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SUNDAY EDITION | Cash-strapped Kentucky spends more on job subsidies than border states

  • 7 min to read

LOUISVILLE, Ky. (WDRB) – In the summer of 2016, Alliance Entertainment was planning to add jobs at its warehouse in Shepherdsville, one of the many e-commerce “fulfillment” centers a short drive from UPS’ global air hub in Louisville.

Alliance, which stores and ships DVDs and CDs at the massive Shepherdsville facility, was looking to hire 150 workers as the company expanded.

The jobs paid on average only $10 per hour, less than the estimated “living wage” in Bullitt County for a single person with no children.

Nonetheless, Kentucky officials thought the Alliance plan was an economic benefit worth subsidizing.

Records show the state Cabinet for Economic Development negotiated a deal that entitles Alliance Entertainment to collect up to $500,000 in “incentives” – state tax dollars -- over 7 years in exchange for the new jobs.

This would be accomplished, as is typical, by Alliance keeping portions of the state income taxes it withholds from employee paychecks, instead of sending the tax money to the state.

Economic development giveaways – including hundreds of deals like the one with Alliance -- cost Kentucky nearly $176 million in the year ended June 30, 2019, according to the state’s annual financial report.

Kentucky gives away more tax revenue for economic development per capita than five border states, according to a WDRB analysis of disclosures in each state’s annual financial report from 2017 to 2019.

Made with Flourish

Only Missouri, which last year reached a truce with Kansas to stop competing over companies in the Kansas City area, spends more, according to the analysis.

This comparison is possible only because of recent change in nationwide government accounting rules requiring states and local governments to quantify the taxes they forgo to attract economic benefits such as a factory, a corporate headquarters or a movie production.

“For the longest time there just wasn’t any data about this,” said John Mozena, president of the Center for Economic Accountability, a Michigan nonprofit focused on highlighting the costs of state and local economic development giveaways.

To be sure, there are still significant limitations to the information. WDRB’s analysis includes only tax giveaways at the state level; incentives given by thousands of cities and counties are reported separately.

State officials also have a lot of latitude in what they disclose. West Virginia isn’t included in the comparison because that state discloses nothing, claiming its economic development incentives are not covered by the new accounting rules.

Still, the comparison underscores how Kentucky forgoes tax revenue in the name of attracting jobs – revenue that might be helpful as state lawmakers have just begun their biannual struggle to craft a balanced budget.

Overall, $176 million isn’t much in the context of the state’s $11.5 billion in annual tax revenue. But it would pay for a $2,000 raise for public school teachers, a 1% increase in basic school funding and 350 additional state social workers – each of which has been proposed by Gov. Andy Beshear – without raising taxes or raiding some special funds, as Beshear has also proposed.

William Glasgall, director of state and local initiatives at the Volker Alliance, a nonprofit focused on effective government, said corporate incentives are generally under the radar because the spending doesn’t show up in government budgets; rather, the taxes never come through the door in the first place.

But lawmakers ought to be paying attention, he said.

“Whether it’s cash that the state is handing out or a credit against future taxes, the state is spending its resources,” he said.

Corporate incentives have come under more scrutiny in recent years, Mozena said, because of Wisconsin’s widely criticized $4 billion subsidy to land a Foxconn plant and the competition among cities for Amazon’s second headquarters project.

In Nashville, a city Louisville leaders often envy, newly minted Mayor John Cooper has promised to curb corporate subsidies that he has blamed for budget problems despite the city’s rapid growth.

“People say, ‘With all these cranes in the sky, how did we run out of money?’” Cooper told The Wall Street Journal in October.

Beshear wants to ‘prioritize’ job deals

On the campaign trail last year, Beshear, a Democrat, frequently promised to stop giving tax breaks to “out-of-state CEOs” who create “cut rate” jobs in Kentucky.

On the other hand, former Gov. Matt Bevin, a Republican, offered a full-throated defense of the giveaways and reveled in the record amount of planned jobs and investments that companies announced during his tenure.

Bevin often defended the deals by saying, as he described one grant to UPS in October, that the money represented only "a small little percentage of a percentage" of a company's investment in Kentucky.

Bevin also suggested Beshear’s “pejorative” tone towards big-company executives displayed naivety as to how good-paying jobs are created.  

Despite his campaign rhetoric, it’s still unclear what changes Beshear will implement, if any, regarding corporate tax breaks. 

The governor, who took office Dec. 10, told WDRB in a Jan. 6 interview that his economic development cabinet will be more discerning in the deals it offers companies looking to move to or expand in Kentucky.

“At a time where there may be more interest where the economy is, we’re going to make sure that when we provide our hard-earned tax dollars to a company, that they’re creating really good jobs that can lift our families up,” Beshear said.

What defines a “really good job?” Beshear would not draw bright lines, but he suggested the state may not compete for a call center, but instead “prioritize” jobs that pay $80,000 or $85,000 a year.

So far, it appears to be business as usual despite the change in administrations.  

On Thursday, the state board that grants incentives approved a handful of new deals, including a promise of up to $100,000 to Shelbyville manufacturer Bluegrass Roller Service. The payoff? Ten new jobs with an average wage of $14 per hour.

