Fine Tuning Regulation Fine Tuning Regulation to Stimulate Job Growthto Stimulate Job Growth

Katherine Schill moderatorKatherine Schill, moderator

i i l iFine Tuning Regulation to Stimulate Job Growth

The first of four issue forums on job creationj

1. Fine Tuning Regulation to Stimulate Job Growth 2. The New Venture Capitalists? Investing in emerging 2. The New Venture Capitalists? Investing in emerging

technology (Wednesday, 11:00 am)3. The Public Works – Creating Jobs through

f ( )Infrastructure Projects (Wednesday, 1:30 pm)4. A Business‐Education Collaboration for Creating Jobs

(Thursday 2:15 pm)(Thursday, 2:15 pm)

i i l iFine Tuning Regulation to Stimulate Job Growth

Purpose: Purpose: T di ff To discuss recent state efforts to reform or revise regulations to reform or revise regulations to impact job creation

A little about regulations …

d f h ffIdentify or constrain rights in an effort to allocate responsibilities Seek to produce (or prevent) outcomes that might not otherwise occurCan be primary legislation or judicial‐made law, but are commonly administrative rules, yCome in various forms Ex price controls, pollution thresholds, ISO stds

Monitored b arious entities Monitored by various entities Gov’t, quasi gov’t, industry

Why regulate?

The benefits of regulation include protections from

Market inefficiencies e g collusion individual Market inefficiencies e.g. collusion, individual vs. public good, externalitiesIrreversible impacts e.g. outcomes impacting Irreversible impacts e.g. outcomes impacting future generationsSubstandard professional conductp fCrony capitalism

Why regulate?

However, the costs of regulation includeEconomic impactsTime impactsAdministrative confusion for those being gregulated, attributable to one of more of the following: lack of clarity, lack of transparency,

li ibl di i f i f il d negligible coordination of agencies, failed coordination among levels of government

Government Regulation Is Killing Economic GrowthGovernment Regulation Is Killing Economic GrowthU.S. News and World Report, May 18,2 012

Wi C t (4) XKCD ‘St d d ’Wise Cartoons (4): XKCD on ‘Standards’

This work is licensed under a Creative Commons Attribution-NonCommercial 2.5 License. This means you're free to copy and share these comics (but not to sell them). http://governancexborders.com/tag/wise‐cartoons/

Senator Jim Hughes, Ohio

Senate Bill 2 (2011)

Review of Kentucky’s Economic Development I i PIncentive Programs

Prepared for:Kentucky Interim Joint Committee on Economic Development and Tourism

July 19 2012July 19, 2012

Caroline M. SalleeDirector, Public Policy and Economic Analysis

Jason HorwitzJason HorwitzSenior Analyst

O v e r v i e w

• About AEG

• Purpose of Report

• Overview of Incentive Programs Studied• Overview of Incentive Programs Studied

• Key Findings

• Recommendations

• QuestionsQuestions

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About AEGAbout AEG

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A n d e r s o n E c o n o m i c G r o u p , L L C

R h d lti fi• Research and consulting firm specializing in economics, public policy, industry research and businessresearch, and business valuation.

Offi i E t L i• Offices in East Lansing, Michigan and Chicago, Illinois.

• Clients include universities, trade associations, private companies, non‐profit

i ti d t t dassociations, and state and local governments.

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Purpose of ReportPurpose of Report

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R e p o r t P u r p o s e

• The Legislative Research Commission (LRC) g ( )commissioned AEG to provide in‐depth information on Kentucky’s major incentive programs so that policymakers can make good decisions about these programs going forward.

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R e p o r t P u r p o s e ( c o n t i n u e d )

• Specifically the report• Specifically the report:– Provides an overview of the major incentive programs– Compares Kentucky’s business environment and incentives to a set Compares Kentucky s business environment and incentives to a set

of 13 peer states.– Evaluates the use of incentives to attract high‐tech and knowledge‐

based jobsbased jobs.– Reports the number of firms receiving incentives and estimates the

number of jobs at these firms.– Estimates the “gross cost” to the Commonwealth of the incentives.– Evaluates the “effectiveness threshold” of a subset of incentives.– Evaluates reporting on incentives programsEvaluates reporting on incentives programs.– Discusses the process of selecting the Secretary of the Kentucky

CED.

