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Minutes for HB2006 - Committee on Commerce
Short Title
Requiring the department of commerce to create a database of economic development incentive program information.
Minutes Content for Mon, Mar 11, 2019
Chairperson Lynn opened the hearing on HB 2006 and requested Revisor Charles Reimer to provide an overview of the bill.
Chairperson Lynn recognized John Hamman, The Pew Charitable Trusts (Pew), who provided testimony neutral to the bill. Pew has been publishing research on the evaluation of economic development tax incentives since 2012 and assists states with making evidence-based reforms to their economic development tax incentives. Research shows that an important step a state can take is to establish a process for regular, rigorous evaluation of tax incentives. To date, 30 states, including Colorado, Missouri, Nebraska, and Oklahoma, have laws requiring regular evaluation of tax incentives. Evaluations resulting from these laws have given policymakers reliable information on the economic and fiscal impacts of incentives, including the extent to which the programs are successfully influencing business behavior, and their effects on state budgets. The testimony highlighted six key questions policymakers should answer, along with best practices information and whether HB 2006 reflects those best practices. (Attachment 1)
First, the law should specify which incentives the evaluator should review. At a minimum, states should evaluate all major economic development tax incentives. HB 2006 provides a clear definition of which incentives are to be included and allows new incentives to be included without necessarily needing to change the evaluation law.
Second, the law should include how often incentives are to be reviewed. States have adopted evaluation schedules of varying lengths, but most states evaluate their incentives on a rotating basis every three to six years. Settling on a three-year re-evaluation schedule, HB 2006 is well within the range of what other states have chosen, and should give evaluators the ability to provide timely, in-depth analysis.
Third, an evaluation law should address who evaluates the incentives. Selecting the right entity to lead tax incentive evaluations is crucial to ensuring the reviews provide independent, well-informed analysis to policymakers. HB 2006 selects the Legislative Division of Post Audit (LPA), which has an established record of providing valuable insights into Kansas' programs, and has already conducted a review of how other states inventory and evaluate their incentives.
Fourth, the law should clarify what data evaluators will use and specify what rights the evaluators will have to access the data needed for their analysis. Evaluators not having access to the information they need to conduct full economic analysis has proven to be a challenge when establishing a new evaluation process. HB 2006 includes data sharing provisions for the LPA, conditioned by existing confidentiality restrictions.
Fifth, an evaluation should clearly state which criteria should be used to evaluate incentives. Evaluations often include information on the history and purpose of an incentive, how well an incentive is designed and administered, the extent to which an incentive affects business behavior, and the fiscal and economic effects of an incentive. HB 2006 asks the LPA to include analysis on some of these criteria, but the Legislative Post Audit Committee could ask the LPA to include all of them, along with any other information the committee deems necessary to provide a full assessment of the effectiveness of an incentive.
Finally, an evaluation law should ensure there is a strong connection between evaluations and the policymaking process. Two practices have helped states act on the information contained in tax incentive evaluation: clear, actionable findings and legislative hearings where evaluators can share them. Legislative research or audit units are the most common offices that lawmakers give evaluation responsibilities to, and those agencies are apt at producing policy-relevant conclusions for the members they work closely with. Evaluators should also be given an opportunity to publicly share their analysis with policymakers and other interested parties. HB 2006 asks the LPA to submit its reports to the Legislative Post Audit Committee, but the Committee is not required to make recommendations on potential changes to state policy.
A regular, comprehensive incentive evaluation process provides an opportunity for policymakers to get good information on both the costs and benefits of the economic development policies they adopt. Research shows that when policymakers have this information, they use it. The testimony included several examples of how states have utilized the incentive evaluation process.
Chairperson Lynn acknowledged Professor Donna Ginther, University of Kansas, who provided testimony in support of the bill. Evidence-based policy is important for the efficient allocation of government resources. The procedures outlined in HB 2006 will allow the state to become more effective stewards of taxpayer dollars. Key provisions of the bill are essential for understanding the costs and benefit of economic development and tax incentives. The goals of the bill are to provide an inventory of economic development and tax incentives provided by the state of Kansas and to provide independent evaluations of these programs for every three years using primary data. (Attachment 2)
Economic impact analyses that calculate returns on investment require accurate, primary-source data as well as justifiable assumptions. Without both of these key inputs, the output of economic impact studies are flawed and inaccurate. Professor Ginther endorsed the bill as an effective approach to allocating the state of Kansas' scarce taxpayer resources to promote economic development.
Professor Ginther's testimony included a brief overview of her work related to evidence-based policy and comments concerning key provisions of the bill. In her opinion, LPA is the appropriate organization within the state government to oversee and conduct the evaluations of economic development incentive programs. The bill will start the process of answering questions about these incentive programs by developing a public database and evaluating the impact of these incentives every three years. The bill is specific about the content and quality of these evaluations. Every tax exemption or incentive provided by the state has an associated opportunity cost. The goal of these evaluations is to gain a better understanding of this opportunity cost.
