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OPINION: Economic development incentives should reward better jobs, not just more jobs

Record low unemployment, automation and the policies of the future
Steve Brunson

By Steve Brunson

Jobs, jobs, jobs. That’s been the motto of politicians and economic developers for as long as most of us can remember. The value of any potential project can be measured in a number of ways, but the ultimate value has historically been tied closely to job creation.

In Kentucky, both state and local governments provide incentives to attract and retain high impact businesses. These programs and others across the country are frequently tied to the jobs that will result from such investments. The ultimate endgame, whether at the local, state or national level, has been the creation of sustainable, fair-paying jobs.

For years, this approach served state and municipalities well, but it could soon become too limiting as we enter a new economic reality.

In many areas, true unemployment is rapidly approaching zero. Many businesses seeking to add employees simply can’t find the available (or qualified) workforce. At the same time, technology and tax reform are accelerating a move toward automation in all industries. Distribution and data centers are also changing the game as these operations frequently involve significant investment – and a significant economic impact – without creating mass numbers of new jobs.

Private investment is already adjusting to this market reality. In lieu of workforce additions, companies are investing in ways to increase production with the same number of workers. Businesses with an agile, highly skilled workforce remain competitive now and well-positioned for the future.

Meanwhile, on the public side, states and municipalities are still judging success based mostly on job generation. Even with virtually no unemployment, current programs favor and incentivize projects that add jobs over programs that improve jobs.

So, how can Kentucky and other states modify credits and incentives to reflect this new paradigm? The first step is to change the way economic development value is measured in an economy with virtual full employment. Municipalities and states must adjust their scorecards to ensure future prosperity.

In Kentucky, leaders could get ahead of this curve with a few simple policy changes:

Reward better jobs, not just more jobs. Give equal consideration and importance to investments intended to increase wages, not just those that seek to add jobs. For instance, Kentucky’s KBI program could reward job improvement, not just job creation. An increase in wages for existing employees may provide a greater economic impact than actually increasing a workforce.

Invest heavily in training. The new workforce must be more skilled. The faster Kentucky and our communities can improve and increase workforce skills, the more appealing the state will be to private businesses. Kentucky is being outspent on training by neighboring states. Expanding the funding and streamlining the process for obtaining Bluegrass State Skills Corporation (BSSC) and Grant-in-Aid and Skill Training Investment Credits could close the gap and jump start the workforce.

Reduce tax burdens on machinery and automation. Many competing states have eliminated taxes on certain machinery and equipment. Other states provide for a direct and simple method by which communities can provide tax abatements on certain equipment. In Kentucky, personal property tax moratoriums are not widely available outside of Louisville. Businesses requiring significant capital investment in machinery prefer long-term homes that don’t place a high price on investment. Expanding areas in which personal property tax moratoriums can be offered and extending the term of these incentives will attract valuable investment.

Expand key investment incentives to include target industries beyond manufacturing. Kentucky’s KRA and KIRA incentives are ahead of the curve in terms of incentivizing investment even without a direct link to an increase in workforce. While valuable, these incentives are somewhat limited in the nature of the projects and industries they can support. Expanding these programs to include investment in target industries outside of industrial/manufacturing could spur investment in high technology sectors.

With historically low unemployment, states must change the way they keep score and the projects they seek to attract. In addition to new jobs, higher wages and strategic investments must become priorities. Competing in the new economic paradigm will require changes at both the legislative and executive levels, and Kentucky must adjust to continue its position as a national economic development leader.

Steve Brunson is a principal at Indianapolis-based McGuire Sponsel, a specialty tax and advisory firm.