The Lexington Herald-Leader reports that my home state of Kentucky recently approved a set of incentives for several companies to expand their operations in the state. Unlike many states, Kentucky makes the entire database cataloging its dozens of different incentive programs over the last several decades publicly available. The most recent round of approved business incentives amounts to $21 million to about 30 companies expected to make $295 million in new investments to “create” 1,140 new jobs.
For example, Sazerac North America, the parent corporation of Buffalo Trace Distillery, has received preliminary or final approval for over $5 million in incentives through three different programs. One such incentive, an income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rebate, amounts to $3.2 million of tax breaks on a project with a total investment of just $5 million. This project would employ 50 people, which means the state is foregoing $65,000 per new employee.
High subsidy-to-project investment ratios are not unique. SMC LLC, an IT and electronics firm, received a $1.5 million incentive package for a project whose total investment is only $1.9 million. Earlier this year, Lockheed Martin received an incentive worth $11 million on a $15 million investment, and Metalsa Structural Products received $14 million in tax breaks for a $28 million project.
What does this incentive data show, exactly? In particular, it demonstrates that Kentucky’s economic development strategy is highlighting a problem in the Bluegrass State’s income tax itself. These incentives suggest that policymakers are aware that lower income taxes would be good for business in Kentucky. But targeted carve-outs for certain firms are a poor substitute for more neutral cuts to the overall rate.
Kentucky isn’t widely known as a high-tax state such as New York or California. But, while Kentucky’s state income tax is about average, it is one of just 12 states that have not only state but also local income taxes. These taxes make Kentucky’s state-local combined top tax rate the 11th highest in the nation, kicking in at $75,000 of income, which is a lower threshold than many other states with similar rates. (To see average local income tax rates, see Table 12 of our 2014 State Business Tax Climate Index.)
This combination of high state-local rates alongside large incentive programs that carve away at the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. create economic distortions and unequal tax burdens. Kentucky would be better served kicking the tax incentive habit, reforming the graduated state income tax, and addressing the local income tax system.
More on Kentucky here.
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