The 3rd meeting of the Interim Joint Committee on Appropriations and Revenue was held on Thursday, September 26, 2002, at 1:00 p.m. at the Paramount Arts Center, in Ashland, Kentucky. Senator Richard Sanders, Jr., Co-Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Richard Sanders, Jr., Co-Chair; Representative Harry Moberly, Jr., Co-Chair; Senators Alice Kerr, Ed Miller, R.J. Palmer II, Johnny Ray Turner, and Jack Westwood; Representatives Royce Adams, Rocky Adkins, Jim Callahan, Danny Ford, Joni Jenkins, Mary Lou Marzian, Thomas McKee, Stephen Nunn, Charles Siler, John Will Stacy, John Vincent, Jim Wayne, Robin L. Webb, and Rob Wilkey.
Legislative Guests: Senator Charlie Borders, 18th Legislative Senate District; Senator Walter Blevins, Jr., 27th Legislative Senate District; Representative Greg Stumbo, 95th Legislative House District; and Representative Tanya Pullin, 9th Legislative House District.
Guests Appearing Before the Committee: Gail Melvin, Director for the Ashland Office of Economic Development; Honorable Bill F. Scott, Judge, Boyd County; Honorable Robert W. Carpenter, Judge, Greenup County; Mayor Kevin Gunderson, City of Ashland; Jim Purgerson, President, Ashland Alliance; Keith Howell, General Manager, AK Steel Corporation, Ashland Works; Doug Sparkman, Plant Manager, Marathon Ashland, Catlettsburg Refinery; Del Boyette and Colleen Tildon, Deloitte & Touche LLP, Atlanta, Georgia; Barbara McGuire, McGuire's Towing; and Secretary Dana Mayton and Mac Gillim, Revenue Cabinet.
Guests: Trish Hall, Arts Council of Northeastern Ky; Joy Jarrell, Professional Fire, Inc.; Jon Herlevich, Sheila Scott, Tom Hearn, Theresa Rufus, Phil Hall, and James Johnson, Marathon Ashland; Joe Ewalt, Phil Huddleston, and Bert May, Ky League of Cities; Michael McCann, John W. Clark Oil Co.; Andy Jones, Kristy Lockard, and Larry Jones Community Trust Bank; Linda Dalton, DTR, Inc.; Paul Melvin, Melvin State Farm Ins.; Jim Lavelle, Brenda Hardin, Rice Vanetta, Ed Payton, Dave Roland, Subir Sarwar, Diane Clement, and Don Hale, MAP LLC; Jackie Howell, Paramount Women's Assoc.; Terry Sicking, Thomas Saylor, and Kathy Lewis; FIVCO ADD; Karen Troxler, Dave Sparks, Cal Bradley, Jr., Susan Pennington, and Jill McDavid, AK Steel; Mike Dixon, Local 248; Roger Hensley, Catlettsburg; Greg Jackson and Kent Dickinson, Catlettsburg Refinery; Wilma Thornsberry, T-Berry Properties; Doug Crawford, Wexton Welding; Mike Goins and Jim Logan, Ashland Alliance; Bruce Lauderdale, Carpenters Union; Joe Coleman and John Bradley, Small Stuff; Cary D. Brown and Sandy Noble, City of Ashland; John Lane, Catlettsburg Refinery; Stephanie and John Gallaher, The Gallaher Group; Chris Hammond, Ashland Mayoral Candidate; Steve Gilmore; Ashland; Don Maxwell, Red Gross, and Melissa Stone, Horizon NR; and Harold McKinney, MTW.
LRC Staff: Terry K. Jones; Susan Viers Wobbe, Louis Pierce, Ginny Wilson, Perry Nutt, and Kathy King.
Chairman Sanders thanked members who attended the tour of Ashland area businesses. Members toured Ashland Marathon, Cintas, and AK Steel. Chairman Sanders recognized Judge Bill Scott, Boyd County Judge/Executive; Judge Robert Carpenter, Greenup County Judge/Executive; and Mayor Kevin Gunderson, Interim Mayor for the City of Ashland.
