-quality universal preschool in the region.
Stick that in your back pocket the next time some conservative wails about Vermont needing to match the new Start-Up NY program of tax-free zones for job creation. No, we don’t.
Also, for a more common-sense version of Thompson’s argument, here’s our friend Paul Cillo of the Public Assets Institute:
…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.
And, going back to Thompson, wouldn’t a state with robust infrastructure and educational systems be a real draw to companies looking for a good place to grow a business? Of course, most business groups (and politicians) are too short-sighted to see that; if Vermont tried to end VEGI and other incentive programs, we’d hear cries of dismay over our alleged “anti-business environment.”
VEGI is better-structured than many incentive programs. But still, there are serious questions to be asked about it on both the micro and macro level. Call me cynical, but I think the best we can hope for is a legislative review of the detail issues. I doubt there’s any desire to take a radical and fundamental look at whether incentive programs are really a good public investment.