Public policies can improve or impair our lives. Weighing the costs and benefits of each policy is vital. To do that, policymakers need good data and good analysis.
One policy currently being examined is Arkansas' use of targeted economic development incentives. Proponents believe that providing special subsidies to favored businesses is an essential part of increasing economic opportunity in the state. However, the vast majority of research and analyses by economists, including myself and colleagues at the Arkansas Center for Research in Economics (ACRE), contradict this belief.
Proponents and critics of Arkansas' targeted incentive programs share a laudable goal: to make Arkansas a better place to live, work, and raise a family. But dedicating Arkansas' limited public resources to incentive programs means Arkansans sacrifice other uses of their tax dollars. This tradeoff means officials must create and change public policies based on the best data and analysis to ensure that resources are used in the most effective way.
If the best data and the best analysis suggested that targeted economic development incentives improved the well-being of Arkansans, I would recommend more of them. But study after study on cities, counties, states, and nations fails to find evidence that incentives are effective policies for stimulating broad economic growth. For example, Drs. Edmund Malesky and Nathan Jensen, professors at Duke and the University of Texas at Austin, respectively, detail numerous studies finding little to no empirical support for incentives in their 2018 book, Incentives to Pander.
My own analysis of Arkansas' Quick Action Closing Fund (QACF) subsidy program fails to find evidence that QACF subsidies increase private employment or business establishments in Arkansas' counties. The data I used to analyze the program was published by the Arkansas Economic Development Commission (AEDC) in annual reports required by Act 510 of 2007. My paper was approved through the academic peer-review process (where experts evaluate the validity of the research) and published in an academic journal, The Review of Regional Studies, as an assurance of its rigor and accuracy.
Do some individual businesses benefit from the QACF? Certainly. But careful analysis shows us that, on average, our local economies are not made better off as a result of subsidizing a select few businesses. And the shortcomings of many QACF projects, including companies failing to meet employment promises or filing for bankruptcy, are well-documented in newspapers of record. LM Wind Power, Nordex, Allied Wireless, Nice-Pak, Pinnacle Foods, Beckmann Volmer, and Soul of the South, among others, are a rich sample of case studies.
Unfortunately for taxpayers, the data on Arkansas' other incentive programs are inadequate for evaluating their broad economic effects. Arkansas is simply not transparent enough with its use of targeted tax breaks for favored businesses. The Pew Charitable Trusts recently rated Arkansas as a "trailing" state in its "State Tax Incentive Evaluation Ratings." "Trailing" means Arkansas "lack[s] a well-designed plan to regularly evaluate major tax incentives."
Former Rep. Warwick Sabin attempted to remedy this in the 2017 legislative session with House Bill 2030. It called for the creation of an online database that would provide greater detail on the use of all economic development incentives, including which companies received special tax breaks and subsidies, what those companies promised in return, and each company's progress toward those goals. However, Arkansas Business reported in March 2017 that AEDC struck a deal with Mr. Sabin to pull the bill and implement the database on AEDC's terms.
That was almost two years ago. We are still waiting. When asked, an AEDC spokesperson responded, "There is a lot of information that is confidential and proprietary that can't be shared, and it's taking quite a bit longer to comb through that than anticipated." Nevertheless, I look forward to analyzing a more robust data set to determine whether Arkansas' use of other incentive programs benefits the public at large, once it is available.
Arkansas has limited public resources, so policymakers must make difficult tradeoffs. But careful, rigorous, and objective analysis can help guide our leaders toward policies and programs that will make our lives better. Economic analysis doesn't care what party you belong to or what ideologies you prefer. If we want to make Arkansas a premier state in which to live, work, and raise a family, we must use data to see policies for what they are rather than what we wish they were.
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Jacob Bundrick is a policy analyst with the Arkansas Center for Research in Economics at the University of Central Arkansas. He is co-author of Do Business Subsidies Lead to Increased Economic Activity? Evidence from Arkansas's Quick Action Closing Fund. The views expressed are the author's and do not necessarily reflect those of UCA.
Editorial on 02/13/2019