The Department of Commerce has 5 major incentive programs that it uses to incent economic development in Kansas. Those programs are the High Performance Incentive Program (HPIP), Job Creation Fund (JCF), Kansas Industrial Training (KIT), Kansas Industrial Retraining (KIR), and Promoting Employment Across Kansas (PEAK).
As part of this audit, we used a research-based model to estimate the economic impacts, tax effects, and total return on investment for 28 projects that we selected. Based on model results from those 28 projects, we estimate all 5 of Commerce’s major economic development incentive programs will generate positive total returns on investment. However, we estimate they won’t cover their own costs to the state through higher tax revenues. For example, all 5 programs appeared to generate economic impacts that are greater than their costs. But none of the programs appear to generate enough tax effects to cover their costs.
The Department of Commerce has 5 major incentive programs that it uses to incent economic development in Kansas. Those programs are the High Performance Incentive Program (HPIP), Job Creation Fund (JCF), Kansas Industrial Training (KIT), Kansas Industrial Retraining (KIR), and Promoting Employment Across Kansas (PEAK).
As part of this audit, we used a research-based model to estimate the economic impacts, tax effects, and total return on investment for 28 projects that we selected. Based on model results from those 28 projects, we estimate all 5 of Commerce’s major economic development incentive programs will generate positive total returns on investment. However, we estimate they won’t cover their own costs to the state through higher tax revenues. For example, all 5 programs appeared to generate economic impacts that are greater than their costs. But none of the programs appear to generate enough tax effects to cover their costs.
Welcome to the Rundown your source for the latest news and updates from the Kansas Legislative Division of Post Audit featuring LPA staff talking about recently released audit reports and discussing their main findings. Key takeaways and why it matters. I'm Mori Exline. In January, 2023, legislative post audit released a performance audit that evaluated the Department of Commerce's major economic development incentive programs. I'm here with Josh Lui, principal auditor at Kansas Legislative Division of Post Audit who supervised this audit. Josh, welcome to the rundown.
Speaker 2:Thanks for having me Mor.
Speaker 1:So to get started, can you give me some background about the incentives that were evaluated in this report?
Speaker 2:Yeah. We evaluated five of the Department of Commerce's programs. Those five programs were the High Performance Incentive Fund or H PIP for short, the Job Creation fund or JC F, the Kansas Industrial Training and Retraining Programs, also known as Kit and Cure, and the promoting employment across Kansas or peak program. In general, these programs are all meant to promote economic development in Kansas. These programs offer financial benefits to try to persuade businesses to do things like locate in Kansas or create new jobs, but the programs are all a little different from one another. So I'll go through each of them in a little more detail. H PIP focuses on encouraging businesses to make capital investments and train their employees. In exchange for doing these things, businesses can earn tax credits and sales tax exemptions. The JC F is the Department of Commerce's deal Closing. Fund commerce has a lot of discretion in the types of economic development opportunities it can use this fund for, but based on what we saw during the audit, commerce generally uses it to give businesses forgivable loans or grant payments. In exchange, businesses have to do things like create a certain number of new jobs over some period of time. Uh, usually about five years. Kit and Kerr reimburse businesses for training workers. Commerce uses kit funds to reimburse businesses for training new workers and it uses cure funds to reimburse businesses for retraining existing workers who may otherwise be fired. And finally, peak encourages businesses to create new jobs in Kansas. In exchange for creating new jobs or for relocating existing jobs, businesses get to keep 95% of the withholding taxes they would've otherwise remitted for those jobs. And like I said earlier, these are all Department of Commerce programs, but the Department of Revenue helps commerce administer the h pip and peak programs. That's because those two programs involve tax benefits. Kor oversees the tax benefits businesses receive, for example, Kor processes, businesses, H Pipp tax credits.
Speaker 1:Okay, so how do businesses actually qualify and receive funding through these programs?
Speaker 2:The criteria businesses have to meet vary by program. So for example, to qualify for Peak, a business must be new relocating or expanding in Kansas, it has to be a for-profit business or a headquarters for a not-for-profit business. Businesses in some industries such as those in the gambling industry don't qualify unless they're a headquarters, and businesses must provide adequate health insurance to full-time employees. A business must pay at or above the county median or industry average wage for any jobs it wants to claim peak benefits on. I won't go through the criteria for each of the remaining programs, but in the report we do discuss, um, the eligibility criteria for each program independent C. But if a business does meet program eligibility criteria for J C F Kit CUR or peak, then it has to negotiate an incentive agreement with commerce. A business isn't guaranteed to get an incentive award simply because it meets program criteria. Commerce has discretion over whether a business will receive incentives and an incentive agreement formally documents what a business must do, how long it has to meet its obligations, and what incentives it might get in return. Generally, the incentives of business receives are based on the extent to which that business meets its obligations. If a business doesn't meet the terms of its agreement, then commerce can do things like prorate incentives or clawback funds. H PIP works a little differently. Commerce certifies whether a business qualifies for H pip, um, but commerce doesn't have discretion here like it does with the other four programs. If a business meets the eligibility criteria for H PIP P, then it can participate. Then that business will work with the Department of Revenue to do things like the sales tax exemption of certificate or claim tax credits. Uh, the last thing I'll say here also is that businesses can benefit from multiple incentive programs. In our evaluation, we looked at a variety of incentive awards businesses received, some businesses received awards from only one incentive program, but other businesses received awards under multiple programs. A few of the businesses we looked at participated in all five programs we evaluated.
