By Caleb Taylor

ACRE Legislative Research Associate Nathan Smith recently testified against legislation expanding tax credits for some businesses in Arkansas.

Smith said the bill would be “basically just a giveaway of millions of dollars a year to shareholders of these companies.”

sponsored by State Sen. David Wallace and State Rep. Joe Jett was considered and passed by the House Revenue and Tax Committee on Thursday, April 15.

According to the :

Senate Bill 543, by Sen. David Wallace, R-Leachville, would allow for recycling tax credits to be calculated at 30% of the expense of the eligible equipment for qualifying projects.  

Wallace said his bill aims to assist Big River Steel in Mississippi County. 

The income tax credit is available under current law to qualified steel specialty products manufacturing facilities that started construction on or after Jan. 1, 2017, with a closing date before July 1, 2018, the finance department said. 

SB543 would extend the credit to such facilities that start construction on or after Jan. 1, 2021, with a closing date before July 1, 2023.”

Jett said to qualify for the tax credits a business would have to have a project of at least a $200 million investment and 150 new jobs with an average salary of $75,000 per job. 

Smith said, based on dividing the size of the tax credit by the number of jobs required, the legislation would lead to the state effectively paying 44 percent of the wages in the target jobs. 

Smith said:

Lots of employers would love to have 44 percent of their wage bill covered by the state but we can’t afford to do that for everybody so in practice it only gets done for a privileged few. That’s not a good way to do business.”

Smith also said the lost revenue from the legislation “could better be used for state infrastructure needs or income tax cuts.”

Smith said:

These types of incentives are usually not pivotal in business decisions. If you give a tax break to a business to do what you’d do anyway, that’s basically just a giveaway of millions of dollars a year to shareholders of these companies. There are better things you can do with this money.”

You can watch his full testimony . Smith’s testimony begins at 5:56:21 p.m.

You can find more of our research on economic development incentives here.

By Caleb Taylor

How effective are Arkansas’s economic development incentives?

Not very, according to ACRE Research Fellow Erica Smith in an op-ed published on May 11 in Arkansas Business entitled “.”

Smith writes about the economic literature on economic development incentive programs such as Arkansas’s Quick Action Closing Fund (QACF) and concludes that the return on investment from such programs don’t match up with the alleged benefits claimed by proponents.

Smith writes:

The QACF disbursed almost $134.8 million between October 2007 and June 2019, state figures show. With such money being spent, we should ask if this program is worth its cost. The governor and the AEDC commonly publicize new grants from this fund, and each press release typically estimates the amount of job creation and future investment expected to result from the allocation of our tax dollars. For example, in 2019 and create 65 jobs with the help of $300,000 from the QACF. Empirical evidence generally does not support the claim that these programs create jobs. Stephen Goetz of Penn State University, Mark Partridge and Shibalee Majumdar, both of Ohio State, and Dan Rickman of Oklahoma State University found that these policies were associated with lower statewide job growth from 2000-07.”

A forthcoming paper entitled “Do Politicians Use Targeted Economic Incentives for Political Gains? Evidence from Arkansas Gubernatorial Elections” co-authored by Smith, ACRE Affiliated Researcher and BT����Lecturer I of Economics Jacob Bundrick, and BT����Assistant Professor of Economics Dr. Weici Yuan examines the question of whether there’s a connection between gubernatorial re-election and which counties get economic development incentives.

Smith is one of the fellows in ACRE’s inaugural summer fellowship program. She and other fellows will continue to work on research with a mentor, participate in an online reading group, and professional development training. She will also continue to be a tutor for econometrics.

Smith was also recently named economics student of the year by the .

For more of ACRE researchers’ work on targeted economic development incentives, go here.

By Caleb Taylor

Is there a connection between getting re-elected and which counties get economic development incentives? 

A new working paper entitled “Do Politicians Use Targeted Economic Incentives for Political Gains? Evidence from Arkansas Gubernatorial Elections” co-authored by ACRE Undergraduate Research Fellow Erica Smith, ACRE Affiliated Researcher and BT����Lecturer I of Economics Jacob Bundrick, and BT����Assistant Professor of Economics Dr. Weici Yuan examines this question.