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P e e r S t a t e s

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R e s e a r c h P r o c e s s

• Met with LRC to identify the 17 major incentive• Met with LRC to identify the 17 major incentive programs, peer states, and other elements of the study in December of 2011.study in December of 2011.

• Met with the Cabinet for Economic Development, T i A t d H it C bi t d thTourism, Arts, and Heritage Cabinet, and the Department of Revenue to obtain data in January and February of 2012and February of 2012.

• Provided a draft report at the beginning of May, 20122012.

• Final report provided in June of 2012.19

p p

Overview of Incentive Programs StudiedOverview of Incentive Programs Studied

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I n c e n t i v e P r o g r a m s

• Studied 17 major incentive programs identified by LRC• Studied 17 major incentive programs identified by LRC.

• We also studied the 4 programs that were rolled into the Kentucky Business Investment (KBI) program:

– Kentucky Rural Economic Development Act (KREDA)

– Kentucky Industrial Development Act (KIDA)e tuc y dust a e e op e t ct ( )

– Kentucky Jobs Development Act (KJDA)

– Kentucky Economic Opportunity Zone (KEOZ)

• Incentives studied included:– 12 tax incentives– 3 loan programs– 1 grant program

1 b d 21– 1 bond program

P u r p o s e o f I n c e n t i v e s

dd d• Address Cost DisadvantagesIncentives are used to reduce the overall cost of doing business for firms that are starting up, expanding, or relocating.

• Revitalize Distressed Local EconomiesGovernments often offer more generous incentives to businesses that choose to locate in areas with higher rates of unemployment and poverty.

• Encourage Beneficial BehaviorAn incentive is provided to reward certain behavior, such as lowering plant emissions or creating new products.

• Targeted Industrial PolicyUse incentives to attract or support an industry that is not already prevalent in the state.

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K e n t u c k y ’ s P r o g r a m s b y P u r p o s e a n d A g e n c y

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Key FindingsKey Findings

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Jobs Reported by Firms Receiving IncentivesJobs Reported by Firms Receiving Incentives(Findings #1 ‐ 3)

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A n a l y s i s o f R e p o r t e d J o b s

• Kentucky offers 7 incentives that have a jobs requirement.

• The Cabinet for Economic Development collects detailed data on firms receiving incentives to make sure they are in compliance with terms.

• Firms report jobs created and maintained to CED.p j

• A Note of Caution: We do not, and cannot, make the claim that these jobs were directly caused by theclaim that these jobs were directly caused by the provision of the incentive.

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D e f i n i t i o n s

Jobs CreatedNew jobs or retained jobs where applicable at a firmNew jobs, or retained jobs where applicable, at a firm the first year they are reported to the CED.

Jobs MaintainedNew jobs, or retained jobs, at a firm in any year in which the firm is monitored by the CED after the first year they report to CED.

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E x a m p l e o f J o b s C r e a t e d a n d J o b s M a i n t a i n e d

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R e p o r t e d J o b s

200 20 02001‐2010• 577 unique

companiescompanies

• 55,173 reported jobsreported jobs created

33 000• 33,000 reported maintainedmaintained jobs on average per year

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p y

D u r a t i o n o f J o b s

Firms that started reporting jobs between 2001‐05:

• Average jobAverage job lasted 5 years.

Companies started reporting between 2001‐05 and continuously reported every year:• Number of jobs

reported by these firms increased, as shown by graph on left.

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left.

N o S y s t e m a t i c O v e r ‐ R e p o r t i n g t o C E D

Comparison of CEDComparison of CED data to BLS data:• Half of companies f f p

reporting jobs numbers to CED are within 15% of BLS reported data.

• More companies under‐reported data to CED thandata to CED than over‐reported data.

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data.

