Dubious yield on tax giveaways

In 1987, gubernatorial candidate Wallace Wilkinson criticized a $147-million tax incentive package that a couple of years earlier helped lure Toyota Motor Manufacturing to Kentucky as, “a laughingstock from Tokyo to Tennessee.”

That same year, the Kentucky Supreme Court narrowly upheld the incentive package in a 4-3 decision.

What a change three decades make. Today, Kentucky gives away in incentives every year almost as much as it gave Toyota initially.

This huge ongoing drain on state revenues is no longer a campaign flashpoint, contested in the courts or debated thoughtfully in Frankfort.

That should change as Gov. Matt Bevin and the General Assembly prepare to overhaul Kentucky’s tax code, an effort the governor has said must produce additional revenue.

Earlier this month, the state announced $43.5 million in incentives for Toyota’s plan to invest $1.33 billion to modernize its processes but create no new jobs.

A 2012 report by the Anderson Economic Group that was commissioned by the Kentucky Legislative Research Commission figured Kentucky spent a total of $140 million in 2010 for tax incentives (including $13 million for operating the Cabinet for Economic Development).

With Toyota, Kentucky emerged from an economy mired in the past onto the international manufacturing stage. A host of its suppliers soon located manufacturing operations nearby. A 1998 study, commissioned by Toyota, found the state’s investment had yielded a 36.8 percent annual return.

But will the same be true for the $40 million given to Amazon Prime for an air hub at the Cincinnati/Northern Kentucky airport? It’s supposed to eventually hire about 600 full-time workers at an average wage (managers and hourly workers) of $26 an hour including benefits. But did anyone ask whether Amazon’s growing presence would further undercut struggling brick-and-mortar retailers in Kentucky, and their employees?

It’s not the state’s job to prop up those retailers, but should it tip the scales in favor of a company working hard to disrupt that sector?

It’s also important to ask if the incentives were a deciding factor for either Amazon, which already has a huge presence in Kentucky, or Toyota, which has invested billions in its Georgetown plant — or did they just sweeten an already-planned project?

Area Development, considered the leading corporate site-selection publication, annually surveys business executives about the factors in location decisions. It recently cited the Amazon Prime decision as validating survey findings that the two leading concerns are highway accessibility and access to skilled labor.

The Toyota and Amazon incentives grab headlines but routinely the Kentucky Economic Development Finance Authority meets and doles out millions more. The minutes from the December, 2016 KEDFA board meeting, for example, include over a dozen projects with significant incentives, and 94 small business incentives totaling just over $1 million.

Average wages were as low as $12.50 an hour although minimums to be eligible for credits are $9.06 an hour in economically distressed counties, $10.88 in more prosperous areas. Working 40 hours a week, 52 weeks a year, that comes to about $19,000 to $22,000, $26,000 at $12.50.

No one can dismiss the importance of a job to someone who doesn’t have one, but those jobs won’t build self-sufficiency for individuals or a strong economy for Kentucky.

Kentucky has many demands on the new revenue Bevin says we need, including the public-pension funding crisis. But for economic development, nothing matters like education. Over half the executives Area Development surveyed “say workers are lacking basic reading and math competency skills.”

Kentucky is well situated, located within a day’s drive of two-thirds of the U.S. population and well-served by interstates. That accessibility combined with an educated, prepared workforce can create an advantage few states could match in the competition for the best employers.

Bevin and legislators must stop eroding our tax base to attract low-paying jobs or reward decisions that would have been made anyway.

This story was originally published April 21, 2017 at 7:48 PM with the headline "Dubious yield on tax giveaways."