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Bad incentives

Rich counties benefit most by Dango Kumwenda Special to the Democrat-Gazette | April 1, 2019 at 1:59 a.m.

In 2015, Arkansas offered financial assistance worth hundreds of millions of dollars to the Chinese company Shandong Sun Paper. In exchange, the company planned to build a paper plant that would employ hundreds of people in Clark County.

The Sun Paper Project received the biggest incentive package ever delivered by the state of Arkansas, and it went to a relatively poor county. Of the 75 counties in Arkansas, Clark County ranks 54th in income per capita.

The extensive publicity given to this deal makes it seem as though incentive projects target poor counties. However, this deal does not represent how Arkansas allocates its tax breaks. Rich counties receive most of the benefits from the state's incentive deals.

In a journal article in Growth and Change, Tim Bartik, an economist at the W.E. Upjohn Institute, finds that state incentive packages are ineffective at creating new jobs, mostly because they are typically given to companies operating in economically vibrant counties. These rich counties have low unemployment rates and very few idle workers. When state incentives allow some firms in rich counties to hire more workers, the jobs are typically filled by people who leave other jobs in the county.

Bartik estimates that in a metropolitan area with a 10 percent unemployment rate, an incentive program that creates 1,000 jobs will have half of these jobs filled by people switching jobs, so only 500 new jobs will be created. Bartik finds the same incentive program is even more ineffective if it is implemented in a county with a 4 percent unemployment rate. In this county with a strong economy, the same incentive program only creates 200 new jobs.

Arkansas Legislative Audit reports that between 2008 and 2017, 40.9 percent of the dollar value of Arkansas' tax incentive packages under the Consolidated Incentive Act of 2001 were given to firms in the richest 15 counties, while only 17.9 percent were given to firms in the 22 poorest counties.

In its most recent annual activity report (required by Act 1282 of 2001), the Arkansas Economic Development Commission reported signing 133 new incentive agreements in 2017 alone. Of those 133, the state gave out a total of 67 incentive packages that were aimed specifically at creating and retaining jobs. Of those 67 packages, a staggering 47 of them were given to companies in the 15 richest counties, and 30 went to firms in three of the four wealthiest counties in the state.

By comparison, companies in the 22 poorest counties received only five incentive packages in 2017.

Bartik's theory suggests these incentive packages are being misallocated. Incentivizing firms in richer counties creates the likelihood that companies will engage in a bidding war to poach the best workers from other companies, as opposed to hiring the abundant idle workers who are in poorer counties.

The incumbent firms in these affluent counties are hurt by the incentive programs because the competition for workers forces their labor costs up and in turn hurts their competitiveness.

If the state gave incentive packages to poorer counties rather than richer counties, a bidding war on wages would be less likely to occur, successful firms in rich counties would not be put at a cost disadvantage, and more unemployed workers would find jobs.

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Dango Kumwenda is a research fellow for the Arkansas Center for Research in Economics (ACRE) at the University of Central Arkansas. The author's views are his own.

Editorial on 04/01/2019

Print Headline: Bad incentives

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