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JACOB BUNDRICK: Incentives wasted

Better uses for our tax money by Jacob Bundrick Special to the Democrat-Gazette | November 8, 2018 at 4:30 a.m.

Arkansas' economic development strategy relies on the use of targeted economic development incentives. Recent examples include a multimillion-dollar incentive package given to Aerojet Rocketdyne in Camden and the state's continued competition with Wisconsin to retain Kimberly-Clark's Conway plant.

Yet despite Arkansas officials' affinity for targeted tax breaks and subsidies, economists regularly express skepticism about their effectiveness. Before continuing to provide financial favors to select firms, officials should investigate whether incentives actually increase economic activity and if there are more productive uses for taxpayer money.

One of Arkansas' most contested incentives is a subsidy program known as the Governor's Quick Action Closing Fund (QACF). The program, which has received $185.7 million worth of funding since its creation in 2007, is intended to help Arkansas compete against other states to attract and retain businesses. The cash subsidies are first approved by the governor and afterwards reviewed by a committee of legislators that are, in part, tasked with providing oversight of the executive branch. In theory, giving the governor discretionary authority over the fund allows the governor to act quickly when economic development opportunities arise.

The QACF's founding legislation (Act 510 of 2007) argues that attracting and retaining businesses with subsidies enables Arkansas to maintain and increase jobs. But recently, state Chamber of Commerce President and CEO Randy Zook argued in this paper that the QACF is not intended to produce jobs, but to incentivize business investment. Nevertheless, research in this topic finds no evidence that an increase in businesses or jobs has occurred. In a 2018 peer-reviewed study published in the Review of Regional Studies, University of Central Arkansas Associate Professor of Economics Dr. Thomas Snyder and I found no evidence to suggest that QACF subsidies increase employment or business establishments in Arkansas' counties.

What's more, anecdotal evidence suggests that many projects receiving QACF subsidies would have taken place in Arkansas without the subsidies. Bad Boy Mowers of Independence County provides one such example. According to January 2016 reporting by Mr. Brian Fanney of the Arkansas Democrat-Gazette, Bad Boy Mowers received $2.2 million in QACF subsidies as part of a $3.8 million incentive package from 2012 to 2014. But Bad Boy Mower's leadership stated that it would have expanded the company in Batesville even without the government aid. In other words, the QACF subsidy served as a taxpayer-funded giveaway to a company for doing as they planned to do.

Despite the evidence, officials often counter that Arkansas must play the subsidy game because other states do it. This is misguided as evidence suggests that subsidies offered elsewhere are just as ineffective as Arkansas'. For instance, a 2018 study by Michael LaFaive and Dr. Michael Hicks published by the Mackinac Center for Public Policy found that subsidies from the Michigan Business Development Program fail to stimulate job growth. Even abroad, these results hold. Research by Bank of Italy economists Drs. Raffaello Bronzini and Guido de Blasio published in the Journal of Urban Economics found no evidence to indicate that government grants encouraged Italian businesses to make investments that they otherwise would not have made.

Some states have already eliminated subsidy programs once considered vital. For instance, the Florida legislature has gone against the governor's pleas in recent years, refusing to fund Florida's Quick Action Closing Fund. New Jersey also shut down its Business Incentive Employment Program in 2013 after the state became unable to provide millions of dollars' worth of grants it had promised to hundreds of companies. Other states, such as New Hampshire, fundamentally reject the notion of picking winners and losers with special incentives and instead rely on an economically sound tax system to grow their economy.

The evidence is clear: Arkansas is unlikely to increase economic activity by providing cash subsidies to favored businesses. Legislators should eliminate the QACF.

The cost of spending scarce resources unproductively is too great to ignore. In fact, 2016 research by Dr. Jia Wang published in the BE Journal of Economic Analysis & Policy found that public expenditures on education, health, and other productive public goods decline as governments increase expenditures on targeted economic development incentives.

Rather than continuing to fund the QACF, legislators should consider other, better uses of taxpayer money: reducing rates on harmful taxes, funding a robust rainy-day fund, building and maintaining highways, increasing teacher pay, or access to health-care services.

Better uses of public money exist. Public officials should prioritize those policies.


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 the author's and do not necessarily reflect those of UCA.

Editorial on 11/08/2018

Print Headline: Incentives wasted


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