According to the abstract of the paper:

State and local governments spend billions of dollars a year on economic development incentive (EDI) programs in an attempt to attract and retain businesses within their localities.  Among these programs, targeted economic incentives allow governments to award discretionary cash grants to select individual companies. However, such policies are generally found to contribute very little to economic performance such as growth, employment, and poverty. This paper investigates political gains from targeted incentives. Using Arkansas’ gubernatorial elections data between 2006 and 2018, we find the evidence suggests that Arkansas’ targeted incentives such as Quick Action Closing Funds and Create Rebate do increase the likelihood that the incumbent party wins the election in the recipient counties. However, there is no evidence that the government strategically direct business subsidies to counties with close votes in the previous elections.”

Smith is a part of ACRE’s Research Fellowship Program. In this program, students work with a professor to write a publishable research paper. 

Smith is from Vilonia, Arkansas. She is a senior majoring in Economics and is considering a career in the global supply chain after graduation.

Bundrick and Yuan also published a paper recently on a similar topic titled “,” published in Economic Development Quarterly on September 20, 2019. 

Bundrick and Yuan used evidence from Arkansas’s Quick Action Closing Fund (QACF) to analyze how effective deal-closing funds are at increasing incomes and decreasing poverty at the county level. Their results indicate that the funds are ineffective at achieving these goals. 

For more of ACRE researchers’ work on targeted economic development incentives, go here.

Bundrick’s latest publication, “” is a policy review highlighting five ways Arkansas officials could improve the Quick Action Closing Fund.

For a summary of the costs of Arkansas’s Quick Action Closing Fund, go here.

Policy makers trying to create a better environment for businesses have many different options – but some are better than others. ACRE Policy Analyst Jacob Bundrick recently discussed some of these options with John Evans and Rachel Sapin of IntraFish.com. In an article published on March 12th, “” Bundrick explains how targeted economic development incentives aren’t necessarily the key to booming business.

Bundrick states:

“Businesses make decisions for a variety of different reasons. They are looking for a workforce that fits their needs, proximity to customers and suppliers, certain natural resources that are only available in certain places,. . . A lot of times the evidence shows it’s not for these incentives.”

Bundrick has done extensive research on targeted economic development incentives. His most recent ACRE publication is “Government Accountability: 5 Fixes for Arkansas’s Quick Action Closing Fund.” For a quick, one-page summary go here.

Evans and Sapin are writing about land-based salmon farms in the United States and how this industry is taking off, in part due to incentives. There are, however, land-based salmon farm company executives and owners that flatly explain that incentives play no role in their site selection process, such as CEO Johan Andreassen of Atlantic Sapphire in Florida. Evans and Sapin write that while these companies may gain some benefits from these deals, Bundrick’s research is evidence that these can be a bad deal for taxpayers.

They state:

“Analysts at the Arkansas Center for Research in Economics (ACRE), for example, found the vast majority of empirical analysis fails to show clear benefits between offering targeted incentives and economic growth.

In that study, analysts could identify no relationship between the value of subsidies and private employment, and furthermore found businesses would have located or expanded in certain area regardless of the financial layout.”

For more on targeted economic development incentives, go here.

You can also find more of Bundrick’s work on his author page here.

What are the trade-offs states make when offering economic development incentives to private businesses?

Prof. Nathan Jensen discussed this and more on Tuesday, November 13th in the BT����College of Business auditorium to a crowd of over 70 attendees.

Jensen is a Professor in the Department of Government at the University of Texas-Austin. He teaches courses and conducts research on government economic development strategies and business-government relations, among other things. He is a coauthor of the book with Edmund J. Malesky of Duke University. The book focuses on political incentives for economic subsidies.

Jensen explained that voters tend to give politicians credit for luring businesses through these incentive programs although they can be “expensive, distorting and ineffective.”

However, voter approval for these programs declines once they’re shown some of the tradeoffs.