Speaker 1:So how did your team evaluate the impacts of these five programs?
Speaker 2:The short answer is we used a research-based model to estimate the impacts of the incentives 28 businesses received. Then based on those results, we estimated how well each of the five programs perform. Um, now I'll expand on that in the much longer version of the answer to your question. First, we selected 28 businesses that received incentives in fiscal years 2017 through 2021. Each business represented one project. So if I start talking about projects instead of businesses, I just know I'm using those words interchangeably. Each business or project included some combination of incentive awards. In total, the 28 projects we selected included 64 agreements. Eight projects also included H pip, which remember don't include agreements. Second, we use a research based model to estimate the impacts of each of the 28 projects. The model we used was developed by Dr. Barick. He's part of the nonprofit w e Upjohn Institute for Employment Research and an expert on the impact of economic development incentives. The model calculates two types of impacts, economic impacts and tax effects. Economic impacts are the effects businesses cause when they create or retain jobs, for example, creating jobs provides income for workers to spend. When workers spend their income, it creates demands for goods and services. This helps other businesses grow. It also means those other businesses will need to hire more employees to meet. Demand for workers can cause population growth. This can increase demand for real estate, which increases property values. These are all generally positive impacts, but there can be negative impacts too. For example, competition for workers may mean businesses have to pay their employees more, which could decrease profits. Tax effects are the new tax revenues. State and local governments will collect it because of the economic impacts I just discussed. Tax effects include things like increased income tax revenues, property tax revenues and sales tax revenues. But not all new revenues are a net gain. For example, governments may need to use some of the new revenues to provide public services for growing population. We also added economic impacts to tax effects to get each project's total returns, which is sort of an overall picture of how well each project did. The model also estimates the portion of economic impacts and tax effects for which incentives are responsible. A major question in this evaluation was whether a business would've done the same thing if it hadn't gotten incentives. If a business would've done the same thing, then the incentives didn't do anything. It wouldn't make sense to say the incentives created any benefits in that case. But if a business did something different because it got an incentive such as create more jobs than it otherwise would have, then the incentives should get credit for the benefits that helped create the portion of benefits for which incentives were responsible is called the but four percentage. The model estimates a but four percentage for each project we modeled by comparing the estimated value of the project to the value of the incentives the business was offered. The but four percentages we calculated ranged between 0.14% and 31.1%. Third, we calculated a return on investment for each project. Incentive awards represent a cost to the state. Our return on investment calculations compare each project's costs to the economic impacts and tax effects. The incentives are responsible for. We calculated each project's return on investment as total returns per$1 of incentive received. This shows how much benefit the state got per$1 of cost, a return of greater than$1 means the project was successful because it generated more in benefits than it cost the state. We also calculated returns for economic impacts and tax effects. And fourth, we used the results from the 28 projects. We modeled to estimate how well each of the five programs performs. Some projects involved multiple incentive programs. So we had to attribute the cost and benefits between programs in these cases. We did this based on how much of the total award each incentive program represented. Finally, I should share a few caveats and clarifications. Our results are based on a judgmental selection and not a projectable sample. Our results may not generalize to the many projects. We didn't model. The model estimates economic impacts over 20 years because of this and because some agreements we looked at were still in progress, we had to estimate how many jobs would be created and retained over 20 years. We also only modeled the impacts of the five programs we evaluated. If businesses received other incentives or will receive other infe incentives in the future, our work doesn't account for them. And finally, covid 19 and ongoing economic circumstances may have affected our estimates. For example, COVID may have caused businesses to perform differently than they otherwise would have. If you're interested in reading more about our methodology, you can find much more detail in Appendix B of the report.
Speaker 1:So your report mentions that the programs will generate positive total returns, but don't cover the cost of the state through higher tax revenues. Can you explain how your team reached this conclusion?
