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 BTĚěĚĂCollege 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.

What is the Quick Action Closing Fund (QACF) and what reforms should be considered to protect taxpayers?

Jacob Bundrick, a policy analyst at the Arkansas Center for Research in Economics, was on the Conduit News radio program Wednesday morning to answer these questions and more.

The QACF allows the state to provide cash grants to select entities in the hopes of attracting and retaining businesses within Arkansas. The state legislature has appropriated approximately $176 million to the QACF since it was created in 2007. The Arkansas Economic Development Commission has said the program is responsible for creating or retaining nearly 20,000 jobs in Arkansas.

In the interview, Bundrick discussed the findings of, “an academic journal article he co-authored with BTĚěĚĂAssociate Professor of Economics and ACRE Scholar Thomas Snyder that was published in The Review of Regional Studies on March 6, 2018.

Bundrick said:

What we found was that these subsidies don’t actually stimulate increased economic activity here in Arkansas. There’s no increases in employment or establishments in Arkansas counties.

Bundrick also said the best policy would be to end the program and use the savings for tax relief or other governmental needs. However, there are incremental reforms to the program that can better protect taxpayers such as increasing transparency requirements and introducing subsidy limits on a per-job basis.

Bundrick said:

The lower the cap, the less risk there is that you overpay and end up losing money for taxpayers.

You can listen to the full interview here:

Bundrick is also the author of the ACRE policy review, “Tax Breaks and Subsidies: Challenging the Arkansas Status Quo”.