Judge Scott, Judge Carpenter, and Mayor Gunderson welcomed students from local schools that were attending the meeting and thanked the students and members of the committee for coming to Ashland to hear discussion about the Ashland area Enterprise Zone program. Judge Scott said it is important to keep existing Enterprise Zone industries in the Ashland area because they offer good paying jobs that are vital to the community. Judge Scott said he believes the state budget issue should be resolved because local governments rely on state government for their funds. Judge Carpenter said Ashland Marathon is currently undergoing a $365 million expansion because of the Enterprise Zone program. The expansion has attracted more jobs to the area and it allows Ashland Marathon to compete with other oil producers. Mayor Gunderson said it is important that the Enterprise Zone program be renewed because its benefits have an enormous impact on local communities and those benefits impact the state as well.
Chairman Sanders welcomed the Ashland area legislative delegation - Senator Charlie Borders, Senator Walter Blevins, Representative John Vincent, Representative Rocky Adkins, Representative Tanya Pullin, and Representative Robin Webb.
Senator Borders said he is extremely pleased that the committee selected Ashland to begin its discussion on the Enterprise Zone program. He said he sponsored an amendment to HCR 13 in the 2002 Regular Session that permits the Interim Joint Committee on Appropriations and Revenue to study the effectiveness and efficiency of enterprise zones throughout the Commonwealth. The amendment passed both chambers easily with the help of the legislative delegation who represent the Ashland area and its surrounding counties. Senator Borders said there are ten enterprise zones throughout Kentucky and many concerned citizens, business representatives, and local community officials want to keep the program because the incentives offered to new and existing businesses promote economic success in those communities. Many of Kentucky's largest employers are located in Enterprise Zone areas and it is important that the legislature study the effectiveness of the program to determine if the program merits continuation before allowing them to expire.
Senator Blevins said the incentives offered to Enterprise Zone businesses keep the businesses in the area and provide jobs which help the local economy and the state economy. He said competition to keep local businesses in the area is enormous because some companies could move their operations to Mexico or Brazil, or even across the river to Ohio where they have an Empowerment Zone to attract businesses.
Representative Adkins thanked members for taking the opportunity to visit the Ashland area. He said there is an old saying that great things happen when people work together and the Ashland area legislative delegation has worked together very closely to build a strong foundation for the Ashland community. With help from members of the Appropriations and Revenue Committee, the General Assembly, and the Governor, this northeastern region of Kentucky is now a competitive region with good access and infrastructure that can attract new businesses and industries to the area. The region has performing arts at the newly renovated Paramount Arts Center, its school systems are excellent, its crime rate is low, and it is an excellent place to live and raise a family. Representative Adkins said five counties consisting of Lawrence, Elliott, Carter, Boyd and Greenup are working together to develop East Park, a 1,000 acre regional industrial park that will be completed in the next year. The Enterprise Zone program and the new industrial park will make the area even more attractive to major employers.
Representative Pullin said all of the counties in the Ashland region work together for the good of the entire community. There is a rich history and spirit of cooperation to make the community a better one. It is important to keep the industries in the area and the Enterprise Zone program is a tool that deserves serious consideration.
Representative Webb said the first and primary duty is to provide for the people who have made investments in the region. Businesses and industries have made financial investments but the working men and women in the region are making blood, sweat and tear investments, and they deserve to be able to live and prosper in their own community. Even in this new economy, the area is competitive on a global scale because it has the best workforce. Due to the innovative, progressive work of the General Assembly and Governor Patton, the Ashland region will soon have the only industrial park with an on-site educational facility to train its workforce. She said this is another incentive as to why the Enterprise Zone program is so important to the Ashland area.
Representative Vincent said the Ashland region has been tremendously successful because of its most important resource, its people. The entire community came together across regional boundaries, setting aside any philosophical differences, to work together to maintain the community for the betterment of the region. The Enterprise Zone program has been an important part of that discussion. County judges, fiscal courts, city officials, and the legislative delegation all view the Enterprise Zone program as an economic tool and a stepping stone to economic prosperity. There is not only national competititon to recruit new businesses and keep existing businesses, but Ashland is in a tri-state area and must compete with its neighboring states of Ohio and West Virginia for industrial development. Representative Vincent said it is an honor to represent a community with such hard working values.
