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Kentucky Provides a Generous Pour for Bourbon Makers

Posted on Jan. 18, 2022

Kentucky, a state synonymous with bourbon, is nonetheless handing out millions of dollars in tourism tax incentives to distilleries.

Gov. Andy Beshear (D) announced in September that the Kentucky Tourism Development Finance Authority (KTDFA) approved more than $29.9 million in tax incentives for Horse Soldier Bourbon, based on a recommendation from the state's Tourism, Arts, and Heritage Cabinet.

The project — touted by state and local officials as one that will create quality jobs and support economic development — is eligible for additional state and local tax breaks. But experts say it isn’t prudent to provide tax breaks for tourism projects, let alone bourbon distilleries in a state that is world famous for its bourbon industry.

The tourism tax incentives for Horse Soldier Bourbon are so generous that Kentucky could actually lose tax revenue on the deal, according to a report from the independent consulting firm Hunden Strategic Partners that was obtained by Tax Notes.

Despite concluding that the project will have a positive net economic effect on the state’s economy, which is needed to qualify for the incentives, the report says the project is expected to generate $17.5 million in new sales tax revenue and more than $8.3 million in income tax revenue. “In total, the combined fiscal impact is projected to be $25.82 million. This level of net new fiscal impact is less than the maximum potential rebate of $29.92 million,” according to the report.

The consulting firm did not respond to a request to discuss the report.

Horse Soldier Farms LLC, also known as Horse Soldier Bourbon, “expects to create more than 50 jobs with a new $200 million tourism development project that will bring bourbon and tourism dollars to Pulaski County,” the governor said in the release.

The project will include a distillery visitor center, an activity center, an amphitheater, an outdoor event space, an adventure center, a wedding chapel, a luxury lodge and cabins, and a retail village, according to the announcement. The company distills its bourbon in Columbus, Ohio, and will transfer its operations to Somerset, Kentucky, once the project is completed, the release said.

The company did not respond to several requests to discuss the project by press time.

American Heroes

Horse Soldier Bourbon was founded by now-retired members of the U.S. Special Forces who were the first to enter Afghanistan on horseback after the terrorist attacks of September 11, 2001. For their service, the company’s founders have been hailed as American heroes. That point is underscored in the consultant’s report, which notes that “the stories of the founders and their service to America offer an element to the project that cannot be replicated by any other distillery.”

The project’s October groundbreaking ceremony was attended by the governor, who said in a release, “I want to thank the team at Horse Soldier Bourbon for their service to our country. We are excited that your next chapter includes making Horse Soldier Bourbon in Somerset and investing in the commonwealth — your story reinforces our belief that Kentucky is truly destined for greatness.”

The company has been “expanding its brand state-by-state, all while developing a long-term investment plan to build a world-class distillery experience in Somerset-Pulaski County,” Beshear’s office said.

The project’s budget is estimated to be $99.7 million, according to the report.

When asked about the difference between the $200 million investment announced by the governor’s office and the $99.7 million figure in the report, Danielle Jones, a spokeswoman for the Tourism, Arts, and Heritage Cabinet, told Tax Notes in an email that the project “represents a total economic investment of $200 million, which includes the manufacturing investment by the company. Incentives approved through the Tourism Development Act are reflective solely of the tourism-related aspect of the overall project.”

Jack Mazurak, a spokesman for the Kentucky Cabinet for Economic Development, told Tax Notes December 2 that Horse Soldier Bourbon has been approved for up to $1 million in tax incentives for the manufacturing component of the project, based on an investment of $25.5 million and the creation of 58 full-time jobs at $26.50 an hour.

The company was authorized for up to $130,000 through the Kentucky Enterprise Initiative Act, which provides a sales tax rebate for construction materials and equipment. It received preliminary approval for up to $870,000 through the Kentucky Business Investment Program, which provides income tax credits and wage assessments, according to documents provided by the economic development cabinet.

A state tax expenditure report for fiscal 2022–2024 shows that Horse Soldier Farms would be eligible for a slightly larger sales tax refund of up to $31.17 million for an investment of $103.9 million in Somerset. The report says the project is expected to have a positive fiscal impact of $25.8 million.

Michael Jones, deputy executive director for the governor’s office for policy research, told Tax Notes that the state first announced the incentive award based on a preliminary study but ultimately signed off on a sales tax rebate for Horse Soldier Farms of about $25.8 million. 

