The stated purpose of House Bill 203, a proposal in the 2019 General Assembly, is to encourage investment in Kentucky’s rural areas and to create and retain jobs. Although these goals are admirable, HB 203 will not achieve them because it lacks requirements and safeguards that will create new economic activity in rural communities. It will, however, reduce the revenue available to make public investments in rural areas.
Under HB 203, the biggest beneficiaries will be fund managers who can make a huge return from a 100 percent tax credit provided to insurance companies that invest in the funds. These types of programs have been peddled to state legislatures across the country by a few companies hoping to profit from the laudable desire of states like Kentucky to help constituents and economies in rural areas.
Here’s why HB 203 will not help rural communities in the commonwealth:
There are no requirements for net job creation or positive economic impact from investments in companies.
As part of the application process, investment funds qualifying for the program must include projections about jobs created or retained and economic impact over 10 years as a result of the investments made. Even though this information must be submitted, there are no requirements anywhere in the bill that they be positive, and that they offset the substantial cost of the tax credits. The Cabinet for Economic Development cannot subsequently impose such requirements because the bill prevents them from denying a fund application that submits all of the required paperwork.
The investments are not narrowly targeted to areas in need.
The definition of “rural” used in the bill would allow investments in all but 17 of the 120 counties in Kentucky, and only 75 percent of the investments must be made in businesses located in these counties. To be “located” in a rural county only 60 percent of the employees or payroll of a business needs to be there, which means that HB 203’s subsidies could support businesses anywhere, including cities and other states, if a company had enough eligible employees or qualifying payroll in an eligible rural county.
The funds have 100 percent control of where investments are made, making it highly unlikely that investments will occur where they are most needed. The bottom line for the funds and their investors is to make as much money as possible, and making investments in the areas and businesses that most desperately need them are unlikely to accomplish these goals.
The extremely generous tax credit is designed to make massive profits for the investment funds.
The bill will make it easy for funds to raise contributions from insurance companies, who will get a 100 percent tax credit on their investment plus any returns. The fund manager only has to make a 10 percent investment itself in the fund while 75 percent is provided by the insurance companies receiving the tax credit. Because the fund manager can profit from the entire fund amount, not just their own contribution, they can earn a return that is several times their initial investment.
In addition, the fund has up to two years after all of the contributions are received to make the initial investments in Kentucky, which means that the fund can and likely will make other investments initially. The investment requirements during the six year term of the fund are also quite flexible — if an investment is sold or repaid within that period, it will be considered continually invested if another growth investment is made within a year, and if the sale or repayment happens in the last year, it doesn’t have to be reinvested. Essentially, there is a great deal of leeway for growth funds to earn money on unrelated investments.
This proposal costs $75 million, leaving that much less to make desperately needed targeted investments in rural Kentucky.
HB 203 caps credits at $15 million a year, but because credits can be claimed over a 5 year period that puts the total cost at $75 million. This proposal is even more generous than a similar proposal in HB 6 in 2018, which cost $60 million.
Rural areas desperately need public investments the state cannot currently afford — in infrastructure like clean water, basic services like public safety and roads, and support for problems like drug addiction and more. Instead, HB 203 proposes to take tens of millions of public dollars that could be used for such purposes and turn them into profits for outside investment companies with no requirement that rural communities will actually benefit.