Jim Purgerson, President, Ashland Alliance, said Ashland Alliance is a member of a coalition of state and local chambers and associated industries organized to promote awareness of Kentucky's Enterprise Zone program. Ashland Alliance strongly supports the Kentucky Enterprise Zone program and has passed a resolution requesting that the General Assembly extend the program. The Ashland area Enterprise Zone program has provided a valuable incentive for retention and expansion of existing business and industry as well as the attraction and growth of new business. It has resulted in the creation and retention of hundreds of jobs for both large industry and small businesses. It has achieved the objective of bringing new, or renewed development, to targeted, economically depressed areas, and it has had a positive impact on the redevelopment and revitalization of downtown Ashland. Mr. Purgerson said job retention is often just as important as recruiting new jobs. Economic development is an extremely competitive livelihood and continuation of the program will help ensure economic stability and competitiveness. He said the program should be continued but it should be evaluated periodically to identify any loopholes, or abuses so that appropriate changes can be made legislatively.
Doug Sparkman, Plant Manager, Catlettsburg Refinery for Marathon Ashland Petroleum, said the Enterprise Zone program has been very important to Marathon Ashland for three reasons. First, Marathon Ashland was recently able to secure the capital to upgrade its facility so many high quality jobs have been retained; second, the refinery will be more competitive within the industry and it will also be more competitive within its own company for the attraction of capital; and, third, it strengthens the community because the area is attractive to new business. The Ashland refinery has been a part of the local economy since the 1920s. It started out processing about 1,000 barrels of oil per day and is currently processing over 240,000 barrels of oil per day. It is the 22nd largest refinery in the United States. The refinery employs approximately 900 regular employees and about 300 contract employees on a regular basis. The average wage at the refinery is about $67,000 a year. Ashland Marathon pays about $7.5 million in state taxes and the employees pay about $2.5 million in income tax to the state. Ashland Marathon also collects about $90 million in motor fuel taxes for the state of Kentucky on the sale of its products. Ashland Marathon is beginning a $365 million upgrade of the facility. This investment is being made to comply with new federal clean fuels regulations that come into effect in 2004, but it almost doubles the compliance requirements of the regulation. About 400 additional contractors have been hired to build the new equipment and about 1,000 contractors on the average will be hired per day in the year 2003, peaking in the fourth quarter of 2003, with over 2,000 construction jobs. This modernization is very positive for the community and it also makes the refinery more competitive. Mr. Sparkman said the industry is very competitive and investment dollars required to stay in business are large and the capital is fairly scarce. The business has to stay competitive within the industry and it also must compete within its own company for more capital. Ashland Marathon has two sister refineries in Louisiana and Illinois and they are both located in enterprise zones. It is felt that the Ashland area Enterprise Zone keeps the Ashland refinery on an equal footing with those sister refineries who are also in competition for capital. Ashland Marathon believes that the Catlettsburg project is a good example of the success of the enterprise zone. The economic activity helps existing businesses and it also helps to attract new businesses. When tax dollars are generated, schools, quality of life, and other intangibles are also enhanced.
Keith Howell, General Manager, AK Steel Corporation, Ashland Works, said that Ashland Works has been operating since 1921. It currently has 1,300 employees with an annual payroll of approximately $84 million. Over the past five years, more than 500 new employees have been hired. Ashland Works purchases approximately $37 million of goods and services in Boyd County per year and a total of $90 million of Kentucky goods and services annually. Approximately $3.4 million in Kentucky payroll taxes were withheld last year, and it paid $3 million in Kentucky use tax. Additionally, in 2001, AK Steel used approximately 500,000 tons of coal mined in eastern Kentucky. Mr. Howell said the impact of the continued viability and success of Ashland Works reaches far beyond the boundaries of Ashland, Kentucky. Ashland Works has maintained its competitiveness and ability to succeed while other steel companies have gone into bankruptcy, or have gone out of business. Ashland Works, however, must compete for capital investment with ten other AK Steel facilities. Even though AK Steel has remained solid financially, it is part of an industry that is considered by many to be flat on its back with more than 30 companies operating currently under bankruptcy. AK Steel intends to thrive during these times but every local cost increase makes that goal much more difficult. The Enterprise Zone program provides benefits that encourage future expansion and promote retention of current employees.
