Should the Arkansas General Assembly have unlimited power to issue bonds for economic development? This is one of many questions Issue 3 of 2016 asks Arkansas voters to consider. Issue 3 would give the General Assembly the power to issue unlimited public debt for economic development by removing the cap on Amendment 82 bonds.
Amendment 82, first passed in 2004 and amended in 2010, authorizes the General Assembly to issue debt for economic development of up to five percent of Arkansas's general tax revenue. State debt under this amendment is generally reserved for large projects such as the $125 million bond issue for Big River Steel in Osceola, the only project to date to receive Amendment 82 financing. But Issue 3 would be a major change to current restrictions. It would not simply double or triple current limits to 10 or 15 percent, but instead remove the cap completely.
In other words, there would be no legal limit to the amount of debt the state could authorize.
Those in favor of eliminating the cap on Amendment 82 bonds claim that removing the current constitutional restrictions would allow Arkansas to lure massive economic development projects that the state currently cannot. Sen. Jon Woods argues that the 5 percent cap means that Arkansas "can't pull the trigger [on some economic development projects] because our hands are tied." For example, Arkansas lost the bid for a Toyota assembly plant in 2007 because Mississippi was able to give Toyota more than $293 million worth of incentives while Arkansas was only able to offer $200 million. Without the current constitutional restriction on public debt, Arkansas could write a check big enough to potentially attract any number of super projects that would likely never come to Arkansas without incentives.
On the other hand, opponents argue that Arkansas is taking on significant risk by removing the cap on public debt. As nineteenth-century economist Frédéric Bastiat famously suggested, sound economic policy must consider "both the effect that can be seen and those effects that must be foreseen." The seen benefits are the new economic projects and jobs which Arkansas may attract. The unseen costs are the risks associated with issuing debt and any additional taxes that would have to be collected to cover projects which fail.
To think about the hidden costs more clearly, let's assume Issue 3 passes and Arkansas is able to land an automobile plant with a large incentive package of $300 million. Now, imagine that the auto manufacturer files for bankruptcy, just as two of the Big Three U.S. auto manufacturers did in 2009. Arkansas no longer receives payments from the company on the debt, which means the burden is now placed on taxpayers of Arkansas or we risk debt default. That is very risky business.
Mike Preston, executive director of the Arkansas Economic Development Commission, says that "the Legislature will perform due diligence on each issue, and neither the governor or our Legislature is going to jeopardize the state's fiscal condition for any company."
But voters should be keen to remember Arkansas' history. Arkansas collected massive amounts of debt in the 1920s, experienced corruption in economic development road-building projects, and suffered a state default on debt in 1933. In 1934 voters responded by passing Amendment 20, which placed very tight handcuffs on new public debt by requiring most new public debt to be authorized by the voters rather than the Legislature. Two generations later, voters are being asked by the Legislature to take the handcuffs off once again.
In 1798 Thomas Jefferson warned, "let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution." Arkansas voters must decide whether they prefer constitutional chains or their confidence in the men and women of the Legislature to restrain themselves.
Proponents argue that times have changed and playing the taxpayer-funded economic development game is a necessity of the modern world. But Arkansans would be wise to consider our own history with regards to public debt, economic development, and the restrictions our ancestors placed on state power.
Jacob Bundrick is a policy analyst with the Arkansas Center for Research in Economics at the University of Central Arkansas, and the author of the recently released policy review "Tax Breaks and Subsidies: Challenging the Arkansas Status Quo."
Editorial on 10/22/2016