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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 Tue, Mar 12, 2019
Chairperson Lynn continued the hearing on HB 2006 and recognized Reed Holwegner, Principal Analyst, Legislative Research Department, who reviewed a corrected supplemental note on HB 2006. (Attachment 1)
Chairperson Lynn recognized Representative Kristey Williams who provided testimony in support of the bill. A healthy, growing economy is catalyzed by our entrepreneurs, the right business climate, a well-trained workforce, and other key variables. Today's competitive business climate includes economic incentives. Adding economic incentives can be a powerful tool if used wisely, with continuous oversite, disclosure, and evaluation. Kansas is pretty good at giving out incentives, either as a state or locally, but not so good at disclosing or measuring those incentives. It is time to make a change and be sure our economic incentives are working for the state. (Attachment 2)
HB 2006 has two primary components: reporting/disclosure and analysis. The reporting piece establishes a searchable data base of economic incentives from programs that provide $50,000 or more of incentives annually. The analysis piece provides that all qualifying incentives would be placed in a review cycle every three years and the review would be done by Legislative Post Audit at the direction of the Legislative Post Audit Committee. The testimony contained information on what the bill does and what the database of economic development incentives date must include.
This bill maintains necessary confidentiality but provides transparent reporting in a searchable database of all incentives that exceed $50,000 by program. In current law, the Kansas Department of Revenue is not allowed to provide this information. HB 2006 would allow the Department of Commerce and Legislative Post Audit to have access to this information.
Passage of HB 2006 helps the Legislature know what works and what does not work. It allows more transparency. It allows the Department of Commerce to become better organized and equipped to team with the Legislature to make good policy decisions.
Senator Alley asked who would put the database together. Representative Williams responded the Department of Commerce would put the information together after receiving data from the Department of Revenue.
Senator Givens asked about confidentiality of disclosure agreements when cities or counties are recruiting new business. Representative Williams responded proprietary information may need to remain confidential but the terms of the deal should become public information once the deal has been finalized.
Chairperson Lynn recognized Clint Anderson, private citizen, who provided testimony in support of the bill. While testifying as a private citizen, Mr. Anderson noted he has experience in capital markets which forms his understanding of financial reporting and portfolio management. His credentials were listed in Exhibit A of his testimony. (Attachment 3)(Attachment 4)(Attachment 5)
Mr. Anderson provided his overall thoughts about state economic development incentive programs. He is generally opposed to state tax policies which favor an industry, business or developer. He listed three high-level principles should be kept in mind with these programs.
1 - Moral fairness of tax policy: Tax policy that benefits a party rather than all Kansas taxpayers is not morally fair. Government should seek to minimize the bestowing of a blessing or treasure on one party over another, in a free market economy.
2 - Cannibalization: Cannibalization happens, often invisibly at a macro level, when state policies or programs enable a favored industry or business to put its in-state competitors out of business, or at least to impair its competitors as a result of receiving "favored status" through cash grants or tax preferences. It is very difficult to measure cannibalization, but it is an inevitable consequence of economic development incentives.
3 - Subsidiarity: This principle refers to the traditional American limited government concept that government should operate closest to home.
Mr. Anderson said HB 2006 would provide helpful tools to the Legislature in evaluating the state's eco-devo programs. The bill prescribes an evaluation framework for the Legislative Post Auditor to review the state's various economic development/incentive programs, and to submit its evaluation to the Legislative Post Audit Committee. His testimony listed positive aspects of the bill as well as Exhibit B which contained a sample of research studies and commentary on economic incentives.
In conclusion, Mr. Anderson said, in his opinion, the most effective tax policy is one that is simple, low, and uniformly applied to all appropriate taxpayers, rather than an approach that puts the government in the role of favoring certain parties at the expense of others.
Chairperson Lynn commented on the reporting mechanism the Committee has received from the Department of Commerce. She indicated the data received by the Committee over the years has become very simplistic and less and less valuable as a means for evaluating the effectiveness of the state's economic incentive programs.
Senator Olson said he agreed more data needed to be made available online to improve transparency. He noted there are tax exemptions that need to be pulled back onto the tax rolls. He provided an example of an exemption on property tax for Ash Grove Cement Company. He said it is not right to give some businesses different tax rates.
