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OPINION | NATHAN SMITH: Stop subsidies

Level the playing field by NATHAN SMITH SPECIAL TO THE DEMOCRAT-GAZETTE | June 18, 2021 at 2:59 a.m.

A recently published list of 2021 "tax cut" legislation passed by Arkansas legislators included some items that aren't really tax cuts, but just rank giveaways to favored businesses.

Act 895 is a $4 million to $6 million per year giveaway to a steel mill with investment plans, likely Big River Steel. Act 594 is a $5 million per year giveaway to a large investor in the wood industry, probably Highland Pellets. Politicians really ought to stop doing this.

How little the wood industry needs a subsidy right now may be judged from the price of lumber, which has tripled to well over $1,500 per 1,000 board feet in the past few months. As for the steel mill, the tax break it is likely to get for creating 150 jobs that should pay an average of $75,000 per year implies that 44 percent of its wage bill will be paid by the state in roundabout ways. A lot of employers in Arkansas would appreciate having 44 percent of their wage bill paid by the state. But such favors are only for a privileged few.

These subsidies--"incentives" is the term of art--are a great deal for shareholders in privileged companies. A few workers benefit too. But academic literature on incentives and business decisions, summarized by Tim Bartik in his book "Making Sense of Incentives" and Nathan Jensen in "Incentives to Pander," finds that "incentives" usually just pay businesses to do what they would have done anyway. They don't add jobs to the economy.

Incentives are a ripoff for the vast majority of Arkansans, who will face higher taxes and/or worse public services because public funds have been misspent on handouts to business.

And yet legislators were almost unanimously supportive. Only Rep. Jim Dotson voted against the wood subsidy. Only Rep. John Payton, Rep. Nelda Speaks, and Sen. Charles Francis Beckham voted against the steel mill subsidy. Most legislators seem to have fallen for spurious "cost-benefit analyses" that make the subsidies look revenue neutral.

Sen. David Wallace, sponsor of the steel mill subsidy, urged the Senate on April 8: "Now this is important. This is the key ... . These tax credits will not be issued until the project has a positive cost-benefit analysis for the state ... . That's better than a money-back guarantee."

No, it's not. It's actually pretty meaningless. These "cost-benefit analyses," provided by external consultants to the Arkansas Economic Development Commission (AEDC), ignore negative side effects and, worse, rely on the very false assumption that all resources used by the projects would otherwise have been unemployed. They have no relevance for assessing the actual economic merits of the projects they score. Almost any business' investment plans would deserve subsidies by this test.

These new subsidies are the tip of the iceberg. The state has an alphabet soup of "economic development" programs, mostly administered by the AEDC. They're so non-transparent that citizens usually can't find out which companies are getting subsidized. And few, if any, address a well-specified market failure in an efficient way. Instead, "job creation" is usually cited as the goal, yet the hiring footprint of all these programs put together is slight, accounting for roughly 1 percent of hiring in the state.

AEDC, in its 2019 Annual Report, estimated the jobs "created or retained" from these programs at 5,968. Of course, without the incentives, most of those people would still have jobs, though maybe different ones. Meanwhile, based on data from the Bureau of Labor Statistics' Job Opportunities and Labor Turnover Survey, about 500,000 to 600,000 hires occur annually in Arkansas, 100 times the job count boasted by AEDC, along with about the same number of quits and layoffs.

In general, about half of hires nationally involve direct job-to-job transitions, based on data from the Census Bureau's Longitudinal Employer-Household Dynamics dataset. Most new hires aren't unemployed pre-hire, they just switch jobs. Subsidized "job creation" projects may poach workers from unsubsidized employers.

Incentives are costly to taxpayers, but it's hard to say just how costly. The potential cost of all subsidies and tax breaks in Arkansas in the decade 2010-2019, as tracked by advocacy group Good Jobs First, adds up to $1.38 billion, or about $450 per Arkansan. But not all awarded tax breaks get used. While the exact costs are hard to pin down, it's clear what direction policy should go.

The best thing politicians could do for private-sector job creation is to stop all this. Quit meddling and subsidizing. Just give businesses a level playing field.

Nathan Smith is a legislative research associate at the Arkansas Center for Research in Economics at the University of Central Arkansas. He holds a Ph.D. in economics and has worked in state government, most recently as state broadband manager. The views expressed here are his own and are not an official statement of UCA.

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