The state of Kentucky is offering EnerBlu, a battery manufacturing company, up to $30 million in tax incentives if the company relocates its operations to the state.
The Kentucky Cabinet for Economic Development (KCED), a state agency whose website says its mission is “encouraging job creation, retention and business investment,” announced in December 2017 a deal with the company’s executives to move its corporate office and manufacturing plant from California to Kentucky.
According to documents from KCED’s December 7, 2017 meeting, the deal requires EnerBlu to employ 910 people by 2021 and 985 people by 2033. KCED will review the company’s compliance with the job-creation targets on a yearly basis.
KCED Communications Officer Brandon Mattingly told Budget & Tax News EnerBlu has not yet set a date to begin construction.
“We know … that the company anticipates breaking ground in mid-2018,” Mattingly said. “However, we have not yet received word of when, exactly, work will begin.”
Cites Benefits of New Companies
James L. Johnston, a director and senior fellow for energy and regulation policy at The Heartland Institute, which publishes Budget & Tax News, says new companies moving into a state provide social benefits.
“There are benefits to society that are provided by the new firms,” Johnston said. “Increased employment and other economic activities are stimulated. This is especially true for state services where there are large excess capacities.”
Says Fairness Is Key
Matthew Mitchell, a senior research fellow at the Mercatus Center at George Mason University, says treating some businesses better than others is not a recipe for economic prosperity.
“Policymakers often wonder whether they should prioritize a flat and equitable tax structure or a pro-growth tax structure,” Mitchell said. “The question is prompted by the false belief that targeted tax relief for particular firms is somehow pro-growth. It isn’t.”
Mitchell says giving special tax treatment to some businesses decreases overall economic prosperity.
“All taxation depresses economic activity, but discriminatory taxation is especially economically depressing,” Mitchell said. “When the government raises, say, $1 million through a flat 5 percent tax rate applied to 100,000 firms, it discourages some economic activity. This is called deadweight loss.
“When the government raises $1 million with a 10 percent tax rate on 50,000 firms and a zero-percent tax rate on the other 50,000, the deadweight loss is greater,” Mitchell said.
Paying for Government Services
Johnston says incoming businesses consume fewer government resources than their existing in-state competitors.
“Firms that are recruited differ from firms that are already resident in a state in an important way,” Johnston said. “The new firm does not demand the same amount of state services as the existing firms. Real assets of new firms do not require protection because their newness makes them less vulnerable to damage. Fire and police, for example, are not demanded to the same extent by new firms as existing firms. Thus, discounts in real estate and other taxes are justifiable.”
‘A Subsidy in Disguise’
Mitchell says incentives can destroy wealth in the name of creating it.
“Often, targeted tax relief is actually a subsidy in disguise,” Mitchell said. “Last year, for example, Wisconsin used its tax code to subsidize Foxconn [a multinational manufacturing company known for producing electronics for Apple] to the tune of $3 billion. In lieu of this subsidy for one firm, the state could have cut its corporate income tax rate, paid by over 16,000 Wisconsin firms, by 21 percent.
“The state’s corporate income tax rate is among the highest in the nation, but reducing it by 21 percent would put it closer to the national average,” Mitchell said. “Basic economic theory suggests that, by keeping its rate 21 percent higher than it needs to be, the government has discouraged more economic development than it encouraged by subsidizing Foxconn. Decades of empirical research supports this theory.”
Editor’s Note: This article was published in cooperation with The Heartland Institute’s Budget & Tax News.
Michael McGrady writes from Colorado Springs, Colorado and is a regular contributor to The Heartland Institute’s Budget & Tax News.