The State of Kentucky recently learned economic development wars between states aren’t just about tax incentives. A burdensome regulatory climate can often outweigh any tax advantages.
This became clear when Medco Health Solutions Inc. decided to locate a planned new automated pharmacy–and its 1,300 high-paying jobs–in neighboring Indiana. Kentucky had offered $30 million in tax incentives compared to the Hoosier State’s $18.5 million.
Kentucky’s outdated, unaccommodating regulatory environment caused Medco to choose central Indiana for what will be the world’s largest mail-order pharmacy–a 318,000-square-foot structure it will open in 2009.
Medco isn’t the only automated-pharmacy company to shun Kentucky. Even Louisville, Kentucky-based Humana, Inc. went out of state, choosing Arizona for its first national mail-order facility in May 2006. The facility ships as many as 75,000 prescriptions a day.
The Louisville Business Journal reported in January that Humana will locate its second mail-order pharmacy–and 335 jobs–in Ohio.
Michael LaFaive, fiscal policy director of the Mackinac Center for Public Policy, said such decisions highlight the damage burdensome regulation does to states’ economic chances. LaFaive recommends states focus on removing the “big three” hurdles that keep jobs out: burdensome regulations, high taxes, and oppressive labor policies.
Michael Hicks, director of the Bureau of Business Research at Ball State University in Muncie, Indiana, says Kentucky’s tax climate causes the state’s entire economy to suffer.
Hicks points to the Tax Foundation’s most recent 50-state comparison of tax rates. Only six states ranked as having a more stifling corporate tax structure than Kentucky. Even worse is the state’s unemployment insurance tax, which ranked No. 48 out of 50, with 50 being the worst.
“Once a state’s given away big chunks of tax incentives, that’s a good indicator their overall tax climate is broken,” Hicks said.
Indiana offers fewer tax incentives but has removed many of its tax structure hurdles. Incentives “are tied to the construction of public infrastructure,” Hicks said.
“In many cases,” Hicks noted, “abating taxes is economically sound because it’s far less costly for the private sector [than government] to build access roads, place new sewer lines, install traffic lights, and build passing lanes; plus, it happens right away.”
Succeeding in attracting companies such as Medco also depends on how quickly states move to remove hurdles once they are aware of them.
For example, Kentucky law requires prescriptions to be filled by a state-licensed pharmacist. But 90 percent of Medco’s mail-order prescriptions in 2006 were dispensed by the company’s two automated dispensing pharmacies in New Jersey and Las Vegas.
Complying with Kentucky’s requirement would have forced Medco’s out-of-state pharmacists who forward prescription data to Louisville to obtain Kentucky licenses–a cumbersome and expensive process that is also unnecessary, given that Medco fills prescriptions already reviewed for accuracy and safety by pharmacists across the country.
Indiana’s Quick Response
At the beginning of the process to entice Medco, Indiana law included requirements similar to Kentucky’s, but the Hoosier State quickly adopted regulatory changes to accommodate Medco’s innovative approach to filling prescriptions. That will help the state attract even more mail-order pharmacies in the future.
“Businesses like this are always going to have to meet certain regulations regarding areas like emissions and bonding, which all pharmacy companies will have to do–I’m not sure those vary much between states,” Hicks said. “What is more problematic for firms is how long it requires to maneuver through the bureaucracy.”
Mike Burleson, executive director of the Kentucky Board of Pharmacy, said the board could have found a way to work around the licensing requirement by changing the regulations to allow mail-order prescription firms to open operations in the state.
In the end, Medco decided it would take too long to work through Kentucky’s regulatory maze, which has not evolved to meet the demands of innovative companies that employ technology to make their operations more efficient and profitable.
Indiana, by contrast, describes its economic development approach as “Shovel Ready.” Hicks said that’s a “program that doesn’t violate the rules, but rather companies are just able to go through the regulatory process more quickly.”
Burleson defended the Kentucky pharmacy board’s more deliberate approach, indicating safety was of paramount concern. “The mission of the Board of Pharmacy is the protection of the public and patients,” he said.
But Economic Development Cabinet Secretary John Hindman told the Louisville Courier-Journal, “safety isn’t really an issue because Medco’s two existing automated pharmacies already ship prescriptions to patients around the nation, including Kentucky.”
New Governor, New Approach?
It’s not clear what Kentucky Gov. Steve Beshear’s (D) approach will be.
Beshear, who took office in December, has indicated he considers helping existing companies in the state an important part of his jobs-creating strategy.
“Success today is not about slogans or a few additions to our industrial base,” Beshear said in his State of the Commonwealth speech. “Rather it’s about a top-to-bottom infusion of imagination–a different way of thinking about things. … It’s about helping our existing companies do better and grow more.”
Jim Waters ([email protected]) is director of policy and communications at the Bluegrass Institute for Public Policy Solutions in Bowling Green, Kentucky.