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Do Tax Incentives for Money Managers Add Up?

Local Matters


Published April 6, 2005 at 4:00 p.m.

Offering hefty tax breaks to the rich isn't the exclusive purview of the U.S. Congress. Apparently, Vermont has been doling out millions of dollars in tax credits to some of the state's wealthiest residents, with the stated purpose of creating and retaining high-paying, clean-industry jobs in the financial-services sector. But a recent independent analysis reveals the program has cost the state more than $5 million, with little or nothing to show in terms of job creation or retention.

In 1996, Vermont implemented the "Financial Services Development Tax Credit," a program designed to attract and retain brokerage houses, investment advisors, hedge-fund management firms and the like. It was specifically created to bring companies into Vermont that serve out-of-state clients, then allow those companies to claim up to a 75 percent tax credit on their corporate income tax return. In 2002, which is the last year for which tax figures are available, 14 different taxpayers claimed nearly a half-million dollars in Vermont tax credits.

An independent assessment of the program raises serious doubts about whether it's accomplishing any of the desired goals. Burlington-based economist Doug Hoffer has analyzed the figures provided by the Department of Employment and Training. He reports that the financial-services tax credit has cost Vermont more than $5 million since 1996 -- or about $700,000 per year, on average -- and yielded no significant employment gains. In fact, Hoffer's analysis reveals that since 2001, both the total payroll and the number of jobs in Vermont's financial-services sector have decreased.

A fundamental problem with this tax credit, Hoffer explains, is that it uses payroll as a measurement of job creation. He asserts that the financial-services sector is "a horrible industry to do this in," as many of its employees are compensated based on the value of their clients' portfolios. Thus, as the value of the stock market rises, so do payrolls and bonuses, without necessarily adding more jobs.

Hoffer challenges the conclusions reached by the Department of Economic Development. In a recent memo to lawmakers and the legislature's Joint Fiscal Office, DED Financial Services Director Dan Towle concluded that this tax program "continues to play an important role in supporting the growth and recruitment of this important economic sector in Vermont."

Hoffer asserts that nothing could be further from the truth. After reviewing all the data available from the DET, he found that in 2002 and 2003, Vermont actually lost 36 percent of the jobs created in the previous five years -- or 88 jobs -- while allowing companies to claim more than $2 million in tax breaks. Meanwhile, in 2002, total payroll actually declined by $4.6 million, while Vermont companies claimed $472,331 in tax credits. In 2003, payrolls increased by less than 1 percent, while financial-services companies claimed $1.6 million in tax credits.

When reached for comment, the DED's Towle didn't refute Hoffer's findings, except to say, "We report the data as we get it from the Department of Employment and Training. They are, arguably, the experts in it." He added, "This is a sector that is creating high-paying, clean-industry jobs, and it's a sector we want to do things to support."

Though Hoffer takes issue with Towle's assessment of this program, he doesn't blame him personally for its failure. Instead, Hoffer asserts that this tax break is "the poster child" for the fallacy of a legislature-created economic development incentive that lacks sufficient oversight. "Any right-thinking person who's not completely brain-dead would see that there's something wrong here," Hoffer says. "There's no evidence that this is achieving its stated purpose. And if no one can come forward to make a compelling case otherwise, then let's get rid of it, tomorrow."

Apparently, Republican Senator Vincent Illuzzi is looking to do just that. The chairman of the Senate Committee on Economic Development, Housing and General Affairs has proposed a summer study commission to look into this and other economic development programs that aren't paying off.