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Audit raises doubts on Dean's tax incentives

As governor of Vermont, Howard Dean presided over the creation of a program that authorized $80.1 million in corporate tax credits without verifying that many of the companies had made good on promises to bring new jobs and investments to Vermont, according to a report by the state auditor's office.

 

The report found that the Vermont Economic Progress Council, the Dean-appointed nine-member body charged with administering the tax-credit program, relied heavily on companies' claims that they were considering bypassing Vermont for their business and needed the credits as incentives. The report also found that the Department of Taxes never checked to make sure that companies followed through on their promises until the Legislature stepped in and required it to do so.

The goal of the program, begun in 1998 and similar to ones put in place by other states, was to lure new firms to Vermont or to ensure that existing ones expanded in Vermont and not in other states. The 2003 state auditor's report found it was likely that some of the 113 expansion or building projects that received credits would have taken place without the enticement.

As such, the report concluded, the credits had probably cost the state more money than they had brought in and had contributed to a 44 percent decline in corporate tax receipts, from $57 million to $32 million, between fiscal years 1999 and 2002.

The report also noted that applications for the credits were kept secret.

Dean declined to comment through his spokesman, Jay Carson. "The auditor's report aside, the governor's record speaks for itself," Carson said. "There was record economic growth. He balanced 11 budgets, provided prescription drugs for seniors, and provided health insurance for children."

Dean, who regularly criticizes President Bush for doling out corporate tax benefits and has made criticism of questionable business gains a cornerstone of his bid to win the Democratic presidential nomination, took an active role in shaping Vermont's tax-credit program, according to an audit report released in 2000. He sought out companies and encouraged them to apply for the credits and shared his views with council members about how companies' qualifications should be evaluated.

According to the 2000 auditor's report, Dean urged the council members evaluating bids for the tax credits to relax their inquiry into whether companies would have gone ahead with expansion and investment in Vermont "but for" the offer of tax credits, a legislatively mandated cost-benefit analysis.

The report recounts a May 1999 council session in which a councilor described a meeting between Dean and councilors aimed at clearing up "continuing confusion about the `but for' issue." At the meeting, according to the report, "the Governor said he broadens the board's authority on the `but for' issue, elaborating by saying that if we were just going by the book we wouldn't need a council."

The report also recounts an e-mail from Christopher D'Elia, the executive director, to council members following the meeting with the governor, stating: "As a result of the Governor's comments, I believe the Council has greater flexibility to interpret the `but for.' We should continue to kick the tires, but no longer have to live by the absolute strict interpretation."

D'Elia said in an interview that the council was simply seeking clarification on the "but for" test, and that the governor had directed the council to follow the legislation and make the best judgment possible. "The council was given flexibility, if you will, in that the guidelines were just guidelines; they were not hard and fast," said D'Elia, who left the job of executive director in 2000. "The governor was saying the program was not black and white."

The auditor's report interpreted the meeting notes and e-mail differently.

"The governor is reported to have directed the council to weaken its already questionable policy regarding the `but for' issue," the report states. "If an applicant's `but for' is weak, it means there is reason to believe the company would create jobs without the tax credits. If so, any credits awarded represent a potential waste of taxpayer money."

Following the meeting with the governor, the report states, the council approved credits for a company that had earlier been considered ineligible because it had not been able to pass the "but for" test.

Dean's spokesman, Carson, said, "Criticizing the governor for job creation is not a criticism we're going to run away from."

Edward Flanagan, the former state auditor who put out the first audit report on the tax-credit program, said in an interview that the program had not performed as intended. "I support Howard and hope there is an explanation," said Flanagan, a Democrat. "The state was supposed to award tax credits in exchange for new corporate expansion and new jobs. The mission was not about extra treats for companies who were, in a robust economy, already expanding and creating jobs."

The current state auditor, Elizabeth Ready, whose office put out the 2003 report, said in an interview that controls for the program were inadequate during Dean's tenure, but she said that several changes have been made to address the problems.

Ready, a Democrat, added: "I think what the governor had in mind was trying to compete for jobs. These tax cuts are like a speck compared to what we have seen at the national level" in tax breaks to businesses.

Dean has long described himself as a governor who was receptive to business needs during his 11 years in office. He counted many from the business community in his inner circle, including the council's chairman, David Coates.

Under Dean's signature, the tax-credit program, formally known as Economic Advancement Tax Incentives, was established in 1998 by the Legislature in answer to companies' concerns that they were shouldering too heavy a tax burden as a result of a law that sought to equalize school funding.

The program provided that firms moving to the state or expanding there could apply for credits to reduce their taxes. The program was designed with safety nets, such as the "but for" test, intended to prevent corporate giveaways. Recipients included Vermont's corporate heavyweights, such as Husky Injection Molding Systems Ltd. and IDX Systems, as well as smaller firms.

The program was the subject of scrutiny from the outset. Vermont was experiencing robust economic growth in the late-1990s, prompting a legislative analyst, Thomas Kavet, to note in his first quarterly oversight report on the program that "after nearly eight years of sustained economic expansion and the economy operating at near-full capacity, it is hard to believe that none of the [tax credit] projects would have occurred without subsidies."

Liberals in the Legislature -- including Ready, now the auditor -- vehemently opposed what they deemed corporate handouts and lambasted the mechanics of the law, which permitted companies to submit confidential applications, limiting public scrutiny of the basis for credit approvals.

"Basically, they gave away state money in secret," Dean Corren -- a former state representative, a member of the Progressive Party, and a vocal critic of the program -- said in an interview.

In 2000, the confidentiality issue gained attention when Flanagan, the state auditor, sought full access to companies' tax-credit applications and was denied. He and the council eventually came to agreement on the matter, but he charged that the council's chairman and executive director had misrepresented facts under oath when they said that no notes of council meetings existed. In fact, the council's secretary regularly took notes, which Flanagan later obtained and printed in his report. The attorney general declined to prosecute the council members.

Coates, the council chairman, could not be reached for comment.

The 2000 auditor's report prompted changes by the Legislature, including a requirement that after July 1, 2000, the council must provide the Department of Taxes with written expectations of jobs created by companies authorized to receive tax credits. Lawmakers also mandated that the department substantiate whether the expectations were met. George Phillips, a policy analyst with the Department of Taxes, said listing the expectations made review of the tax credits possible.

Prior to the change, he said, "There were not specific expectations, and we were not digging into the applications."

Sarah Schweitzer can be reached at Schweitzer@globe.com.

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