Del Boyette, an analyst with Deloitte and Touche, said Deloitte and Touche was selected by the Kentucky Chamber of Commerce, Associated Industries of Kentucky, and a coalition of Kentucky businesses to analyze Kentucky's Enterprise Zone program and to make recommendations based on that analysis. The study compares the benefits of an enterprise zone to four other selected states' incentives and whether those states have those incentives. The states are Indiana, Ohio, Tennessee, and Alabama. Eight companies who receive Enterprise Zone benefits were selected by the coalition of the Kentucky Chamber of Commerce and interviewed for the analysis. Kentucky has ten designated enterprise zone areas. Each zone is scheduled to expire 20 years after the date of its creation. The zones are located in Louisville, Hickman, Ashland, Covington, Owensboro, Lexington, Knox County, Campbell County, Paducah, and Hopkinsville. All business enterprises and individuals in the current Enterprise Zone program qualify for the benefits of the program. Fifty percent of the workers must be employed at the business enterprise within the zone. Existing businesses have an option of increasing capital investment, or increasing workforce, with a targeted workforce criteria. New businesses must meet targeted workforce criteria. The existing benefits under the program are sales and use tax exemptions on building materials, sales and use tax exemption on machinery and equipment, motor vehicle tax exemption, and a tax credit for targeted hiring, which is ten percent of the wages up to $1,500 per employee with a five-year carryforward.
Mr. Boyette said the sales tax exemption on building materials and the sales tax exemption on machinery and equipment were critical benefits to the companies that were interviewed for the analysis. The analysis also determined that there are loopholes in the program especially relating to the motor vehicle exemption and building materials for residential homes.
Mr. Boyette said a recommendation from the analysis of the Enterprise Zone program is that the program be continued but that it be continued strictly to those industries already in the program in the ten enterprise zones. In this global economy, now is not the time to take away needed benefits from existing industries. There are six recommendations that focus on existing industry: (1) redefine eligible businesses to include manufacturing and service technology companies and data processing and research and development businesses; (2) limit zone expansions by freezing the boundaries of the zone as they currently exist, or limit the zone size, but not its geography. This possibility would allow developers the ability to work around areas incapable of being developed and take advantage of sites not previously included in the zone, which may be more appropriate for development. For example, if there is an existing industry in the community where the zone is located and the zone would need to be expanded for competitive purposes then consideration should be given; (3) No new certifications for businesses new to the zone and that there be a final sunset date. "Grandfather" the certified manufacturers and non-retail establishments currently participating, or already existing in the zone. Set period of time for extending the benefits and eliminate the staggered expiration dates; (4) Stop the tax exemption on motor vehicles; (5) revise the hiring requirements to allow the hiring of low to moderate income individuals to qualify as targeted workforce employment; and (6) Require skills upgrade training for employees. Each certified company would be required to conduct and document one skill upgrade training session during the year for all employees.
Representative Wayne asked about the recommendation relating to enterprise zone boundaries and hiring requirements. Mr. Boyette said some companies in enterprise zones are penalized because there are not enough qualified workers within the boundaries of the zone to recruit employees. The recommendation is to eliminate the boundary on the hiring requirement to allow employment of low to moderate-income individuals outside the boundary by using income statistics that the Department of Labor already provides for other programs. Mr. Boyette said the purpose of the program is to develop economically depressed areas and this purpose would be achieved if there is a larger pool of qualifying workers.
Senator Sanders said Kentucky's budget was based on a phase out of the Enterprise Zone program. He asked if the study makes any recommendations about how to make up lost revenue if the enterprise zone programs are continued. Mr. Boyette said Deloitte & Touche did not do a quantitative analysis as to how much the program has cost, or what it would cost to implement the recommendations made in the analysis. He said, however, that incentives are a fact of life in a global economy, and to stop the benefits for companies that have invested in Kentucky could be detrimental in the long-term. Existing industries may not be able to continue to invest, or expand, or pay their employees.
Representative Adkins asked if the recommendation is to freeze the boundaries and sunset the program. Mr. Boyette said the recommendation is that boundaries cannot be expanded more than the current geographic size. The "sunset" provision allows companies in the program to continue receiving benefits for a set period of time provided the company continues to meet the enterprise zone requirements. A gradual phase-out is recommended to allow companies enough time to make adjustments accordingly for their increased tax liability.
Representative Webb said a recommendation is to limit the zone size but not its geography. She asked how existing boundaries can be changed so that there would be flexibility to make adjustments where development might be better suited. Mr. Boyette said the study does not include that detail.
