Kentucky spent $1.29 billion on economic development incentives over last decade

jcheves@herald-leader.comJuly 19, 2012 

FRANKFORT — Kentucky has spent $1.29 billion on economic development incentives over the last decade, mostly in the form of tax breaks to companies that pledged to create jobs, according to a new report shared Thursday at a legislative hearing.

The 577 companies that took incentives reported creating 55,173 jobs in the state from 2001 to 2010, more than two-thirds of them in the manufacturing sector. The gross cost per job was $23,385, according to the report by Anderson Economic Group of Chicago.

The General Assembly ordered a study of the state's incentives programs in 2011.

Testifying Thursday, senior consultant Caroline Sallee said her firm's findings had gaps. It's impossible to know how many jobs would have been created anyway if the state hadn't offered incentives, she said. And it's hard to say, when considering the total cost of incentives, what the state simultaneously gained from those jobs through taxes it collected from workers and the money they spent in their communities, she said.

"What should give you comfort is that we feel the gross cost is not that high," Sallee told the Interim Joint Committee on Economic Development and Tourism. "If anything, the actual net cost is lower."

Lawmakers said the report left them satisfied with the incentives offered by the state Cabinet for Economic Development and Tourism, Arts and Heritage Cabinet.

"I do think Kentucky is moving the ball more forward than we get credit for," said House Speaker Pro Tem Larry Clark, D-Louisville.

Among the report's other conclusions:

■ Kentucky lags behind a peer group of 13 other states in the Southeast and Midwest, including its neighbors, in knowledge-based jobs, which the consultants defined as jobs in advanced manufacturing, life sciences or communications technology. These jobs tend to pay the highest wages.

About 5 percent of Kentucky workers are employed in the knowledge-based sector, compared to 8 percent on average in the peer states. Kentucky spends competitively on its research universities, but graduates often leave the state to pursue jobs elsewhere. Kentucky does not aggressively leverage its incentives at the universities in ways that stimulate private research-and-development start-ups, as North Carolina does.

"There appears to be something of a brain drain here," said Jason Horwitz, senior analyst at Anderson Economic Group.

■ Kentucky pays Economic Development Secretary Larry Hayes $250,000 a year, which is $100,000 more than the average for his counterparts in peer states. However, some of the other states may offer additional compensation for their officials that could not easily be identified, the consultants said, and it's possible that Hayes' job duties may be more demanding in some way.

■ Kentucky is a tax-friendly state for businesses. The overall share of business profits taken as taxes in Kentucky is 18.2 percent, compared to 19.3 percent on average for the peer states.

However, that means Kentucky offers tax breaks against a tax rate that's already lower than the regional average, the consultants said. Meanwhile, Kentucky is not competitive in two areas important to corporate leaders looking for locations: infrastructure, such as roads and Internet access, and an educated workforce.

Kentucky should throw less money at businesses and invest more in schools, vocational training, transportation and high-speed Internet access, said Jason Bailey, director of the Kentucky Center for Economic Policy in Berea.

"That trade-off is not debated enough around here," said Bailey, who attended the hearing. "We have to understand that tax breaks result in less revenue. That affects our ability to pay for the fundamental things we expect government to provide, such as infrastructure and education — things that businesses benefit from just as much as individuals do."

John Cheves: (859) 231-3266. Twitter: @BGPolitics. Blog: bluegrasspolitics.bloginky.com

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