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Kentucky's Economic Development Incentives: pay for play not promises

In the August issue of The Kentucky Legislative Ethics newsletter was the following report:

"In the first eight months of 2015, the Kentucky Economic Development Authority (KEDFA) gave final approval to $124.4 million in tax incentives for businesses locating or expanding in Kentucky."

So far, this year's biggest incentive package was awarded to AMZN WACS, a wholly-owned subsidiary of Amazon Fulfillment Services, which in turn is a wholly-owned subsidiary of Amazon.com ($10.25 million for a technology center in Winchester). This year's other largest incentives went to: ConAgra's Carriage House Co. ($10 million) for a food production facility in Oldham County, where the company makes sauces, syrups, and jams and jellies; Hitachi Automotive Systems ($9 million for two projects); Dr. Schneider Automotive Systems ($7 million); ISP Chemicals ($5.3 million); and Senture ($4.7 million).

In 2014, tax incentives worth $170.2 million were given final approval by KEDFA, including Metalsa Structural Products ($21 million); Westlake Vinyls ($20 million), CafePress ($10 million); and General Dynamics Information Technology ($9.3 million for two projects).

2013 was KEDFA's biggest recent year, as $371.6 million in tax incentives were given final approval, with $149.1 million going to Toyota Motor Manufacturing for two projects. Other awards included: Flex Films ($20 million); Century Aluminum Sebree ($15 million); Metalsa Structural Products ($14 million); General Motors ($12 million); Lockheed Martin ($10.8 million); and Martinrea Heavy Stampings ($10 million).

In 2012, KEDFA approved $163.9 million in incentives, including General Electric ($20.5 million); ZF Steering Systems ($15 million); Faurecia ($14 million for two projects); Magna Seating ($8.5 million); Hill's Pet Nutrition ($8.3 million); Jim Beam Brands ($6.3 million); U.S. Bank National Assn. ($4.4 million); and Remington Arms ($4.1 million). "

That sounds like a lot of money. But according to Caroline Baesler, general counsel for the Cabinet for Economic Development; included in the numbers above very little cash given or loaned to businesses under KEDFA's programs. When there is a loan, there is a letter of credit or the loan is collateralized.

To participate, companies go through an application process. To get tax incentives preliminary approval comes from The Kentucky Economic Development Finance Authority (KEDFA). Preliminary approval gives companies a dollar figure of eligibility. That figure doesn't mean the dollars or tax break start to flow. Kentucky pays for performance - not promises.

According to Baesler, not all companies that seek and receive preliminary approval follow through. Some projects never get off the ground. Companies go bankrupt or choose another state. For those who proceed to final approval, incentives include abatement or reduction of state corporate income taxes and reallocation of occupational taxes from state and local governments to the business. Local governments must agree to give up a percentage of occupational taxes from the company for certain programs and projects locating in certain counties. Those taxes, usually paid by the employee to the local entity, will go to the company instead.

Other programs assist with site selection and training through Bluegrass State Skills,

While tax incentives look hefty, the story is more complicated than at first glance. The incentives are not one year deals but often must be takin over 10 - 15 years. There is oversight. There are reporting requirements.

This is the Cliff Notes version of what the Cabinet for Economic Development offers businesses looking to expand or relocate into Kentucky. A full discussion would include a mind numbing alphabet soup of agency names and programs. Program managers from the Cabinet are available to guide interested businesses through the process. As Baesler said, the goal with project managers is to build a relationship with companies and "think about what they need" not just offer a tax break.

For those who wish to delve more deeply, www.ThinkKentucky.com has virtually pages and pages of information on offerings. Visitors to the site can search for projects by county, region and/or company name. (Disable your pop up blocker first).

Kentucky may look like a big spender but it's got some serious competition. Especially in the area of manufacturing, other states vie strenuously for their share. Some offer upfront incentives. Alabama received a C- in the category of "what we get for our money" in a review of tax incentives and a D in transparency.

Then there's that labor thing called "right to work". Kentucky is not a right to work state and it isn't looking to become one anytime soon. That has lost some big employers to states to the south of us. In this Summer's 2015 edition of The American Prospect, Harold Meyerson writes in an article criticizing the Deep South's move to a low wage economy. Meyerson argues that the reason companies are coming back from China is the South is evening the playing field in worker wages. In his article "How the American South Drives the Low-Wage Economy" Meyerson says that "Manufacturing has continued to move to the South, and factory worker's wages have gone south as well." http://prospect.org/article/how-American-south-drives-low-wage-economy

At least in Kentucky's incentive program, companies have to meet a standard for worker pay - and that information is visible on the state website.

For all the shock value of giving companies incentives to come here and stay here, there is little the state can do to get off the merry-go-round of tax incentives. If it does, that big whooshing sound will be the sucking sound of companies heading south for greener pastures, sunnier skies and smaller pay packets for workers.

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