State spent nearly $1.3 billion on incentives from 2001 to 2010
By Lorie Hailey
Kentucky spent nearly $1.3 billion on economic development incentives from 2001 to 2010, and businesses that received the incentives created 55,173 new jobs, according to a report by the Anderson Economic Group presented Thursday to state legislators.
Many of the new jobs lasted for more than one year, resulting in an average of 33,000 “maintained” jobs per year, according to the report, which was commissioned by the General Assembly in 2011 to help legislators and other policymakers make informed decisions about the operation of the state’s 17 incentive programs.
Seven incentives, which are administered through the Cabinet for Economic Development, have a jobs requirement. Between 2001 and 2010, 577 unique companies received final approval for incentives.
The jobs created lasted for an average of five years, according to the information reported by business receiving incentives. The average gross cost of incentives for the state was $3,330 per job per year.
Anderson Economic Group said it is difficult to know whether the jobs or the investment created by the firms receiving incentives only happened because of the incentive.
“Nevertheless, we can gain insight by examining whether the incentive is better than an alternative policy at increasing aggregate employment and wages in the state,” the report’s summary of findings says.
• Kentucky’s business tax and labor cost environment is competitive compared to peer states, but it is behind its peers in education attainment and certain types of infrastructure.
The state “mostly uses its incentive programs to reinforce the good components of its business environment, rather than addressing its weaknesses,” the report says.
Kentucky’s No. 1 priority in how it uses its incentives is lowering business taxes and labor costs, according to the report. The state spends relatively little on incentives to address its weak areas of skilled labor and infrastructure.
• The salary for the state’s Cabinet for Economic Development secretary — at $250,000 per year — is $100 ore than the average salary of the economic development head in peer states, the report says. Kentucky law requires the use of a search firm to identify three candidates to present to the governor for selection, No other states require the use of a search firm, according to Anderson’s research.
• The state has a low share of its employment in knowledge-based industries, “but these industries are growing faster in Kentucky than in peer states and the nation,” according to the report. The state is doing well with advanced manufacturing, but lags behind in computer programming and data management industries.
• Kentucky has one-quarter of the research-intensive industries — engineering, testing laboratories, scientific research and development services — that its peers have, but it is rapidly increasing employment in those areas.
“However, these research industries in Kentucky grew at an average annual rate of 18 percent per year for biological research industries and 6.5 percent for advanced manufacturing research industries,” the report says.
In comparison, the average rate of growth in peer states was 0.3 percent and 4.5 percent in these industries, respectively.
• Fourteen of Kentucky’s incentive programs are available to high-tech and knowledge-based firms. The state is in the top half of peer states in its offering of targeted incentives, but other states have unique programs that include funding for infrastructure development and technology transfer assistance.
• The Cabinet for Economic Development publishes extensive data on all incentives on its website, a level of transparency that is unique to Kentucky.
Suggestions for improvement
The research and consulting firm offered several recommendations in areas where research produced insight into specific actions the state could take to improve its incentives programs, including the reporting on the programs and the use of incentives to target knowledge-based and high-tech firms.
Anderson recommended the state:
• Put more emphasis on bridging the gap between research universities and private enterprise.
“Beyond an annual business plan competition, the OCI does not work with local researchers and students to foster innovation and entrepreneurship,” the report finds. “Kentucky’s public research institutions provide an opportunity for the state to develop more knowledge-based and high-tech businesses. Public research universities are a great economic growth driver.”
• Consider increasing or expanding the state’s tax credit for qualified research and development expenditures. The legislature could make more generous the current R&D income tax credit equal to 5 percent of qualified expenditures; consider expanding the tax credit to other taxes, such as sales tax and use, as other states have done; and think about providing an enhanced incentive if a firm works with universities for the R&D.
• Consider statutorily requiring that information available on the CED website be reported.
• Continue to maintain quality annual reports from Bluegrass State Skills Corporation and the Office of Innovation and Commercialization (OCI).
• Produce one comprehensive, annual summary report.
Lorie Hailey may be reached at firstname.lastname@example.org. Follow her on Twitter, @loriehailey.
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