Cabinet commissions study of economic incentives

BYLINE: John Stamper, HERALD-LEADER FRANKFORT BUREAU

Two University of Kentucky researchers will produce a first-of-its-kind study by year's end that attempts to measure the effectiveness of Kentucky's expensive job-creation programs.

The $75,000 report, commissioned this year by the Cabinet for Economic Development's board of directors, will come one year after the Herald-Leader ran a series of articles scrutinizing the Cabinet's business incentive programs. The Cabinet has spent more than $1.2 billion recruiting jobs over the past 25 years.

The newspaper found that the Cabinet has done little to gauge the effectiveness of its incentives, is more secretive than counterparts in many other states and sometimes loosely monitors its programs.

"We are confident¼ that the study will find that the current programs are effective in attracting new business, and in retaining and expanding existing business," Cabinet for Economic Development Secretary Gene Strong said Friday in a written statement. "However, it is important to routinely evaluate the economic development tools in our toolbox and to stay on the cutting edge by making changes if there are better ways to achieve our goals."

Strong told a panel of lawmakers in late August that he and his board of directors, the Kentucky Partnership for Economic Development, will consider changes to the state's job-creation strategy if the study indicates they are necessary.

"I think we can anticipate that the study will say that the various types of tax incentives have been successful, but beyond that, there are other questions and concerns," said Democrat Harry Moberly of Richmond, chairman of the House Appropriations and Revenue Committee. "There's still an issue as to why it's necessary to keep so much confidential while other states that are doing quite well manage to disclose more information."

Moberly and others criticized the Cabinet's policies this spring, but the General Assembly did not pass a proposal that would have required limited disclosure of how much individual companies benefit from tax incentives. The Cabinet said the measure would have hurt business recruitment efforts, even though North Carolina, a state ranked first for its economic development efforts by industry magazine Site Selection, posts such information on a Web site.






Access to confidential files

The UK study isn't expected to tackle disclosure issues, but will address the critical question of how often tax breaks actually sway a company to choose one location over another.

Many economists believe that incentives are effective less than 10 percent of the time, but much of that research is theoretical, since states have generally refused to share confidential data with researchers.

Although the Cabinet stifled an attempt in 2000 by the Legislature's Program Review and Investigations Committee to study incentive programs, it will give researchers at UK's Center for Business and Economic Research access to its confidential files -- including details of incentive packages the state offered to companies that located elsewhere.

Strong said Friday that the Program Review and Investigations Committee is welcome to look at the same data.

"I applaud the Cabinet for taking what seems like serious steps to understand the impacts of tax incentives," said Justin Maxson, president of the Mountain Association for Community Economic Development.

MACED issued a report late last year that criticized the state for not evaluating the impact of business tax breaks. It also found that Kentucky relies on a narrow strategy of attracting businesses with financial subsidies, leaving relatively little for work-force development, entrepreneurship and high-tech initiatives.

Although encouraged by the Cabinet's response to criticisms, Maxson and others are baffled by the Partnership for Economic Development's decision to spend $75,000 on a report that salaried economists with the LRC, the General Assembly's research arm, could have done.

"I'm glad to hear somebody is doing that, but UK is so wedded to corporate interests that you have to question whether you will get an objective study," said Rep. Jim Wayne, D-Louisville. "We have excellent economists here (at the LRC) who are not wedded to corporate interests."

The Cabinet's personal service contract with UK says that it is not feasible to use state workers for the study. It also calls for a $25,000 follow-up report in 2007 and can be renewed at the Cabinet's discretion for three additional years at a cost of $75,000.






Questions about UK

The contract's structure raises concerns for Greg LeRoy, executive director of Good Jobs First, a Washington-based advocacy and research center. LeRoy wonders if the researchers won't feel pressure to produce a rosy initial report in order to gain the additional $75,000 contract. He also questions why the Cabinet chose to offer a no-bid contract to UK instead of issuing a request for proposals from other nationally respected research groups.

"I hope they do a good study ... but reasonable people would raise their eyebrows," LeRoy said. "There is a history of forum shopping by commerce departments looking for friendly academic forums to provide a stamp of approval."

Strong did not answer questions Friday about the contract bidding process, but state law does not require the Cabinet to seek multiple bids for such contracts.

The study's chief researcher said he has been told by the Cabinet to hold no punches.

"If it's not working, they want to know about it," said Kenneth Troske, a UK economics professor and director of the Center for Business and Economic Research.

In their project proposal, Troske and colleague William Hoyt said they will attempt to estimate the influence tax incentives have on the location decision of firms by comparing the incentive packages offered to companies by Kentucky and surrounding states.

Troske said he is optimistic, but uncertain, that other states will cooperate.






A meaningful analysis?

Even if Troske does get all the data he wants, other researchers are skeptical that the analysis will be meaningful.

"I don't have a lot of confidence that they'll be able to sort things out about who would have come without the incentives and thus may do what a lot of other studies do and vastly overstate the impact of incentives and their benefits," said Peter Fisher, a University of Iowa economist who has co-authored two books on economic incentives.

Fisher also has qualms about Troske's proposed method of determining the impact that companies getting incentives have on the state's economy, since the study only proposed to measure changes in employment, earnings, tax revenues and property values.

Absent are any measurements of how much more governments will have to spend providing new workers with roads, sewers, schools and public safety.

"It's almost like they are proposing to do a cost/benefit analysis but aren't looking at all of the costs," Fisher said.

Troske defended the study, saying that changes in property value will adequately reflect the total cost of providing services to new residents.

"If the benefit of the people coming to the area is smaller than the cost of providing services, then the price of land will go down," he said.

Reach John Stamper at (859) 231-3204, (502) 227-4390 or jstamper @herald-leader.com.