Fine Tuning Regulation to Stimulate Job Growth

Size: px

Start display at page:

Download "Fine Tuning Regulation to Stimulate Job Growth"

Roland Booth
5 years ago
Views:

1 Fine Tuning Regulation to Stimulate Job Growth Katherine Schill, moderator

2 Fine Tuning Regulation to Stimulate Job Growth The first of four issue forums on job creation 1. Fine Tuning Regulation to Stimulate Job Growth 2. The New Venture Capitalists? Investing in emerging technology (Wednesday, 11:00 am) 3. The Public Works Creating Jobs through Infrastructure Projects (Wednesday,( 1:30 pm) ) 4. A Business Education Collaboration for Creating Jobs (Thursday, 2:15 pm)

3 Fine Tuning Regulation to Stimulate Job Growth Purpose: To discuss recent state efforts to reform or revise regulations to impact job creation

4 A little about regulations Identify or constrain rights in an effort to allocate responsibilities Seek to produce (or prevent) outcomes that might not otherwise occur Can be primary legislation or judicial made law, but are commonly administrative rules Come in various forms Ex price controls, pollution thresholds, ISO stds Monitored by various entities Gov t, quasi gov t, industry

5 Why regulate? The benefits of regulation include protections from Market inefficiencies e.g. collusion, individual vs. public good, externalities Irreversible impacts e.g. outcomes impacting future generations Substandard professional conduct Crony capitalism

6 Why regulate? However, the costs of regulation include Economic impacts Time impacts Administrative confusion for those being regulated, attributable to one of more of the following: lack of clarity, lack of transparency, negligible ibl coordination i of agencies, failed coordination among levels of government

8 Government Regulation Is Killing Economic Growth Government Regulation Is Killing Economic Growth U.S. News and World Report, May 18,2 012

9 Wise Cartoons (4): XKCD on Standards d 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). cartoons/

10 Senator Jim Hughes, Ohio Senate Bill 2 (2011)

Development and Tourism July 19, 2012 Caroline M.

11 Review of Kentucky s Economic Development Incentive Programs Prepared for: Kentucky Interim Joint Committee on Economic Development and Tourism July 19, 2012 Caroline M. Sallee Director, Public Policy and Economic Analysis Jason Horwitz Senior Analyst

12 Overview About AEG Purpose of Report Overview of Incentive Programs Studied Key Findings Recommendations Questions 12

13 About AEG 13

Anderson Economic Group, LLC Research and consulting

Clients include universities, trade associations,

14 Anderson Economic Group, LLC Research and consulting firm specializing in economics, public policy, industry research, and business valuation. Offices in East Lansing, Michigan and Chicago, Illinois. Clients include universities, trade associations, private companies, non profit associations, and state t and local governments. 14

15 Purpose of Report 15

16 Report Purpose The Legislative Research Commission (LRC) 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. 16

17 Report Purpose (continued) Specifically the report: Provides an overview of the major incentive programs 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 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 programs. Discusses the process of selecting the Secretary of the Kentucky CED. 17

18 Peer States 18

19 Research Process Met with LRC to identify the 17 major incentive programs, peer states, and other elements of the study in December of Met with the Cabinet for Economic Development, Tourism, Arts, and dheritage Cabinet, and dthe Department of Revenue to obtain data in January and February of Provided a draft report at the beginning of May, Final report provided in June of

20 Overview of Incentive Programs Studied 20

21 Incentive Programs 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 e e Act (KIDA) Kentucky Jobs Development Act (KJDA) Kentucky Economic Opportunity Zone (KEOZ) Incentives studied included: 12 tax incentives 3 loan programs 1 grant program 1b bond program 21

22 Purpose of Incentives Address Cost Disadvantages Incentives are used to reduce the overall cost of doing business for firms that are starting up, expanding, or relocating. Revitalize Distressed Local Economies Governments often offer more generous incentives to businesses that choose to locate in areas with higher rates of unemployment and poverty. Encourage Beneficial Behavior An incentive is provided to reward certain behavior, such as lowering plant emissions or creating new products. Targeted Industrial Policy Use incentives to attract or support an industry that is not already prevalent in the state. 22

23 Kentucky s Programs by Purpose and Agency 23

24 Key Findings 24

25 Jobs Reported by Firms Receiving Incentives (Findings #1 3) 25

26 Analysis of Reported Jobs 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. A Note of Caution: We do not, and cannot, make the claim that these jobs were directly caused by the provision of the incentive. 26

