Tax breaks and subsidies dominate the headlines of economic development. Proponents regularly tout their successes. But the city of El Dorado recently found out that corporate welfare is not what it is cracked up to be.
The idle Therma-Flite plant and the lack of progress on the Union County Lumber Mill has left Mayor Frank Hash saying, "We hear all of these promises, and we end up with egg on our face."
While the intentions behind financial incentives may be good, the economics are not. Support for corporate welfare is often based on economic myths. In my forthcoming policy review from the Arkansas Center for Research in Economics, "Tax Breaks and Subsidies: Challenging the Arkansas Status Quo," I discuss and dismiss many of these myths.
Supporters argue that financial incentives spur economic activity. But evidence does not support this claim. In fact, 25 of 26 peer-reviewed academic studies performed since 1980 found that tax incentives had no clear positive impact on the local economy.
Handouts are not free. Corporate welfare requires tax hikes on those who do not receive financial incentives. For example, Clark County and Mississippi County have both increased sales taxes to finance economic development projects.
Furthermore, financial incentives are direct costs to the government's budget that reduce revenue for other functions. Issuing tax breaks and subsidies to firms that are going to expand or locate in Arkansas regardless of aid means that the state forgoes tax revenue that it would have otherwise received or sacrifices other potentially more productive uses of its tax dollars.
When incentives are not the deciding factor in where a firm chooses to locate or expand, they become merely a taxpayer-funded giveaway to politically favored firms.
Two examples clearly show that Arkansas is not immune to the costs of corporate welfare. A 2016 report in the Arkansas Democrat-Gazette revealed that both Bad Boy Mowers of Batesville and Alabama-based Peco Foods in Independence County would have expanded regardless of financial incentives. Arkansas clearly lost revenue by issuing this unnecessary corporate welfare.
How many other companies did not need the incentives they received?
Another false belief is that financial incentives allow government officials to "steer" the economy in a "better" direction. This argument assumes that a government bureaucrat is better at allocating resources than the market. But there is no omniscient wizard who knows exactly what kind of widgets need to be made, how many should be produced, where they need to be sold, and at what price. Rather, people have specific, local knowledge about a business or industry, and their potential to earn a profit motivates them to react to market signals.
Government officials lack this knowledge and this motivation, making them too far removed from market signals to behave in the same manner as incentivized individuals. Government interventions interfere with the market signals that coordinate activity in our economy.
Finally, financial incentives do not benefit taxpayers. Subsidies and tax breaks increase risk to taxpayers because they encourage bureaucrats and business people to engage in activities that they otherwise would not. Put more simply, people tend to take more risks when using someone else's money. Politicians are willing to provide incentives to riskier ventures because they are using taxpayer money, not their own paychecks.
This means that a failed project, such as Nordex in Jonesboro, does not lead to a loss for government officials, but for taxpayers. If people have good business ideas, private money will invest.
Allowing myths to dictate public policy puts Arkansas on a dangerous path. Issuing tax breaks and subsidies despite empirical evidence of their harms will not improve the state's economy.
Instead, the state should focus on reducing its regionally worst state and local tax burden and simplifying its complex and out-of-date tax code.
Changes such as lowering sales-tax rates by getting rid of special interest carve-outs, reducing the number of corporate tax brackets, and removing antiquated manufacturing taxes are not flashy headlines. But they are simple steps toward a faster growing Arkansas economy.
Jacob Bundrick is a policy analyst with the Arkansas Center for Research in Economics (ACRE) at the University of Central Arkansas. He is the author of "Tax Breaks and Subsidies: Challenging the Arkansas Status Quo."
Editorial on 07/16/2016