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Tax incentives audit cites impact on state; critics doubt programs key to luring firms

by Hunter Field | December 14, 2019 at 9:09 a.m.
FILE — The state Capitol is shown in this file photo.

State auditors concluded that four of Arkansas' economic incentive programs have an overall positive impact on the state, but that one program has a negative impact while four others needed further study.

Arkansas Legislative Audit found in its annual cost-benefit analysis of the incentive programs created by a 2003 state law that the TaxBack, Advantage Arkansas, Create Rebate and Invest Arkansas programs have a net positive cost effectiveness, while In-House Research and Development-Targeted Business projects were negative cost effective.

Auditors reported that more data was needed to gauge the effectiveness of the ArkPlus, Sales and Use Tax Refund-Targeted Business, Payroll Tax Credit-Targeted Business and In-House Research and Development programs.

The General Assembly created the programs to help economic development officials in Arkansas recruit and retain companies that will provide jobs and capital investment in the Natural State.

Supporters of the incentives argue that they're necessary to compete with other states. Critics, meanwhile, say that incentives aren't the deciding factors for most companies when deciding where to locate.

"'Would they come here anyway?' is always the question that gets asked," said Jim Hudson, general counsel for the Arkansas Economic Development Commission. "I think if you consider, though, the conversation we have with companies that are looking at coming to Arkansas, they're not looking at Arkansas in isolation. They're looking at our competitor states around us. Arkansas needs to be competitive with those other states who also have incentive programs."

Jacob Bundrick, a lecturer of economics at the University of Central Arkansas, has frequently criticized the state's incentive programs, saying that they sound good in theory but fail or have overlooked consequences in practice.

In a policy paper for the Arkansas Center for Research in Economics, Bundrick wrote that one negative consequence of incentives is the stymieing of innovation because companies are more concerned with gaining advantages through political breaks.

"Arkansas could do better by eliminating tax incentives and subsidies, lowering marginal tax rates, and simplifying the tax code," Bundrick wrote.

State auditors reviewed a sampling of projects from 2009-18. Arkansas' incentives awarded and issued under the 2003 law totaled $684.5 million during that period, according to the report.

The incentives are divided into two categories -- statutory and discretionary.

Statutory incentives are awarded to any company that applies and meets the criteria; they comprised $519.9 million of incentives offered over the 10-year period, which is about 76% of incentives.

Discretionary funds are awarded at the discretion of the director of Economic Development Commission, and they represent $164.5 million of the 10-year window of incentives.

The programs are business incentives like tax credits that aim to make Arkansas a friendlier business climate. The InvestArk program, for example, is a sales and use tax credit for companies that invest $5 million or more at a single location on new construction, expansion or modernization.

Hudson noted that the report represented only a sampling of the almost 900 projects for which the state has offered incentives. He said the commission projects that it will get a $4.22 return for every dollar spent on incentives.

Auditors reviewed 11 In-House Research and Development-Targeted Business incentive projects, finding that none had a positive cost effectiveness. The projects' negative impacts on the state, auditors noted, were due in part to the high incentive cost of 33%.

"However, if the intent of this incentive is to promote research and development in specified areas for greater long-term prospects, rather than shorter-term benefits, [Arkansas Economic Development Commission] may want to consider developing a verifiable method to capture the long-term economic benefits," auditors wrote in the report, which was presented to the Legislative Joint Auditing Committee on Friday.

Hudson said he believed that commission had addressed weaknesses in the research and development incentive with a new law enacted earlier this year that narrowed the eligible expenses that can be considered for credit under the program. Now, those eligible expenses are focused on research and development worker salaries, which Hudson said prioritizes high-wage jobs.

"The cost-benefit analyses that they ran verify that in most cases we're yielding a positive contribution to the taxpayers of Arkansas based on the expenditures for these incentive programs," Hudson said.

Bundrick, meanwhile, said he was skeptical of auditors' methodology. He pointed to a portion of the Legislative Audit report where auditors acknowledged that it's impossible to know if incentives were deciding factors in businesses' decisions. It's likely, auditors wrote, that companies claimed incentives for projects they would have pursued regardless of whether the incentive was offered.

"However, for the purposes of this report, incentives were analyzed under the assumption that, without the incentive, the corresponding economic activity would not have occurred," the report reads.

Bundrick said that empirical and anecdotal evidence has proved that assumption invalid.

"We see time and again that incentives are not the deciding factor in a company's location/expansion decision, but merely serve as a reward for doing as they intended," he said in an email. "In these cases, incentives are a cost to taxpayers and provide no benefit. Put more simply, if the assumptions used in the analysis are invalid, how can we trust the results? We're making real decisions with real taxpayer money using analysis we know to be flawed."

Also at Friday's meeting, lawmakers received a report of athletic expenditures at Arkansas colleges and universities for 2018-19. State universities and two-year colleges spent $202.9 million on athletics -- a 7.1% increase over 2017-18.

The largest spenders were the University of Arkansas, Fayetteville, which spent $126.9 million, and Arkansas State University, Jonesboro, which spent $20.6 million.

The U of A's athletics revenues exceeded $128.2 million, the report said. ASU's athletic revenues were more than $20.6 million.

Metro on 12/14/2019

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