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Democratic Gov. Andy Beshear on Friday vetoed a bill the Kentucky legislature passed to give unknown millions of dollars in tax breaks to high-tech corporations that open data centers inside the state and to remote workers employed in Kentucky by out-of-state companies.
Beshear cited “the rushed nature” of how House Bill 372 was rewritten and passed in the 2021 General Assembly’s final hours. The bill also did not come with a comprehensive fiscal note to explain what the tax breaks would cost the state treasury in coming years.
“While I support the concept of programs to incentivize remote workers to locate in the commonwealth and reasonable incentives to support the creation of data centers, I have concerns about the drafting of this particular language, as well as the rushed nature in which the bill was passed,” Beshear wrote in his veto message.
“Legislation creating these programs requires more time, discussion and nuance,” Beshear wrote. “I also have concerns about the amount of up-front dollars that the bill provides based merely on the promise of a project, as well as the lack of discretion to say ‘No’ to a project that is certain to fail.”
Beshear’s veto will stand because the Republican-dominated legislature has adjourned.
The House bill is unrelated to two other bills that Beshear signed into law in recent weeks awarding a variety of tax incentives to cryptocurrency mining companies that purchase and upgrade existing buildings in the state and then purchase large amounts of electricity.
The House bill started as a plan to award tax breaks to corporations like Amazon, Facebook and Google if they open data centers inside Kentucky. The bill’s drain on the state’s General Fund would start at $15 million a year and possibly rise, according to a fiscal note attached to the bill.
“The negative impact to the General Fund at full implementation will be substantial if a number of entities avail themselves of this exemption,” the fiscal note continued.
The data centers — where computer servers run continuously — wouldn’t be expected to employ many people under terms of the House bill. To qualify for the tax breaks, which would be available immediately and guaranteed for 30 years, the corporations would agree to create at least 20 permanent jobs and spend at least $150 million within five years on construction and equipment.
In the Senate, with little discussion, lawmakers added more language to the House bill that would have provided income tax breaks over a five-year period to Kentuckians who work remotely for out-of-state companies.
Critics, including the Kentucky Center for Economic Policy in Berea, urged Beshear to veto the bill, saying it was poorly written, open-ended and gave away too many state resources without a clear plan to achieve any goals.
There already are state incentive programs available for companies that want to create jobs in Kentucky, said Jason Bailey, the center’s executive director. But these tax breaks could be “easily gamed” and “stacked on top of existing incentives” to drain the state treasury while creating few new jobs, Bailey warned.
There also is another complication: Congress, in its recent $1.9 trillion COVID-19 relief package, prohibited the states from accepting federal aid while passing tax cuts, Bailey said.
“Both the remote worker and data center tax breaks in House Bill 372 may be seen as an unallowable, indirect use of American Rescue Plan funds to pay for tax cuts,” Bailey wrote to Beshear.
“Under the provisions of that law, Kentucky would be forced to repay an equal amount of federal aid. Kentucky’s budget would be hit twice — first with the loss of state tax dollars from the tax break and second with the loss of desperately–needed federal aid,” Bailey wrote.
The bill’s sponsor disagreed with the veto on Monday.
State Rep. Phillip Pratt, R-Georgetown, said states like Ohio are reaping the economic benefits of hosting data centers that hire local residents with decent pay, and the legislature wanted to get Kentucky in on that action.
“I think (Beshear) missed an opportunity to bring good-paying jobs to Kentucky,” Pratt said. “We tried to tailor it so it would go to the counties with lower populations. I thought it was a good economic development bill. Evidently, he saw something in it he did not like.”