Speaker 2:Right. Uh, like I said earlier, total returns is equal to economic impacts plus tax effects. We then divide total returns by the cost of incentive awards to get total returns per$1 of incentive costs. That's basically a return on investment. So let's use Peak as an example. 18 of the projects we reviewed included peak awards. We estimated those peak awards will cost the state almost 60 million, but we also estimated those peak awards will create about 270 million in economic impacts and about 27 million in tax effects after adding the economic impacts to the tax effects. We can see the Peak awards uh, will have an estimated total return of about$297 million to get a return on investment for economic impacts, tax effects and total returns will divide each of those by the cost of the peak awards. This helps us see whether the Peak Awards created more than$1 of benefit, uh, per$1 of incentive cost. So first we estimated peak's economic impact return on investment to be about$4 and 54 cents. That is for every$1 peak cost. The estate, we estimate peak will generate about$4 and 54 cents in economic impacts over the next 20 years. This means peak is creating more in economic impacts than it's costing the state. But we also estimated peak's tax effects per$1 of cost to be about 45 cents. That is, we don't think peak will generate enough tax revenues to offset its cost to the state. This makes sense. If you look at the dollar values I talked about earlier, uh, we estimated the peak projects will cost the state almost 60 million. And we also estimated those projects will create about 27 million in tax effects. Tax effects are lower than the incentive costs, so new tax revenues likely only partially make up for the cost of the program. And finally, we estimated peaks total return on investment to be about$4 and 99 cents. But most of that comes from the economic impacts we estimate the peak awards will create. So the bottom line here is we estimated peak will create more in total benefits than it will cost the state, but it won't likely create enough tax revenues to totally cover its cost of the state. Either. This pattern holds for all five programs we evaluated, we estimated all five programs will create more in total benefits than will cost the state. But we don't think any of the programs will create enough new tax revenues to cover their cost of the state. But because we estimated the programs will all have a total return on investment that's greater than$1, we think the programs are generally successful. In particular, we estimated all programs create more than$1 in economic impacts per$1 of incentive cost. Since these programs are all meant to promote economic development, we think this means it's reasonable to say the programs seem successful.
Speaker 1:So your report also included a survey of businesses that asked about the importance of these incentives. What insight were you able to gain from this?
Speaker 2:We worked with the Department of Commerce to survey businesses about the importance of economic development incentives. Among other things, 30 businesses ultimately provided complete responses to our survey. Our results aren't projectable, but we do think they provide valuable insight. And that main piece of insight is that economic development incentives don't always affect business' decisions. Earlier we talked about the idea of a but four percentage that percentage estimates how much an incentive affected business' decision. If an incentive didn't change a business's decision at all, then the incentive didn't create any benefits and it was just a cost to the state. But if the incentive did affect a business's decisions, then the incentive created benefits for the state. You might question though whether this idea of a but four percentage makes sense. We think our survey results help show that the idea of a but four percentage does make sense. We ask businesses what they would've done if they hadn't received incentives from commerce. 11 of the 30 businesses that responded said their businesses would've done the same thing even if they hadn't received any incentives. This shows incentives some times have no effect on businesses. 13 businesses said they still would've done a project in Kansas, but that project would've been smaller or it would've happened at a later date. This shows incentives sometimes affect businesses decisions, but they don't totally change them. Only three businesses said they would've canceled their projects or done them in another state if they hadn't received incentives. And another three businesses, um, gave free responses that didn't make clear what they would've done if they hadn't received incentives. To reiterate these survey results show incentives aren't generally responsible for convincing a business to do something it totally otherwise wouldn't have done based on our results. That does seem to be relatively uncommon. It may be more common for incentives to either make a project larger, happen sooner, or have no effect at all. And we think this aligns nicely with our use of but four percentages. That said, our survey results aren't representative of all businesses perspectives. We only surveyed businesses that received incentives and were willing to participate in our survey. Businesses that didn't receive incentives may have different perspectives on how important incentives are.
Speaker 1:All right, so finally, what was the biggest take away from this audit?
Speaker 2:I think the bottom line is based on our work, the five programs likely generate more in benefits than they cost the state. There is some uncertainty in our estimates though, so we wouldn't advise getting too focused on the specific returns. We estimated. Rather, we think it makes more sense to focus on the idea that estimated total return on investment for each program was greater than$1.
Speaker 1:Josh Luha is a principal auditor at Legislative Post audit. He supervised an audit that evaluated the Department of Commerce's major economic Development Incentive Programs. Josh, thanks for visiting the rundown and discussing this audit's findings with me. Thanks
Speaker 2:Again Mor.
Speaker 1:Thank you for listening to the Rundown. To receive newly released podcasts, subscribe to us on Spotify or Apple Podcasts. For more information about legislative post audit and to read our audit reports, visit ks lpa.org. Follow us on Twitter at ks audit or visit our Facebook page.