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Review of Kentucky's Economic Development Incentives

Kentucky’s Legislative Research Commission (LRC) retained Anderson Economic Group (AEG) to study the efficiency, effectiveness, oversight, and reporting requirements of Kentucky’s economic development incentive programs. The purpose of this report was to provide in-depth information on these programs to help policymakers make informed decisions about them in the future.

This project reviewed many aspects of Kentucky’s incentive programs. Notable components include a review the purpose and main requirements of incentives, comparisons to 13 peer states chosen by the Kentucky Cabinet for Economic Development (CED), evaluation of incentive cost and effectiveness, and a review of incentive program reporting requirements and practice in Kentucky and peer states.

We estimated the number of jobs created and maintained by firms in Kentucky receiving incentives for each year between 2001 and 2010. We also estimated the cost of these incentives to the state. We completed these analyses using data provided by the CED, the Kentucky Tourism, Arts and Heritage Cabinet (TAHC), and the Department of Revenue. We were able to compare information firms reported to the CED and data maintained by the U.S. Bureau of Labor Statistics (BLS) in order to independently verify employment at firms receiving incentives.

Our analysis found the following. First, businesses that received Kentucky incentives reported creating 55,173 jobs between 2001 and 2010. This resulted in 33,000 “maintained” jobs per year. We also found no systematic over-reporting by businesses to the CED by verifying self-reported data from the businesses with BLS data. Second, the “gross cost” to the Commonwealth of Kentucky was $140 million in 2010 and averaged $3,330 per job per year between 2001 and 2010. In our effectiveness analysis, we found that approximately 35% of all jobs reported would need to have been directly caused by the incentives for the incentives to be more effective than a broad-based tax reduction. Third, we compared Kentucky to its peer states and found several areas where Kentucky lagged. Our recommendations include ways for Kentucky to improve incentive reporting and evaluation, and ways to encourage growth in knowledge-based industries.

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