Danielle Jones said the “net fiscal impact outlined in the consultant’s report is the maximum amount that KTDFA can approve for a project.”

“Project incentives are limited to the lesser of the maximum potential rebate as outlined by state statute or the net fiscal impact as determined in the consultant’s report. After approval of the consultant’s report, KTDFA has the authority to approve a lesser amount than the report estimates. The applicant may also request the project cost be adjusted,” Danielle Jones said.

In 2019 KTDFA gave preliminary approval for a sales tax rebate of up to $6,375,000 for American Freedom Distillery LLC — which bottles Horse Soldier Bourbon — for a $25.5 million project in Somerset.

The American Freedom Distillery project was later withdrawn and updated to become the Horse Soldier Farms project, according to Danielle Jones.

Tourism Incentives

Horse Soldier Farms in April applied for a sales tax rebate under the Kentucky Tourism Development Act, a program that was created in 1996 for tourism-related economic development projects. The state said the program was the first of its kind in the nation.

When the program was first established, companies were eligible to receive up to 25 percent of development costs over a period of 10 years. The act was altered in 2014 to allow new or expanded tourist attractions in enhanced incentive counties to receive up to 30 percent of project capital costs through a rebate of sales taxes generated from the attraction.

The program doesn’t have job creation requirements.

To receive the incentives, a company is required to apply with the secretary of the Tourism, Arts, and Heritage Cabinet. If the secretary recommends the project, it goes before KTDFA for preliminary approval.

Once the project receives preliminary approval, a consultant chosen by the cabinet does a study — which is paid for by the company seeking the incentives — to ensure the project meets statutory requirements.

The act requires the consultant to analyze the project and ensure that it will “have a significant and positive economic impact” on the state considering, “among other factors, the extent to which the tourism attraction project will compete directly with existing tourism attractions in the Commonwealth and the amount by which increased tax revenues from the tourism attraction project will exceed the credit given to the approved company.”

The secretary then decides whether to request that the authority give the project final approval. If the project receives final approval, the applicant signs an agreement with the state allowing it to receive the sales tax rebate.

Similar programs are offered in other states, though Kentucky’s program has been described as generous.

Mississippi has a tourism rebate program, which provides a sales tax rebate for new tourism projects to reimburse businesses for costs incurred during the project’s construction. It allows businesses to recoup a percentage of sales taxes paid by visitors for up to 15 years. Project expansions are excluded.

Georgia also offers a sales tax rebate program for tourism projects, which allows businesses to recover up to 2.5 percent of the project’s development cost over a period of 10 years. The rebate is available for new projects and expansions of existing projects.

Under the Arkansas Tourism Development Act, tourism attraction projects are eligible to recoup up to 15 percent of project costs via sales tax credits if the company invests more than $1 million, or up to 25 percent of project costs if they’re located in high-unemployment counties.

Kentucky’s program drew attention when the state approved incentives in 2014 for a religious theme park known as the Ark Encounter, which the state later pulled under the administration of then-Gov. Steve Beshear after the company posted hiring criteria for park workers that required a promise to follow fundamental Christian beliefs and “salvation testimony” from applicants.

Ark Encounter LLC filed a lawsuit challenging the denial of the rebates, claiming that the state discriminated against it on the basis of religion, and the U.S. District Court for the Eastern District of Kentucky ruled in 2016 that the state could not deny Ark Encounter a sales tax rebate equal to 25 percent of its development costs, or approximately $18.25 million, because the park met the criteria for the incentives.

Sales tax rebates have been approved for other bourbon distilleries under Kentucky’s program, including Maker’s Mark, Jim Beam, and Buffalo Trace. But Horse Soldier Bourbon’s project appears to be eligible for one of the largest refunds in the program’s history, according to a spreadsheet on the tourism cabinet’s website.

Pam Thomas, senior fellow at the Kentucky Center for Economic Policy, told Tax Notes that projects eligible for incentives through the Kentucky Tourism Development Act have historically not generated the sales tax revenues that were initially projected.

“I think in a lot of these instances, what we see on the front end is pretty rosy projections of what will happen . . . and then the reality of it is very often not what was expected,” said Thomas, who previously worked for the Appropriations and Revenue Committee of the Kentucky General Assembly and drafted the act.

Regarding the Horse Soldier Bourbon project, Thomas said she’s not sure how realistic some of the figures are that were used to come up with projections in the consultant’s report, such as the number of visitors and the average daily hotel room rate of $400.

