Are Arkansas' economic development incentives working? Morrilton Packing Co., the parent of Petit Jean Meats, is investing $2.1 million in Morrilton and creating 34 new jobs in exchange for incentives. There are others too. But is that evidence that incentives are working?
Academic research attempts to identify reasonable counterfactuals of "what would have happened" with different policies or no such incentives. Without this research, we can only examine the results of the choices that were made. But what about the road not taken?
Whether incentives cause firms to increase hiring and investment is difficult to determine. Business leaders are unlikely to disclose this information, so those who want to study these programs must find a different way. One way economists test the effectiveness of incentives is through counterfactual analysis. This method compares the business practices of government-assisted companies and those of very similar, unassisted companies. This allows economists to draw conclusions about whether companies receiving special tax breaks and subsidies would have created the new jobs or made the new investment even if they did not receive the incentives. Consider the following:
In a study published by the National Tax Journal, economist Dr. Dagney Faulk found that approximately three-quarters of jobs created by firms participating in Georgia's Jobs Tax Credit would have been created even if the firms did not receive the tax benefit. As a result, Georgia provided at least $3.6 million worth of tax benefits to favored firms for jobs they would have created anyway.
A 2017 study by Dr. Nathan Jensen published in the Journal of Public Policy found that firms receiving tax incentives from Kansas' PEAK program did not create more jobs than similar firms that did not receive PEAK incentives. More troubling is the majority of respondents to the author's survey of businesses receiving PEAK incentives said that the government help did not affect their location or expansion decisions.
These results are not unique to the U.S. Research from Bank of Italy economists Dr. Raffaello Bronzini and Dr. Guido de Blasio published in the Journal of Urban Economics found no evidence that publicly funded capital grants increased Italian business investment. Rather, they found subsidized firms simply made planned investments earlier than they originally intended. Further, their study suggests that subsidized firms may have taken investment opportunities from unsubsidized firms.
What about Arkansas?
Arkansas Legislative Audit (ALA) certainly has its concerns. In an October 2017 special report titled "Cost-Benefit Analysis of Selected Economic Incentive Projects," ALA stated, "Essentially, any company with knowledge of incentives available will know upfront what it is allowed to claim and will incorporate this knowledge into the decision to create jobs or build a new facility. It is likely, then, that the existence of statutory incentives will cause some companies to claim incentives for projects they would have pursued in the absence of incentives."
ALA's concern is valid. According to a January 2016 article published by the Arkansas Democrat-Gazette, Bad Boy Mowers, a lawnmower manufacturer established in Diaz in Jackson County in 1998, reportedly received $3.8 million in incentives from 2012-14 for an expansion project in Batesville. However, Scott Lancaster, general counsel for Bad Boy Mowers, told the Democrat-Gazette that it would have expanded in Arkansas regardless of the incentives provided by state and local governments.
There's more. Peco Foods received $485,000 from the state and $175,000 from Independence County for an expansion project. Yet in January of 2016 the Democrat-Gazette quoted Benny Bishop, COO of Peco Foods, saying they "would have chosen Arkansas for expansion even without state incentives."
Statistical and anecdotal evidence strongly suggests economic development incentives are not working. And these programs are not free. When the state provides incentives to businesses that would have invested in Arkansas regardless of the aid, the state is forgoing revenue that would have been collected and giving away tax dollars that could be better spent.
Arkansas' public officials should focus on broad, comprehensive reforms to increase economic growth. Fortunately, progress is being made on this front. The state's Tax Relief and Reform Task Force is set to deliver solutions to improving Arkansas' comprehensive tax system before the 2019 legislative session. Gov. Asa Hutchinson has also continued his commitment to lowering the state's tax burden, calling for another reduction in the state's income tax rate. Moreover, the recent formation of the Red Tape Reduction Working Group is a step toward reducing the barriers to employment created by unnecessary occupational licensing.
Comprehensively reforming our tax and regulatory environments--not providing incentives to select businesses--is the more proven path 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. The views expressed are those of the author and do not necessarily reflect those of UCA.
Editorial on 03/19/2018