Published: Burlington Free Press, Creative Corner, September 27, 2012.
I am not an expert on Vermont but I understand emerging markets. What I hear about doing business in Vermont is eerily similar to what I hear about doing business in Kazakhstan, Argentina, or Indonesia. Businesses here talk about state policies like high corporate taxes, high energy costs, arduous permitting, and extensive regulations that make investing in Vermont unattractive. Quietly, businesses share their dismay at the revolving door of state bureaucrats in favored Vermont businesses and anti-business interest groups. It’s no surprise then to hear that businesses worry about whether the state government will simply “change its mind” on everything from their tax rates and future expansion plans to fundamental contractual terms.
I’m too new to Vermont to know whether or how much of this is true. I suspect many factors are at play in explaining business-government relations in Vermont and, independent of politics, why doing business in Vermont is difficult (e.g. location, population). I also see evidence of pockets of success in the Vermont economy, like agricultural entrepreneurialism. That said, when I apply a few established tools to analyze Vermont’s political environment for business, Vermont seems as politically risky as many emerging markets. Why is that?
Let’s start with the policies. What we know from emerging markets is that capital flows to the most attractive destination. In the US, Vermont’s corporate income tax rate is the twelfth highest, and state and local property taxes are the sixth highest. In terms of energy, Vermont has one of the highest energy rates in the US. Although there is no state-level measure for business regulation and permitting, one experienced entrepreneur told me that getting a business started in Vermont requires navigating “a labyrinth of Byzantine rules.”
Vermont’s ideological politics are also at play. Existing research finds that political risk increases for business as more ideologically-motivated interest groups oppose them. Groups with ideological agendas have strongly felt preferences, tend to leverage public pressure effectively, and typically focus on politically salient or “hot” issues. In Vermont, anecdotal evidence suggests that businesses largely confront interest groups distrustful of the private sector and hostile to business interests. Environmentalist and anti-growth groups opposed the Circ-Williston highway proposal that IBM advocated. Walmart battled VNRC and buy-local groups for 18 years in St. Albans. Employee unions fought Fletcher Allen. VPIRG and NEC confronted Vermont Yankee and Entergy.
Vermont is moving in a direction that will exacerbate risk. Extensive research in business and politics has found that environments characterized by a lack of political competition introduce significantly more uncertainty for private businesses. When countries are run by heavy-handed autocrats or elections are dominated by one party, leaders face few constraints on arbitrary policy change. Increasingly, Vermont lacks any political competition: the executive, legislative, and judicial branches are dominated by one party that holds significant majorities and winning margins in each branch.
In political risk analysis, a nonpartisan tool used widely to measure political competition is the Political Constraints Index (POLCON) which ranges from 0 to 1. The higher a government’s POLCON score, the more veto players can constrain arbitrary policy making. If we model policy risk in Vermont using POLCON, Vermont’s 2012 score is 0.45 out of 1.00. This places Vermont in the same policy (in)stability category as countries like El Salvador, Sri Lanka, Burundi, Panama, and Mali. In the US, Vermont ranks in the bottom quartile of states. Admittedly, POLCON is an imperfect tool when applied to U.S. states, but it is instructive: we’ve learned from emerging markets that even a small increase in political constraints generates sizable improvements in GDP and capital investment.
What becomes clear then is that Vermont’s politics interact with its ideology-motivated opponents to create an environment of significant policy uncertainty for private business. This uncertainty makes investing in Vermont unattractive for new and existing businesses and puts their business sustainability at risk. We know the stories of Suss Microtec and Tubbs Snowshoes, we've seen how GE Healthcare and IBM have chose not to expand offices or fabrication plants locally, and we hear how Dealer.com and other IT businesses may be enticed by better incentives in other states. While I don’t know enough about any of these cases to be confident in their application, they do beg the question - What businesses might have moved here, stayed here, or grown here had our business environment been more attractive? How much better off could Vermont be if the state had a little less hostility toward business and a little more political competition?
Allison F. Kingsley, Ph.D.