People are likely to be willing to drive to an area like Somerset to visit a distillery, Thomas said, but an important question will be whether enough people would want to spend several days there. “I don’t really think anyone that would finance this endeavor would count on that revenue in any sort of appreciable way — at least not at the value they predict in the analysis of the fiscal impact,” she said.

Local Incentives

On top of the state tax incentives, Horse Soldier Bourbon’s distillery complex will also be eligible for local tax incentives.

Alan Keck, mayor of Somerset, said a tax increment financing district was established for the project, which will allow the company to receive up to 80 percent of the tax revenues generated above the existing tax base over a period of 20 years.

Keck could not provide an estimate of how much local revenue would be forgone as a result.

“We were really excited to come to the table and create it; it was a beautiful opportunity for the city and the county government along with our economic development group to come together and show strong support that we were behind the project,” the mayor said.

According to Keck, the project will create at least 50 new jobs, with an average wage of about $20 per hour, in addition to hundreds of construction jobs. The consultant’s report projects that the tourism project will support 439 full-time jobs, which includes direct, indirect, and induced jobs.

Criticisms

Nathan Jensen, a professor of government at the University of Texas at Austin who reviewed the consultant’s report, said in an email that it suggests the project will have a negative fiscal impact.

“The state will lose money on this deal, according to this consultant report,” said Jensen, who researches tax incentives.

Jensen said the tourism incentive is very generous by any standard and that “there is some irony of Kentucky subsidizing the expansion of an existing bourbon factory.”

Much of the research done on economic development incentives has found that the economic activity is likely to occur without the incentives. A 2018 working paper by Timothy Bartik, senior economist at the W.E. Upjohn Institute for Employment Research, found that at least 75 percent of firms receiving grants and tax breaks for location, expansion, or retention decisions would have made similar decisions without the incentives.

Jeremy Horpedahl, associate professor of economics at the University of Central Arkansas, said in an email, “As a fan of bourbon tourism myself, I'm always excited to learn about new options in Kentucky. But I'm skeptical that the tax incentives were needed to encourage them to move to Kentucky, or that the state will come out ahead on this deal.”

Horpedahl, who also reviewed the consultant's report, said the current macroeconomic conditions suggest that a lot of the new jobs won't really be new, but just moving people around in the state and county. “The unemployment rates for Pulaski County and the entire state are basically at their lowest levels ever. It's a little hard to judge this data during pandemic times, but ordinarily we interpret this as a very tight labor market where most jobs created are just people changing jobs,” he said.

Horpedahl also noted that about 40 percent of the new jobs and spending are from induced and indirect effects. “These effects are even more likely to be shifting around resources, rather than true new economic activity. Taking these away, the fiscal impact on capturable taxes falls to about $15.5 million, which is about half of the potential tax benefits for the company (about $30 million),” he said.

Horpedahl also said he thinks some of the indirect and induced spending and jobs will end up in Tennessee and Virginia, given how close Pulaski County is to both states. That wasn’t mentioned as a possibility in the report, though it could have been included in the model that was used to estimate the project’s economic and employment impacts.

Greg LeRoy, executive director of Good Jobs First, said that any new economic activity in a state will have some positive ripple effects, but you can’t judge it without the cost-benefit analysis. “When a study finds that the benefits don’t meet the costs . . . it’s hard to justify from a taxpayer point of view,” he said.

According to LeRoy, tourism is a thin reed upon which to build an economic development strategy because travel and leisure time are discretionary activity and therefore very cyclical. “In a recession, fewer people travel, people have less disposable income and therefore they can’t go to movies, they can’t go to sporting events, [and] they can’t go to distilleries,” he said.

The other issue with tourism as an economic development strategy is the ripple effects, LeRoy said.

“It’s not like it has complex inputs. It’s not the Toyota plant in Georgetown, Kentucky, with several times more jobs upstream making parts, some of which get made in Kentucky or neighboring states and then shipped to the assembly plant in Georgetown, [thereby] creating lots of ripple effects upstream,” LeRoy explained. He added that the quality of the direct jobs created is also a factor: the auto assembly jobs provide enough wages for people to save money, send their kids to school, buy homes, and eat out.

In the tourism industry, many more jobs are seasonal and lack good benefit packages, Leroy said. “Tourism activity creates much more modest ripple effects and is a further justification for less subsidization, because the bang for the buck is less,” he added.

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