A v e r a g e W a g e s – I n d u s t r i e s R e c e i v i n g I n c e n t i v e s

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Cost of IncentivesCost of Incentives(Findings #4 & 5 in report)

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D e f i n i t i o n o f G r o s s C o s t

Total Gross CostTotal Gross Cost– Tax revenue that has been foregone (e.g. tax

credits)credits)– Direct payments to firms in the form of forgivable

loans and grantsloans and grants– Budget for CED

f bGross Cost per Year of Job– Equals Total gross cost of incentives divided by

l bi d h j b d dtotal combined years that jobs are created and maintained

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G r o s s C o s t 2 0 0 1 ‐ 2 0 1 0

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G r o s s C o s t p e r J o b p e r Y e a r

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Effectiveness Threshold AnalysisEffectiveness Threshold Analysis(Findings #6 & 7)

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W h a t i s a n “ e f f e c t i v e n e s s t h r e s h o l d ” ?

• Kentucky requires firms to sign a “but for”• Kentucky requires firms to sign a “but for” agreement before receiving an incentive, indicating that a firm would not come to Kentucky or remain inthat a firm would not come to Kentucky or remain in business “but for the incentive.”

• We estimated each program’s “threshold effectiveness,” which is the share of new investment at firms receiving incentives that must be directly created by the incentive in order for the incentive to b b i j b i i hbe better at creating jobs or increasing wages than an alternative policy.

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A n a l y s i s S t r u c t u r e

• Incentives analyzed• Incentives analyzed:• KIDA• KREDA• KREDA• KJDA• BSSC Credit• OCI Loans

• Alternative policy: we compare the use of incentives provided to some firms versus a broad‐based tax cut i l ( i i di id lin a relevant tax (corporate income, individual income, property tax).

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R e s u l t s

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T a k e ‐ a w a y o f a n a l y s i s

• The effectiveness threshold for the KBI predecessor incentives and BSSC Credits are in the middle‐to‐incentives and BSSC Credits are in the middle tohigh range of what effectiveness we would expect these incentives to achieve.

• Do not think the OCI High Tech Pools are achieving job creation that makes it more effective than a broad‐based tax available to all firms.

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Use of Knowledge‐based IncentivesUse of Knowledge based Incentives(Findings #8 – 10)

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K n o w l e d g e ‐ b a s e d S e c t o r s ( K B S )

• Knowledge based sectors (KBS) include• Knowledge‐based sectors (KBS) include:Advanced manufacturingLife sciencesLife sciencesInformation and communication technology industries

K t k h l l l f l t i KBS b t• Kentucky has a lower level of employment in KBS but has been growing faster than peer states.

Kentucky Peer States

Employment in KBS 5.2% 8.1%(share of total)

Average Annual Growth(2004-2009)

3.1% 1.6%

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P e r f o r m a n c e i n K B S

K k i ll i kl i bi l i l i d i ( h• Kentucky grew especially quickly in biological industries (such as pharmaceutical and medical product manufacturing and scientific R&D services) and research relevant advanced manufacturing industries (such as engineering and testing labs).

K k ’ h f l i h i i i d i• Kentucky’s share of employment in research‐intensive industries was ¼ to ½ the share of employment in these industries in peer states in 2009.

• Kentucky is only above the national and peer averages in l d ll h i d d f iemployment and payroll share in advanced manufacturing

industries.

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F a c t o r s t h a t C o n t r i b u t e t o K B S

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U s e o f I n c e n t i v e s t o T a r g e t T h e s e F i r m s

• 14 of Kentucky’s 17 incentive programs studied are available to• 14 of Kentucky s 17 incentive programs studied are available to high‐tech and knowledge‐based firms.

K t k ff ifi i ti th t t t th fi• Kentucky offers specific incentives that target these firms.• Kentucky is one of 7 states (out of 14 studied) that provides a tax credit or

tax exemption for expenditures on R&D equipment.

• OCI programs specifically target high‐tech and knowledge‐based firms. WE found that 72% of companies receiving loans from the OCI High‐tech Pools were in KBS.

• Kentucky also provides grant funding to these firms.

• Virginia, Arkansas, and North Carolina all have unique programs that provide incentives for infrastructure, start‐up companies, and technology development.

