March 4, 2024

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Audit identifies concerns about state economic development incentives

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A new report from the Kansas Division of Legislative Post Audit identifies serious deficiencies in several economic development incentive programs created in 2022.

State law requires Post Audit to review all programs a year after creation.  The report says it is difficult to determine whether or not they are effective because they are so new.

“In 2022, the Kansas Legislature created 8 tax credits and 2 programs that meet this requirement,” the report reads. “The Department of Commerce also created a program that meets this requirement. State law requires the evaluations to include several components: a description of the incentive, including its history and goals, a literature review including a comparison to other states, and an estimate of each incentive’s economic and fiscal impacts. 

“There was little data for us to review about these incentives because they’re so new. Thus, our review and evaluation of the new incentives was limited.”

However, in many cases auditors found reporting and controls are not sufficient.

The Attracting Powerful Economic Expansion (APEX) program is the biggest subsidy program, providing tax and reimbursement incentives to businesses that agree to invest at least $1 billion in a Kansas facility. Businesses can receive a refundable income tax credit for their capital investments, a sales tax exemption for their construction costs, and reimbursements for payroll, training, and relocation costs. Such businesses’ suppliers may also be eligible for benefits.

Moreover, Post Audit had serious concerns with the way the program is structured.

“Neither Commerce nor Revenue currently have a systematic way to track how much in sales tax exemptions businesses have gotten under APEX,” the report reads. “So, no one can say how much sales tax Panasonic has been exempted from so far. Commerce officials told us they’re developing a process to track this information. We think it’s important Commerce or Revenue does this so it can accurately report the costs of APEX incentives to the state. Having this information would also be important if the state needs to claw back incentives from Panasonic or Integra.”

No cap on Affordable Housing Tax Credit

The Affordable Housing Tax Credit was also found to have issues.

The program creates a state tax credit to match the federal low-income housing tax credit (LIHTC). If a housing project gets some amount of federal LIHTCs, then that project also gets an equal amount of Kansas Affordable Housing tax credits. Both credits subsidize the creation of affordable rental housing.   The Kansas Housing Resources Corporation (KHRC) administers both the state and federal tax credit programs. 

Owners of the housing projects to which KHRC awards credits can sell the state and federal tax credits to investors in exchange for investment in their housing projects. 

Investors who purchase the state tax credit can use it to reduce their state income, privilege, or premium tax liabilities. 

The problem, Post Audit found, was that State law doesn’t cap the amount of Kansas Affordable Housing Tax Credits that can be awarded each year beyond tying them to the federal low-income housing tax credit cap. 

“Housing Resources awards the same amount of state credits as it does federal credits. As we discussed earlier, this means the cost of this tax credit could be significant (i.e., in the hundreds of millions annually) in the long run. Many other states with similar tax credits cap the amount of state credits that can be awarded each year. For example, Oklahoma caps its annual awards at $4 million per year. The Legislature may want to consider setting a cap for the Kansas Affordable Housing Tax Credit. 

Commercial Restoration and Preservation Tax Credit 

Under this law, taxpayers can claim a tax credit against their income, privilege, or premium taxes for restoring or preserving historic commercial structures. The credit is equal to 10% of the costs of restoring or preserving a commercial structure at least 50 years old and the costs must be between $25,000 and $500,000. State law also allows an additional credit equal to 10% of the costs of installing fire suppression materials or equipment. These costs must also be between $25,000 and $500,000 and the total annual statewide cap on this credit is $10 million. The credit may be carried forward for up to 10 years. The credit is also transferrable, but the recipient taxpayer can only carry the credit forward for up to 5 years. Finally, state law also requires financial institutions to pay taxes on only 50% of the interest earned on loans for the restoration or preservation of commercial structures at least 50 years old. 

However, Post Audit found that state law fails to define “commercial structure.”

“This means it’s unclear what buildings are eligible for the Commercial Restoration and Preservation Tax Credit,” the report reads. “For example, it’s unclear whether buildings that are residential and income-producing (e.g., rental units) should qualify for this credit. This means Revenue is currently using its discretion to decide what buildings qualify for the credit. The Legislature should consider defining ‘commercial structure’ for this tax credit.”

Issues with economic development incentives are nothing new

Last year, a similar review of economic development “incentive” programs by Post Audit found that — while incentives may generate positive returns for developers — they do not generate enough tax revenue to cover their costs.

Post Audit evaluated five of the Kansas Department of Commerce’s major economic incentive programs: The High-Performance Incentive Program (HPIP), the Job Creation Fund (JCF), the Kansas Industrial Training (KIT) program, and the Promoting Employment across Kansas (PEAK) program.

These programs are meant to promote economic development in the Sunflower State and incentivize businesses to move to Kansas, create or retain jobs, pay a higher-than-average wage, or make capital investments. In return, businesses earn financial benefits.

All of the economic development incentives are funded with state dollars or through foregone revenues. JCF, KIT, and KIR spend state funds to make cash payments to businesses. HPIP and PEAK reduce state tax revenues — all in the hope the programs will return economic benefits to the state.

 

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