Mr. Anderson encouraged the Legislature to consider ending the incentive programs and adopt a simple low tax that applies to everyone.
Chairperson Lynn recalled about four years ago when a group of Senators tried to pull back several of the $6.2 billion in exemptions. She stated a large number of the people who were to be affected by the change came out in droves so it became a political issue, particularly in regard to campaign contributions. She expressed her hope the Committee would be serious and make things right for Kansas taxpayers and for those that are competing against other companies that get tax exemptions.
Senator Holland expressed concern about the opaqueness of certain Kansas programs. He indicated he would not be in favor of this legislation unless there is qualifying language that makes it very clear it is the Legislature's duty to independently evaluate these programs. The Commerce and Tax Committees need to be constantly probing into the results of the state incentive programs.
Senator Pilcher-Cook thanked Mr. Anderson for taking the time to testify as a private citizen before the Committee.
Senator Olson said it was important to get the data online for review. He noted every time an exemption is given to a company, it has an impact on the local economy.
Chairperson Lynn encouraged private citizens to express their opinions about issues to the Legislature.
Written only testimony in support of the bill was provided by:
- Kurt Knutson, Private Citizen (Attachment 6)
No testimony was provided in opposition to the bill.
Chairperson Lynn recognized Justin Stowe, Legislative Post Auditor, who provided testimony neutral to the bill. He indicated his office was neutral on the bill because it is a legislative policy decision. (Attachment 7)
In October, 2017, the Legislative Division of Post Audit released a performance audit report comparing Kansas' process for evaluating its tax incentives to best practices from other states. As part of that audit, the department found The Pew Charitable Trusts (Pew) had examined the evaluation practices of all 50 states and identified three major best practices for evaluating tax incentives in its May 2017 report.
- States should require regular and systematic evaluations of all major tax incentives.
- Those evaluations should address the costs and economic impacts of selected incentives, and especially how they affect business behavior.
- Lawmakers should have a formal process to consider the results of those evaluations and make changes as necessary.
Although Kansas maintains a comprehensive inventory of its tax credits and exemptions, it trails what other states are doing to regularly evaluate their tax incentives and make policy decisions. That is because Kansas lacks a formal process to systematically evaluate its major tax incentives. The ad-hoc evaluations currently conducted in Kansas do not always address the cost or economic impact of the incentives, and the state lacks a consistent process to ensure lawmakers consider the results of those evaluations. On the other hand, several states, including Kansas' neighbors, met many of Pew's best practices and often had legislative staff perform the evaluations.
The following provisions of the bill, which would affect the Legislative Post Audit office, were highlighted:
- Require the evaluation of the state's economic development incentives on a three-year cycle at the direction of the Post Audit Committee. Those evaluations must include a description of each incentive, an assessment of the program's design and administration, an estimate of the economic and fiscal impact of the incentive, and a return on investment calculation. Many of these requirements are consistent with best practices identified in the 2017 audit.
- Require the office to provide certain information collected on the incentives evaluated to the Secretary of Commerce, if it is not already available to the Secretary. That information could include the names and addresses of people receiving program benefits, the annual amount of incentives claimed and distributed to each recipient, and the program cost and return on investment.
The fiscal impact of the bill will vary depending on how the work is structured. Regardless of the approach used, the provisions will require Legislative Post Audit to reduce the number of other performance audits it accomplishes unless additional staff is added.
In the short term, fiscal years 2019 and 2020, Legislative Post Audit could handle the initial work required by the bill with existing staff and within the current budget.
In the long term, fiscal year 2021 and beyond, additional funding would be needed to contract with economists and other specialists to assist with the evaluations described in the bills. Moreover, unless the Post Audit Committee is willing to have existing staff work on tax incentive evaluations, which would reduce the number of other performance audits completed each year, a couple of additional staff positions would be needed to handle this work. The estimated total long-term fiscal impact of this bill would be between $100,000 and $240,000 annually, depending on how the Post Audit Committee decides it would like to handle staffing.
Mr. Stowe addressed a couple questions concerning how this bill would affect the ability of Post Audit to perform other projects.
Chairperson Lynn said the hearing on HB 2006 would be continued on March 13, 2019
The meeting adjourned at 9:25 a.m. The next meeting is scheduled for March 13, 2019.