Senator Sanders asked if the study includes information on the impact of enterprise zones in areas of the state that do not have the benefit of an enterprise zone. Mr. Boyette said the study does not include that information.
Representative Wayne asked if there are any statistics on how many low to moderate income workers have been hired in enterprise zone areas. Mr. Boyette said the study does not include that analysis. However, a company in northern Kentucky commented that it has a lot of people on its payroll today that would not have been hired if there was not a hiring requirement. Representative Wayne said the skills upgrade training would benefit many of the low to moderate income workers because most of the workers would have few job skills.
Frank Crockett, Community Services Manager, American Electric Power, said enterprise zones provide jobs, stability, and tax income to communities, and to the state. It allows companies in an enterprise zone to have a competitive edge that keeps them located in Kentucky, or to make needed expansions. These benefits ultimately mean jobs to areas in an enterprise zone. Mr. Crockett said there is fierce competition to recruit new businesses and this is a perfect opportunity to strengthen the state of Kentucky's competitive position in the United States.
Mr. Purgerson said the enterprise zone report reinforces that program benefits are important to the growth and development of existing businesses that anchor Kentucky's economy. Twenty years ago, enterprise zones were created to meet a specific need. Now, almost 20 years later, enterprise zones are meeting another need. They are providing another key role in sustaining the competitiveness for existing key industries. The recommendations outline a number of ways to keep providing the benefits while eliminating program waste and abuse. The coalition is prepared to work with members of the Appropriations and Revenue Committee and the General Assembly to develop an enterprise zone program that provides the support necessary for strengthening the Commonwealth's economy and the state revenues collected from a growing economy.
Barbara McGuire, McGuire's Towing, said enterprise zones are not just for large businesses. She said she and her husband own a towing business in Ashland. The business has grown from a single man operation to a business that has eight employees, who support seven families. The payroll last year was $92,000. Ms. McGuire said the enterprise zone program is an investment program for the future. It attracts new businesses and enables current business to continue to invest in themselves and in their employees. Ms. McGuire commented on the Deloitte and Touche recommendations. She said future entrepreneurs will be handicapped if new companies are prohibited from applying for enterprise zone benefits. She said new businesses need tax incentives to compete and grow. The motor vehicle tax exemption for enterprise zones businesses is a one-time sales tax exemption on the initial purchase of a commercial vehicle used in the business. She said taxes are paid on that vehicle every year after that initial purchase.
Secretary Dana Mayton and Mac Gillim, Director of the Division of Collections, with the Revenue Cabinet, appeared before the committee to update members on the status of the Tax Amnesty program. Secretary Mayton said the Tax Amnesty program is in its last week and it will probably take most of the month of October to realize the full success of the program. At the close of business on September 24th, the program had netted $15 million, and this morning, that amount is $16.7 million. Secretary Mayton said it is believed that the final results will exceed the original estimate The Revenue Cabinet has received just under 10,000 amnesty applications and 19,000 phone calls to date to a toll-free number to assist tax filers. There have been 120,000 hits on a special website set up for amnesty that has all the necessary forms and information that tax filers may need. The sales and use tax is leading on receipts at nearly $5.5 million. The corporate income and license together is around $3 million, and the individual income tax is behind that at $2.2 million. About one-half of the money received has come from other states. Jefferson County accounts for the highest single total with about $2 million. Fayette County is just below $1 million. The Revenue Cabinet estimates that over a half million dollars will go back to the local jurisdictions. Secretary Mayton said regional offices will be kept open late and on Saturday to assist with the tax filing deadline. She said the cabinet is optimistic about the final results.
Senator Sanders asked what the original estimate was for tax amnesty. Secretary Mayton said $20 million in this fiscal year, and $7 million in the next fiscal year.
Senator Westwood asked about the marijuana control substance tax. Secretary Mayton said a person who is in possession of marijuana, or controlled substances must purchase a stamp from the cabinet.
Representative Webb said she introduced legislation that clarified the bill from the enforcement aspect. The legislation allows prosecutors to collect taxes when there is a conviction relating to controlled substances. She said many prosecutors are doing that now throughout the Commonwealth.
Senator Sanders and Representative Moberly thanked Ashland Alliance, Gail Melvin, Director for Economic Development, the Kings Daughters Medical Center, the Paramount Arts Center, and the local businesses for their hospitality.
The meeting was adjourned at 2:50 p.m.