Josh Luthi, an auditor with the Kansas Legislature’s auditing division, says a new report on five of the state’s prominent economic development incentives will produce positive business growth but may not generate enough tax revenue to cover taxpayers’ investment in those programs. (Kansas Reflector screen capture from Kansas Legislature YouTube channel)
TOPEKA — Auditors working for the Kansas Legislature estimated five of the state’s major business development incentive programs would generate positive total returns for the private-sector economy but not produce enough growth in tax revenue to cover public investments.
The evaluation was ordered in June by a joint committee of the House and Senate due to skepticism among some legislators with the state government’s use of tax credits or exemptions, or direct expenditure of state funds, to convince businesses to make capital investments or create jobs in Kansas. Gov. Laura Kelly, who won reelection in November, invited scrutiny by pointing to her first-term success in pursuing new jobs, including a $4 billion Panasonic battery plant for De Soto.
Legislative auditor Josh Luthi said during a briefing with lawmakers all five programs were viewed as “generally successful” despite projections the programs wouldn’t deliver enough new state and local income, sales or property taxes to cover every dollar in direct costs or foregone revenue devoted to economic development.
Ranking the five programs in terms of proficiency would be folly, Luthi said, because they were of different size, targeted different needs and were funded differently.
The audit focused on an alphabet soup of incentives: High Performance Incentive Program (HPIP), Job Creation Fund (JCF), Kansas Industrial Training (KIT), Kansas Industrial Retraining (KIR) and Promoting Employment Across Kansas (PEAK). At least $400 million has been awarded to businesses by the Kansas Department of Commerce through these programs from 2017 to 2021.
Luthi said auditors sent surveys to nearly 300 businesses that received benefits from the five programs to determine whether executives would have made the same business decisions if they hadn’t received state incentives. In response, 11 said they would have created a new business facility in Kansas and hired people to work there without the state’s generosity. Thirteen businesses said incentives convinced them to do bigger projects or to speed development timelines. Three businesses said they would have canceled the projects or moved to another state if denied tax dollars.
“Incentives do not always make 100% of the difference,” Luthi said. “Sometimes they don’t make any difference.”
The audit didn’t delve into details of how the Kansas Department of Commerce administered these programs. For example, auditors didn’t examine how the department negotiated incentive awards with businesses.
Frustration bubbles over
Sen. Mike Thompson, R-Shawnee, said cost recovery was the bottom-line issue related to incentives paid by Kansas taxpayers.
“If we’re putting more money into the program that we’re recovering, then it’s not doing its job. The taxpayers need to receive some kind of return,” he said.
Democratic Sen. Mary Ware of Wichita said she was frustrated by the audit’s lack of reform recommendations and absence of an apples-to-apples assessment of economic incentives. She said the Legislature could dig deeper into complex topics with the addition of personnel to the overloaded auditing division or by shrinking the number of audits assigned to them.
“I honestly am not sure what to do with this report,” she said. “Throughout this there’s the words estimate, assumption, not a projectable sample, survey results can’t be considered representative. My conclusion is that this is a 40-page report with limited utility.”
Rep. Sean Tarwater, a Republican from Stilwell and chairman of the House Commerce, Labor and Economic Development Committee, said legislators would welcome information about the experience of companies competing with business rivals that got state incentives.
Augusta Rep. Kristey Williams, a Republican, suggested the Department of Commerce’s reliance on economic development incentives could fail to address the state’s labor shortage. She said there was an estimated 2.5 unfilled jobs for every unemployed Kansan seeking a job.
“Are you concerned that further incentives are going to not drive more people into Kansas, but to move Kansans from one job to another?” she said.
The Department of Commerce, which operates the five business incentive programs, responded to the report with criticism of the decision by auditors to rely on a new economic modeling program rather than stick with methodology deployed in 2014 to evaluate state incentives. The commerce department said the switch meant meaningful comparisons between audits would be impossible.
Bob North, chief counsel to the Department of Commerce, said auditors “arbitrarily” chose the new model. He viewed it as a drastic departure from the previous evaluation tool. He recommended the state select a model and stick with it so program success could be coherently measured over time. Internally, he said, the Department of Commerce used a system developed at Wichita State University.
He said the auditor’s process was flawed because it didn’t take into consideration the influence of construction jobs and capital expenditures flowing through the economy. In terms of the Panasonic facility, he said, there would be 16,000 construction jobs in the course of two years. If those jobs averaged $50,000 per year, he said, the auditors’ approach wouldn’t capture that significant fiscal impact.
“We want a tool that helps us administer a programs and we think that will be most meaningful to you as well,” North told legislators. “We want to give the least amount of incentives possible to recruit or retain a project to the state.”
The agency also disagreed with auditors’ decision to closely study 28 Kansas projects — they were selected, not randomly identified — from among 600 projects involving state incentives from 2017 to 2021. Some projects were linked to several economic development initiatives. Auditors reported 23 of the 28 were projected to yield positive economic returns over a 20-year period.
North said the agency supported appropriation of additional funding to the Legislature’s auditing division to allow for more robust assessments of business incentives. It would be improper to extrapolate the value of programs through the lens of a couple dozen projects, he said.
In addition, the commerce department said broad conclusions shouldn’t be drawn from a supplemental survey of businesses with an “extremely low” response rate. The survey was sent to 298 businesses, but only 30 volunteered to fully complete the survey.
“No one wants to go through another audit,” North said, “but if we’re going to do it, let’s do it right.”
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