Jack Mazurak, a spokesman for the economic development cabinet, said the deals approved last week had been in the works for months.

He said cabinet officials are “cognizant” of Beshear’s stance on incentives, but he didn’t know of any “special directive from the governor’s office” to change how they are given out.

“We’re aware that’s the goal of the governor, with the end outcome of raising the average wage,” Mazurak said.

Glasgall, of the Volker Alliance, said the “key question” is, “What did Kentucky get for all that spending (on the corporate giveaways)?”

During Bevin’s 2015-2019 term, Kentucky offered $928 million in potential giveaways to about 600 companies through its main program, called Kentucky Business Investment, according to WDRB’s analysis of a cabinet database.

The giveaways, which would be realized over 10 years or longer, amounted to $17,404 per new job.

The typical new job was reported to pay $21.32 per hour, using the “average hourly wage” metrics provided by each company. That’s slightly above the average wage in Kentucky, $20.77 an hour, according to the U.S. Bureau of Labor Statistics.

But that program represents only a portion of Kentucky’s economic development spending.

Figuring out how much “bang” Kentucky truly gets for its buck is complicated because much of the spending isn’t specifically tied to job growth.

For example, most of the taxes attributable to the $300 million Omni Hotel in downtown Louisville do not go to the state, but to retire construction debt for the 2018 project. So-called “tax increment financing” cost Kentucky $32 million in all during 2019.

On Thursday, the state promised Makers Mark Distillery in Lebanon up to $400,000 in sales tax exemptions to help the company build five new warehouses to age bourbon barrels. The state routinely shields companies from sales taxes on new facilities, and those arrangements aren’t predicated on new jobs.

Making sure ‘voters think think politicians are creating jobs’

In a research paper published in 2018, economist Timothy Bartik of the W.E. Upjohn Institute for Employment Research concluded that state and local subsidies “probably” change companies’ decisions about where to invest and create jobs only 2% to 25% of the time.

Mozena, of the Center for Economic Accountability, said there “all sorts of fundamental business factors” that actually dictate executives' decisions, such as the company’s existing locations, the pool of available workers and proximity to suppliers and customers.

Yet, corporate subsidies are useful to companies and elected officials alike, so changing them is heavy lifting, he said.

“These programs don’t exist to create jobs; they exist to make sure voters think politicians are creating jobs,” Mozena said.

Elected officials like showing up at ribbon cuttings and claiming that they had a hand in a company’s decision to open a plant or expand its workforce, he said. Companies, meanwhile, “get free money,” Mozena said. “They love that.”

Despite that dynamic, some Kentucky legislators have shown interest in examining the subsidies. 

In 2018, a large group of lawmakers backed a House bill to create a legislative “review board” that would “analyze the financial and economic performance of economic development incentive programs” and recommend ways to change them.

But that bill died without even a committee hearing.

Rep. Jason Nemes, a Republican whose district includes eastern Jefferson County and parts of Oldham County, told a Greater Louisville Inc. audience at a breakfast last year that the bill to study incentives was “squelched,” perhaps because “some companies that receive” incentives don’t want them reviewed.

Nemes told WDRB last week that he’s still interested in “understanding where those tax incentives go” and whether “they (are) actually bringing jobs into Kentucky” – jobs that wouldn’t have come otherwise.

“I can tell you there is an appetite in our caucus to look at every single dollar we are spending and make sure it’s providing a return on investment,” he said.

But House Speaker David Osborne, R-Prospect, played down the significance of corporate subsidies in a recent interview.

Speaking to WDRB last month, Osborne noted that business incentives pale in comparison to other ways that the state gives up tax revenue, such as exempting groceries, drugs and utilities from the state sales tax and allowing retirees their first $31,110 without income tax.

““It’s alluded to often in terms of ‘corporate welfare’ or something like that,” Osborne said. “It’s important for the people to understand – most of those things, the largest items we exclude from taxation, are things like food, medicine, residential utilities (and) retirement income. Those are things that are very, very important to a lot of people in Kentucky that go way beyond corporate giveaways.”

Kentucky Chamber of Commerce CEO Ashli Watts told WDRB that economic development incentives are “an important tool that has resulted in the huge investment of jobs in our Commonwealth.”

“Though Kentucky has many competitive advantages, there are also challenges we face and these incentives, which are performance based, help level the playing field in many instances,” Watts said in an email. “If Kentucky did not offer incentives, we would be the ONLY state to do so and many companies would simply not even look at Kentucky as a possible location.”

Watts added that the chamber “has long advocated all incentives should have a positive return on investment and be able to stand up to the light of day.”

Lawmakers did take action on incentives last year – not to study them, but to offer more.

They overwhelmingly passed a bill that opens the state’s most generous program – under which manufacturers like Ford and Toyota have been offered hundreds of millions of dollars – to a broader set of companies.

Reach reporter Chris Otts at 502-585-0822, cotts@wdrb.com, on Twitter or on Facebook. Copyright 2020 WDRB Media. All rights reserved.