The provisions of the bill offer detailed specifications for the evaluations of economic development incentive programs with the goal of uncovering the full costs and benefits of the policy. The legislation requires a return on investment calculation for each program. The evaluations are required to examine how the incentive changes business behavior and the positive and negative effects of the incentive on the Kansas economy. The return on investment provision requires LPA to examine both the direct and indirect economic impact of the policy. These indirect (or multiplier) effects are subject to the assumptions used to model the economic impact. As a consequence, they can be manipulated to obtain a "result" that shows positive economic impacts. The testimony included comments concerning the role of assumptions and multiplier effects in return on investment or economic impact analyses.
Economic impact model projections are rarely compared against what actually happens when a project or policy change takes place. HB 2006 will remedy this situation because it mandates impact analyses every three years. LPA is well-positioned to provide unbiased estimates of the effects of these programs. LPA's incentives are aligned with those of the taxpayers: to determine whether state resources are being allocated effectively.
Professor Ginther recommended the Legislature consider expanding the scope of this legislation to provide the necessary data to LPA to conduct independent economic impact evaluations of new economic development and tax exemption incentives prior to enactment. She suggested the Legislature consider expanding the time period of the evaluation to be within five years of the incentive program. Three years may be too soon to realize the full gains of these programs.
Concerning the cost-benefit analysis of the bill, the benefits may prove to be significantly larger than the direct and opportunity costs of the evaluations. To the extent these evaluations can identify the most successful programs and lead to the sunset of unsuccessful programs, the savings to taxpayers and the economic impact on the state could be substantial.
Chairperson Lynn requested Professor Ginther to provide an example of primary source data and how data can effect multipliers.
Senator Longbine asked Professor Ginther if she thought the public data base was a good idea and did it put the state at a competitive disadvantage. Professor Ginther responded the public data base was a good idea. Better information should lead to better decisions, even if other states can see the data. It is good for the public to be aware of how state funds are being spent.
Noting the part-time nature of the Legislature, Senator Sykes asked Professor Ginther whether it would be beneficial to offer training on primary source data and related topics to put members of the Legislature in a better position when evaluating the information reported in the incentive program evaluations. Professor Ginther responded affirmatively.
Senator Baumgardner questioned the ability of the Department of Commerce Secretary to use discretion concerning the disclosure of information. Professor Ginther replied it is important that as much information as possible be disclosed.
Senator Baumgardner asked Professor Ginther her opinion of the requirement for reporting every three years. Professor Ginther responded three years may be too soon to realize the full gains of these programs so four to five years may be more appropriate for the first evaluation of an incentive program.
Senator Rucker asked Professor Ginther if she could think of another position in government, that either in consultation with the Secretary of Commerce or in substitution of the Secretary of Commerce, should be called upon to make a determination whether or not an item or a matter is detrimental to the development of a STAR bond project or would jeopardize an economic development incentive program or project. Professor Ginther responded on option would be for LPA to weigh in on the matter. Senator Rucker asked, with the public sensitivity to such matters, whether or not the Attorney General, in consultation with Legislative Post Audit, might be another option since the Attorney General's office has consumer protection responsibilities as well as a responsibility to defend the state of Kansas when violations of law have occurred. He asked Professor Ginther if she had any suggested language should the Legislature decide to expand the scope to provide the necessary data to LPA to conduct independent economic evaluations of new economic development and tax exemption incentives prior to enactment. The Professor responded she could assist in the development of the language in consultation with staff who draft legislation.
Concerning the concept of evaluating new economic development and tax exemption incentives prior to enactment, Mr. Hamman reported this is a practice which is emerging in other states.
Senator Alley, intrigued by opportunity costs, questioned whether those costs should be added to the fiscal note. He questioned whether there should be penalties added to the bill for situations in which the incentive programs do not achieve their stated goals.
Senator Suellentrop referred Mr. Hamman to the section of the bill concerning confidentiality and questioned how long other states have had their evaluation programs in place. Mr. Hamman replied in terms of the incentive evaluations, most of the states have implemented programs in the last 10 years, however, some states go as far back as 1999. He said Pew's research has focused more on the incentive program benefit issue rather than on the transparency issue. Senator Suellentrop asked if states with evaluation programs have made policy changes requiring parties involved in an incentive program to disclose certain information. Mr. Hamman responded he has seen a few states making these types of policy changes to improve transparency.
Senator Baumgardner requested Legislative Research staff to provide to Committee members an updated supplemental note and fiscal note for HB 2006. In addition, she requested the number of vacant full time employees currently in the Department of Commerce (DOC) and whether the DOC is already collecting the data requested in the bill.
Chairperson Lynn said the hearing would be continued on March 12, 2019. The meeting adjourned at 9:29 a.m. The next meeting is scheduled for March 12, 2019.