For example, support for using property tax exemptions decreases when people are also asked to consider that this would lower tax revenues that support schools.  

Jensen said:

Voters love the use of incentives to bring jobs until you show them the costs. I don’t mean the dollar costs. I mean…what are the tradeoffs?”

Speaking of tradeoffs, here’s some of the alternative programs Arkansas could fund with the money it’s appropriated to Arkansas’s “Quick Action Closing” economic development incentive fund since 2007:

Jensen concluded his remarks with noting that such incentives rarely change firms’ behavior even though all states engage in such policy.

Jensen said:

Just because another state does something that’s stupid, it doesn’t mean you should too. There are unique things about Arkansas and there’s reasons why firms want to be here. There are reasons why firms want to be elsewhere. You just have to know that very rarely these incentives change firms’ investments.”

You can watch a video presentation summarizing Jensen’s research . A video recording of Jensen’s talk will be uploaded to the soon.

New Policy Review

Jensen’s visit wasn’t the only big news related to incentives on Tuesday. The Arkansas Center for Research in Economics released a new policy review entitled Government Accountability: 5 Fixes for Arkansas’s Quick Action Closing Fund by ACRE Policy Analyst Jacob Bundrick last week.

The review outlines five ways Arkansans can improve the transparency and accountability of the program.

The five reforms include:

• Improving reporting standards of the state’s use of the QACF
• Making clawback agreement formulas public and void of renegotiation
• Limiting the value of subsidies awarded on a per-job basis
• Paying subsidies awarded as project targets are achieved
• Capping the number of QACF projects allowed in any given year

For a one-page summary of Bundrick’s research on the QACF, go here. The full text of the policy review can be found here.

For more of ACRE’s research on targeted incentives, go here.

Since its creation in 2007, state officials have allocated more than $185.7 million to the Quick Action Closing Fund (QACF). The program, which allows the state to provide discretionary cash grants to select companies, is intended to attract and retain businesses in Arkansas. But have these millions actually increased economic activity?

Research says “no.” In a 2018 study published in The Review of Regional Studies titled “,” BT����Associate Professor of Economics and ACRE Scholar Thomas Snyder and I found no evidence to suggest that QACF subsidies lead to increased employment or business establishments in Arkansas’s counties.

Our results suggest that providing targeted subsidies through the QACF is not an effective use of Arkansas’s tax dollars.

What else could Arkansas officials have done with $185.7 million?

1. Provide every taxpayer a one-time income tax refund of $124.[i]
2. Construct 55 miles of new 2 lane arterial road.[ii]
3. Establish a $185.7 million rainy day fund.
4. Provide a one-time bonus of $5,562 to every certified K-12 teacher.[iii]
5. Hire and employ 100 parole/probation officers for 46 years.[iv]
6. Hire and employ 100 public defenders for nearly 30 years.[v]

This list is by no means exhaustive. There are probably other equally worthy policies that Arkansas officials could prioritize.

The bottom line is that spending Arkansas’s limited tax revenue in unproductive ways is costly to the state and its residents. The evidence is clear: there are better uses of public money than providing subsidies to firms through the QACF.

[i] One-time income tax refund per taxpayer is calculated using the total number of Arkansas taxpayers based on calendar year 2016 income tax returns. Taxpayer data was collected from the Arkansas Department of Finance and Administration’s April 26, 2018 presentation to the Arkansas Tax Reform and Relief Legislative Task Force titled “.”

[ii] Miles of new 2 lane arterial road is calculated using the estimated cost per mile for a new 2 lane arterial road in an urban area.

[iii] One-time bonus for teachers is calculated using the number of certified teachers in Arkansas school districts during the 2018-2019 school year. Teacher data was collected from the .

[iv] The employment period of 100 parole/probation officers is calculated using the 2017-2018 GS07 minimum pay rate. Salary grade information for parole/probation officers was collected from . GS07 pay rate data was collected from the .

[v] The employment period of 100 public defenders is calculated using the 2017-2018 GS11 minimum pay rate. Salary grade information for public defender I’s was collected from . GS11 pay rate data was collected from the .