27 Definitions Jobs Created New jobs, or retained jobs where applicable, at a firm the first year they are reported to the CED. Jobs Maintained New 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. 27

28 Example of Jobs Created and Jobs Maintained 28

29 Reported Jobs unique companies 55,173 reported jobs created 33,000 reported maintained jobs on average per year 29

30 Duration of Jobs Firms that started reporting jobs between : Average job lasted 5 years. Companies started reporting between and continuously reported every year: Number of jobs reported by these firms increased, as shown by graph on left. 30

31 No Systematic Over Reporting to CED Comparison of CED data to BLS data: Half of companies reporting jobs numbers to CED are within 15% of BLS reported data. More companies under reported data to CED than over reported data. 31

32 Average Wages Industries Receiving Incentives 32

33 Cost of Incentives (Findings #4 & 5 in report) 33

34 Definition of Gross Cost Total Gross Cost Tax revenue that has been foregone (e.g. tax credits) Direct payments to firms in the form of forgivable loans and grants Budget for CED Gross Cost per Year of Job Equals Total gross cost of incentives divided by total combined years that jobs are created and maintained 34

35 Gross Cost

36 Gross Cost per Job per Year 36

37 Effectiveness Threshold Analysis (Findings #6 & 7) 37

38 What is an effectiveness threshold? Kentucky requires firms to sign a but for agreement before receiving an incentive, indicating that 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 be better at creating jobs or increasing i wages than an alternative policy. 38

39 Analysis Structure Incentives analyzed: KIDA KREDA KJDA BSSC Credit OCI Loans Alternative policy: we compare the use of incentives provided to some firms versus a broad based tax cut in a relevant tax (corporate income, individual id income, property tax). 39

40 Results 40

41 Take away of analysis The effectiveness threshold for the KBI predecessor incentives and BSSC Credits are in the middle to high 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. 41

42 Use of Knowledge based Incentives (Findings #8 10) 42

43 Knowledge based Sectors (KBS) Knowledge based sectors (KBS) include: Advanced manufacturing Life sciences Information and communication technology industries Kentucky has a lower level lof employment tin KBSb but has been growing faster than peer states. Kentucky Peer States Employment in KBS 5.2% 8.1% (share of total) Average Annual Growth ( ) 3.1% 1.6% 43

44 Performance in KBS Kentucky grew especially quickly in biological i l industries i (such as pharmaceutical and medical product manufacturing and scientific R&D services) and research relevant advanced manufacturing industries (such as engineering and testing labs). Kentucky s share of employment in research intensive i industries i was ¼ to ½ the share of employment in these industries in peer states in Kentucky is only above the national and peer averages in employment and payroll share in advanced d manufacturing industries. 44

45 Factors that Contribute to KBS 45

46 Use of Incentives to Target These Firms 14 of Kentucky s 17 incentive programs studied are available to high tech and knowledge based firms. Kentucky offers specific incentives that t target t 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. 46

47 Comparison with Peer States (Findings #11 14) 47

48 Kentucky s Business 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 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 peer average. Student retention rates and graduation rates at public universities are lower than other states. LaborForce 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) 11) 48

49 Type of Incentives Offered 49

50 Use of Incentives to Address Bus. Factors 50

51 Claw backs 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: 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 they met some of the requirements). Total amount claw backed was $7.6 million or less than 6% of all funds originally disbursed. 51

52 Reporting 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 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 incentives. The information on the website is not statutorily required. 52

53 Selection of CED Secretary (Finding #15) 53

54 Selection of CED Process Kentucky s process of using a national search firm is different from that of other states. The process of selecting the current secretary of the CED met statutory tor requirements. Kentucky pays its secretary an annual salary of $250,000. This is $100,000 more on average than peers. While we used two sources to determine salaries in each state, we caution making an apples to apples interpretation because: 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

55 Recommendations 55

56 Recommendations: Improve Reporting 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 report. 4. Maintain i consistent t monitoring i and data definitions iti to allow for easier tracking of performance by incentive. 56

57 Recommendations: Encourage Growth in KBS 1. Put more emphasis on bridging the gap between research universities and private enterprise. 2. Consider increasing or expanding the state stax s tax credits for qualified research and development expenditures. 57

58 Questions? 58

59 East Lansing Chicago Anderson Economic Group, LLC 2012 May only be replicated in entirety with proper citation.

FINANCIAL INCENTIVES

FINANCIAL INCENTIVES Benefits are available for all types of companies - new, existing and relocating; regional and national headquarters; back-office; distribution and supply chain; manufacturing; and