Arkansas needs jobs. Government officials attempting to attract jobs to the state have increasingly turned to subsidies and tax breaks. However, a recent analysis by the Arkansas Democrat-Gazette found that state incentives are not very effective at producing jobs. While the report detailed various disappointing outcomes, perhaps the most troubling takeaway is the state's admission of Arkansas' policy-driven competitive deficiencies.
Mike Preston, executive director of the Arkansas Economic Development Commission, stated that Arkansas' incentives help us "to stay competitive where we might have disadvantages--wherever that might be in our current tax structure, corporate income tax rate, things like that--these incentives really help us overcome those deficiencies."
Arkansas' deficiencies do not rest on Mr. Preston, but his quote raises an important question. If the state recognizes that certain policies and structures are damaging to Arkansas' competitiveness, why does the state continue to implement ineffective corporate-welfare policies rather than fixing the problem at its core?
For example, a recent study from the Tax Foundation found that Arkansas has the highest overall state/local tax burden among the nine regional states which also include Alabama, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Tennessee and Texas. Tax Foundation research also found that Arkansas has the second highest combined state/local sales tax in the nation. Furthermore, data indicates that Arkansas has the third highest corporate income tax burden in the region.
This high-tax environment is detrimental to Arkansas' economic growth. Research from the Federal Reserve Bank of San Francisco finds that states with lower taxes see faster economic and employment growth than states with higher taxes. While 2015's personal income-tax reduction was a start, one cannot help but wonder how many jobs Arkansas has lost due to the state's lack of a competitive tax environment. Reducing the tax burden faced by all firms, not just those lucky enough to receive a tax break from the government, would allow Arkansas to attract and retain more jobs.
Taxes are not Arkansas' only structural deficiency. According to the Fraser Institute's Economic Freedom of North America index, Arkansas ranks sixth among the nine regional states in regards to economic freedom. Economic freedom is a measure of the amount of taxes and regulations that might prevent people from creating prosperity. Arkansas' low ranking is damaging to the state, as research shows that economic freedom is linked to economic growth.
Moreover, a recent study in Contemporary Economic Policy demonstrates that economic freedom is associated with more favorable labor-market outcomes. The empirical evidence surrounding the benefits of economic freedom indicates that Arkansas would be better off if it focused policy on becoming freer rather than designing the next corporate handout.
Arkansas also struggles to compete in education. The latest results from the National Assessment of Education Progress indicate that the percentages of Arkansas' fourth- and eighth-graders that are proficient or better in math and reading are well below the national average and near the bottom in the region.
This is troubling, given Harvard economist Robert Barro's research that finds that the quality of schooling, as measured by science, mathematics, and reading test scores, has a positive relationship with economic growth.
Arkansas' relatively poor education is hurting economic opportunity within the state. Firms are not attracted to regions that cannot provide the skilled work force they need. While Arkansas' computer-science initiative is progress, the state's corporate-welfare policies do little to improve Arkansas' education.
Corporate welfare is nothing more than smoke and mirrors. Issuing subsidies and tax breaks will not fix Arkansas' policy-driven competitive disadvantages. Rather than trying to use financial Band-Aids, Arkansas should focus on creating a more competitive business environment through lower taxes, higher economic freedom, and better education.
By doing so, Arkansans can expect more economic opportunity within the state.
Jacob Bundrick is a research associate with the Arkansas Center for Research in Economics (ACRE) at the University of Central Arkansas.
Editorial on 02/06/2016