Funding economic-development projects with taxpayer money is a risk to Arkansans. Yet, politicians frequently do it.
Most recently, government officials committed to providing tax dollars to Energy Security Partners (ESP). The Economic Development Corporation of Jefferson County devoted more than $3.9 million to ESP. The company is also negotiating with the Arkansas Economic Development Commission for state incentives. With the public's money in hand, ESP plans to build a $3.7 billion industrial gas-to-liquids processing plant in Jefferson County. In return for their tax money, taxpayers can expect ESP to create 225 jobs that will pay an average wage of $40 per hour.
While projections may be enticing, using tax dollars to fund economic-development projects like ESP is no more than a gamble with public money.
In a recent Talk Business & Politics article, Mark Agee, vice president of business development at Emerging Fuels Technology, said there has been talk of gas-to-liquids projects in recent years, but large capital costs and volatile oil prices have halted them. Because the project makes more economic sense when natural gas is cheap and oil is expensive, fluctuating oil prices have made financing hard to come by.
Edward Osterwald, a partner at Competition Economists Group in London, added that building such a plant today is essentially "placing a bet" that natural gas will remain cheap while the price of oil will rise. But is gambling with taxpayer money really the best public policy?
The state of Arkansas has gambled and lost taxpayer money before. Government officials previously bet that the federal government would extend wind-energy tax credits and subsequently funded businesses in the wind industry. Nordex, a wind turbine manufacturer in Jonesboro, received more than $3.9 million in subsidies from the Governor's Quick Action Closing Fund. Beckmann Volmer, a steel company supplying turbine main frames to Nordex, received $1.5 million.
But less than three years after opening, Nordex ceased production in its Jonesboro plant, citing "the wind industry's global overcapacity and the continued uncertainty and instability of the U.S. market." Shortly after Nordex shut down operations, supplier Beckmann Volmer entered bankruptcy. Public officials lost their bet, but taxpayers lost their money.
Betting on economic-development projects with tax dollars equates to moral hazard. Moral hazard occurs when people engage in risky activities that they otherwise would not because they share the risk with others. Put more simply, people tend to take more risk when using someone else's money instead of their own.
Government officials are willing to place corporate-welfare bets on projects like Energy Security Partners because they are using taxpayer money rather than their own paychecks. If the bet fails, politicians do not lose, taxpayers do. Politicians are able to raise more "economic development" money through taxation, but taxpayers never see their lost tax dollars again.
Rather than taxing Arkansans to gamble with public money, the state should let the market decide which economic development projects are viable. If private investment is willing to finance an economic-development project, the state should let the market run its course. There is no need to spend tax dollars on corporate welfare when private money is willing to fund a business.
Furthermore, if private money is unwilling to finance a company, state and local governments should not either. The fact that private money will not fund a business should signal to government officials that the project is not a good investment. Ignoring this signal puts Arkansas taxpayers at risk.
Projections surrounding economic-development projects like Energy Security Partners are often alluring. But if these projects are good investments, private money will fund them without the help of corporate welfare.
When government officials use taxpayer money to bet on economic-development projects, it is the taxpayers who carry the risk. Burdening Arkansas taxpayers with undue risk is poor public policy.
Jacob Bundrick is a research associate with the Arkansas Center for Research in Economics (ACRE) at the University of Central Arkansas.
Editorial on 03/07/2016