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Comparison with Peer StatesComparison with Peer States(Findings #11 – 14)

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K e n t u c k y ’ s B u s i n e s s E n v i r o n m e n t

• Competitive business tax environment• Competitive business tax environment• Overall business tax burden below state peers (18.2% taxes as a share of profits

compared to 19.3% in peer states)

• Low corporate income and effective property tax rates• Low corporate income and effective property tax rates

• Average infrastructure• Pretty good road quality

• Lower % of population with broadband internet at home

• Educational attainment is lower than peers• Population 25 years + with bachelor’s or advanced degree is lower than peerPopulation 25 years + with bachelor s or advanced degree is lower than peer

average.

• Student retention rates and graduation rates at public universities are lower than other states.

• Labor Force• Percent college or career ready is lower than peers (16% versus 24%)

• Median average hourly rate is lower than peer states ($14 62 versus $15 11)48

• Median average hourly rate is lower than peer states ($14.62 versus $15.11)

T y p e o f I n c e n t i v e s O f f e r e d

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U s e o f I n c e n t i v e s t o A d d r e s s B u s . F a c t o r s

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C l a w ‐ b a c k s

• Kentucky does not have a need for claw backs due to its incentives being• Kentucky does not have a need for claw‐backs due to its incentives being “performance based.”

• Kentucky’s approach has 3 main advantages over claw backs:• Kentucky s approach has 3 main advantages over claw‐backs:• Limits the cost of incentives each year

• Is preferred by business

• Limits the state’s recovery costs

• Kentucky’s OCI High‐Tech Pools is the one program that has a “claw‐back like provision.” Our analysis of this program found:• 57 out of 139 projects had to pay back some funds.

• However, these companies only had to pay back a small amount (meaning , p y p y ( gthey met some of the requirements).

• Total amount “claw‐backed” was $7.6 million or less than 6% of all funds originally disbursed.

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g y

R e p o r t i n g

• The detail of reports on incentive programs varies by incentive• The detail of reports on incentive programs varies by incentive. Some, but not all, have extensive annual reports.

• Statutory requirements for: OCI, BSSC, KTDA, KEIA, IEIA, TIF, and the Film Credit.

• Level of reporting among peer states varies. Kentucky is similar to many peers in its level of reports A handful of states publishto many peers in its level of reports. A handful of states publish detailed reports on all programs, which Kentucky does not do.

• Kentucky is the only state that has an extensive website with monitoring data made available to the public.

• Going forward, the website will show extensive performance data on more incentivesdata on more incentives.

• The information on the website is not statutorily required.

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Selection of CED SecretarySelection of CED Secretary(Finding #15)

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S e l e c t i o n o f C E D P r o c e s s

• Kentucky’s process of using a national search firm is y p gdifferent from that of other states.

• The process of selecting the current secretary of the CED met stat tor req irementsmet statutory requirements.

• Kentucky pays its secretary an annual salary of $250,000. This is $100,000 more on average than peers., g p

• While we used two sources to determine salaries in each state, we caution making an apples‐to‐apples interpretation becausebecause:– There could be other compensation components for heads in other

states.

– Kentucky has very specific requirements for the secretary, requiring extensive experience and an established reputation in the field.

– The requirements of the job are likely to differ state by state.54

RecommendationsRecommendations

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R e c o m m e n d a t i o n s : I m p r o v e R e p o r t i n g

1. Consider statutorily requiring information available on the CED website be reported.

2. Maintain quality annual reports from BSSC and OCI.

3. Provide one comprehensive, annual summary treport.

4 M i t i i t t it i d d t d fi iti4. Maintain consistent monitoring and data definitions to allow for easier tracking of performance by incentive

56incentive.

R e c o m m e n d a t i o n s : E n c o u r a g e G r o w t h i n K B S

1. Put more emphasis on bridging the gap between research universities and private enterpriseresearch universities and private enterprise.

2 Consider increasing or expanding the state’s tax2. Consider increasing or expanding the state s tax credits for qualified research and development expenditures.expenditures.

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Questions?Questions?

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