9696614-states-need-processes-not-just-policies-to-manage-incentives

This post is part of an occasional series reviewing state reports evaluating economic development incentives.  Here we look at the September 2013 performance audit report from Kansas, “Economic Development: Determining Which Economic Development Tools are Most Important and Effective in Promoting Job Creation and Economic Growth in Kansas, Part 1,” from the Legislative Division of Post Audit, the audit arm of the Kansas Legislature.

 The audit sought to answer 2 questions:

1. What economic benefits has Kansas realized as a result of the PEAK and HPIP tax incentive programs?
2. Does the Department of Commerce adequately enforce performance clauses for economic development incentive programs? 

The Promoting Employment Across Kansas (PEAK) program allows companies that create 100 new jobs within a specified two-year period to retain 95% of employee withholding taxes for up to 10 years. The High Performance Incentive Program (HPIP) provides a training tax credit and a 10% income tax credit to eligible companies for capital investments such as facility or equipment purchases or upgrades.

The quick answers to the two main questions are:

1. “Assessing the benefits of the PEAK Program is difficult because the Department of Commerce has not complied meaningful information on the program.”  Still the PEAK program is estimated to have generated 5,200 jobs in exchange for $21 million in foregone taxes through FY12, while the HPIP program companies created or retained 6,900 jobs in exchange for $21 million in tax credits in FY10.

2. While clawback terms were included in enforcement agreements and were enforced when there was awareness of a problem, the lack of consistent, quality reporting “limited the ability to identify underperforming companies.”

What is interesting to us at Smart Incentives and what is relevant to economic development groups elsewhere is the insight this report provides into the tremendous challenge organizations face in terms of record-keeping, compliance management, and reporting on incentive programs.

Despite having broad rules in place regarding company reporting requirements, legislative caps on tax credit use, and statutory requirements to report on overall results, it has proven difficult for the Departments of Commerce and Revenue to develop the internal systems and devote the necessary resources to adequately manage this complex process, let alone report consistently and clearly on outcomes.

Here is just a sample of some of these challenges:

• 15% of companies had not submitted required reports.
• All data is self-reported, either on tax forms or on reports submitted to the Department of Commerce.  It is not independently verified.
• Neither the Department of Commerce nor Department of Revenue collects data on the number of individuals trained under the HPIP training tax credit program.
• Companies that file for the HPIP tax credit over several years can report the same jobs every year, making it difficult to assess how many new jobs were created.
• There is disagreement over the meaning of the legislative cap on PEAK incentives, with the Department of Commerce indicating the cap is $6 million every year, while the Auditor believes the total cap is $6 million, which led to the finding that commitments have exceeded the cap.
• While the Department of Commerce is required to submit annual reports to the Governor and Legislature, the audit found reports had been submitted late or not at all, and for some programs “the latest report produced by the marketing department does not include the level of detail required by state law.”

There is agreement that adequate processes are not in place, with staff explaining that their focus is on developing agreements rather than monitoring past agreements.  Further, staff had asked for and had not received additional staff to help with this task.   Finally, the Department of Commerce in its response to the audit explains that ongoing legislative changes to the PEAK program made reporting and compliance monitoring very difficult.  These changes – “amending the definition of a PEAK eligible employee, enactment of expansion and retention programs; average wage vs. median wage, amended definition of “wages,” enactment of a 95% tax credit available to certain “owners” of PEAK companies and similar changes” – are substantial and do pose real challenges to program implementation and assessment.  These aren’t just excuses.

Our takeaway from this report is that process matters just as much a policy.   Policies that require reporting, clawbacks and caps in incentive programs are just a start.  Economic development organizations also need resources (funds, trained staff, guidance on best practices) to create the internal tools and processes that will enable them to comply with these policies.