Rep. Lance Kinzer, an Olathe Republican, understands the frustration that many small business owners experience when they see a new enterprise supported by state tax incentives set up shop in Kansas.

“Main Street businesses wonder why incentives available to a new company aren’t available to them,” said Kinzer, a member of a small Olathe law firm.

As a response, a KU economics professor is floating a proposal that would do away with state tax incentive programs that favor one business over another with a system that would offer benefits to all Kansas businesses that wanted to participate, regardless of size.

The proposal is sponsored by Kansas, Inc., a state agency co-chaired by Gov. Kathleen Sebelius and Donna Johnson, president of Pinnacle Technologies, Lawrence. The agency is charged with providing oversight of state economic development programs.

Art Hall, executive director of the Center for Applied Economics at the KU School of Business, said the so-called “expensing” plan would not only take the government out of the business of “cherry picking” which companies get economic development incentives, it also would provide significant benefits to Kansas businesses.

“[The proposed plan] would create an outstanding investment climate that would be unique to Kansas, and it would be open to any business, so if you’re investing in Kansas, you get the benefit,” Hall told KansasLiberty.com.

The proposal in effect would allow all Kansas businesses, even mom-and-pop shops, to write off capital investments up-front, rather than over time.

“It just accelerates what’s already allowed,” Hall said.

If this all sounds familiar, there's a reason.

A bill containing the proposal stalled last session in the Legislature, but several lawmakers said they would like to see it revisited this year, particularly in light of a post audit study that concluded that the state’s economic development programs have been largely ineffective.

Rep. Richard Carlson, a St. Mary’s Republican who is vice-chair of the House Tax Committee, said he believed the proposal was “definitely worthy of more consideration.”

He added that it wasn’t lack of interest that caused the proposal to stall in the Legislature. He said the tax committee had other priorities to address, notably changes related to the federal economic stimulus package.

Carlson said he believed the expensing provision would be much more fair than the current apparently arbitrary system of granting economic development assistance.

“It would level the playing field because it would be available to all businesses,” he said.

Other legislators agreed.

Rep. Arlen Siegfried, an Olathe Republican who serves on the House tax committee, said he strongly supported the proposal, and that he would be willing to reintroduce legislation if he is re-elected.

Siegfried said most economic development programs in Kansas are designed with job creation in mind.

“Don’t get me wrong, we want jobs, but when you create a good environment for capital investment, you’re going to get jobs.”

Hall agreed. “The focus on jobs is the wrong focus. What we need to be focused on is wealth creation.”

Hall conceded implementation of the proposal would initially be expensive, perhaps as high as $100 million the first year, though the annual cost would decline significantly after the first year. On the other hand, Kansas spent more than $460 million from 2002 to 2007 on economic development assistance programs that could be replaced with expensing.

Rep. Lana Gordon, a Topeka Republican, said she believed expensing could be a better alternative to the “carrot on a stick” approach employed in economic development assistance programs.

She said not only would it be open to all businesses, regardless of number of employees, it also would tend to equalize benefits geographically.

Currently, according to the post audit study, more than half the state economic development funds dispersed in Kansas between 2002 and 2007 went to three urban counties.

Hall said the expensing proposal would not affect economic development assistance offered by local governments, such as property tax abatements. Under the proposed plan, economic development officials at the local level would still be able to use incentives helpful in luring new companies to the state.

- Phil LaCerte

This is the second in a series about the benefits and costs of economic development incentives. Part one is here.

The Week in Review