Arkansas' recent General Improvement Fund (GIF) scandal highlights a serious concern for the state. No, not just the questionable program that is GIF. But the overall lack of transparency in Arkansas, particularly in the state's economic development incentive programs.
For democratic societies to function properly, it is absolutely necessary for governments to be transparent. Public officials must provide the electorate with enough information to allow voters to adequately evaluate their government officials. It is not only a moral duty of elected officials, but it provides practical benefits. Increased transparency leads to residents who are more trusting of their government because they are able to identify and correct misguided policy or corrupt practices.
Arkansas desperately needs more transparency in its economic development incentive programs. These programs allow public officials to provide tax breaks and subsidies to select businesses in return for the promise of jobs and investment. Not only does the academic research indicate this is misguided policy, but tax breaks and subsidies are ripe for potential corruption and cost Arkansas taxpayers millions of dollars every year.
According to a 2016 report from the Arkansas Department of Finance and Administration (DFA), business tax incentives alone cost the state more than $2.06 billion from 1984 through 2015 in inflation-adjusted dollars. That is more than $1,800 per Arkansas household. And, over the last decade, subsidies from the Quick Action Closing Fund and Amendment 82 bonds have cost the state another $251 million, adjusted for inflation.
Arkansas' current transparency measures are not sufficient for its incentive programs. The handful of annual activity reports leave much to be desired. To start, the state does not require the same data to be reported across each incentive program. This means that some reports are missing information on the companies that receive incentives, their job and average wage projections, and the projected costs of each project.
Furthermore, no activity report details the realized benefits and costs of each project. There is no accounting of how many jobs are actually created by each project, the actual wages of those jobs, and the actual investment each project made in the local economy. While politicians may count photo opportunities at ribbon-cutting ceremonies, economic development is ultimately about realizing actual gains in economic activity. Failing to report the progress--or lack of progress--that each company is making toward its promises is a gaping hole in state transparency.
The annual reports also lack other important information. For example, median wages for both projected and realized jobs, North American Industry Classification System codes, and "clawback" formulas are not included. However, this information is essential in determining the benefit provided to employees, the types of firms Arkansas is able to attract, and how the state intends to protect taxpayer dollars when projects go awry.
The good news, though, is that Arkansas has a fantastic opportunity to improve economic development incentive transparency. Recent changes in the Governmental Accounting Standards Board's rules for disclosing tax abatements should motivate public officials. And Arkansas' existing annual incentive activity reports, required DFA audits on firms receiving incentives, and established fiscal information website, transparency.arkansas.gov, provide a solid foundation to build upon. Implementing small tweaks in the data reported, and the reporting methodologies, should yield significant gains in Arkansas' transparency.
To start, Arkansas should make economic development incentive agreement contracts available to the public. This would allow residents to see how and with whom public officials are "investing" their tax dollars and what companies are promising in return.
The state should also improve and expand the data it reports in regards to each project. This means including regular progress reports on the actual benefits and costs of each individual project.
Finally, the state should consolidate all economic development incentive reporting into an online database, similar to or a part of transparency.arkansas.gov. Creating a functional database with all the relevant incentive activity would encourage uniform reporting methods and provide an easily accessible portal for Arkansas residents.
Other states have seen the benefits of greater transparency. For example, Washington State's 2013 transparency legislation allowed state officials to find that Boeing's incentive package was on track to cost more than the $8.7 billion originally estimated, despite the company having cut thousands of Washington jobs and planning to cut thousands more.
Increasing transparency in Arkansas' economic development incentive programs should be a priority for the Legislature. It will increase the public's ability to monitor specific economic development projects, to evaluate the merits of tax breaks and subsidies, and to judge public officials' use of financial incentives. Most importantly, though, increased transparency makes it easier for residents to hold public officials accountable for their economic development policies.
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Jacob Bundrick is a policy analyst with the Arkansas Center for Research in Economics (ACRE) at the University of Central Arkansas.
Editorial on 01/19/2017