Arkansas’ Ineffective Incentives (Erica Smith Commentary)

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The Economic Development Incentive Quick Action Closing Fund was created by the Arkansas Legislature to help the state attract business, but the evidence suggests it is ineffective. The governor has discretionary authority over the disbursement of funds, though these decisions must still be reviewed by the Arkansas Legislative Council.

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.

This is an Opinion

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 the Arkansas Times detailed Radius Aerospace’s plan to expand a factory 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.

Todd Gabe of the University of Maine and David Kraybill of Ohio State studied the effect of Ohio’s economic development incentives on business expansions between 1993 and 1995 and found a negative relationship between government incentive programs and actual job creation, but a positive relationship between these incentive programs and the publicized number of jobs that were expected to be created. Several other studies have found the benefits of these types of incentives are lower than their costs.

But the research is not unanimous. Charles De Bartolome of the University of Colorado and Mark Spiegel of the Federal Reserve Bank of San Francisco did find a positive relationship between incentives and job creation in manufacturing.

At the University of Central Arkansas and its Arkansas Center for Research in Economics, Jacob Bundrick, Weici Yuan and Thomas Snyder have studied the economic effects of Arkansas’ Quick Action Closing Fund. They found no link between the incentives and a cumulative increase in employment in Arkansas counties that received QACF subsidies. They concluded that, on a county level, the QACF fails to increase income or reduce poverty rates in the long term.

Given that QACF money is allocated at the discretion of an elected official, there is a potential for incumbents to direct funds to aid their re-election chances. Looming votes prompt governors to create tax breaks and other incentives to increase blue-collar employment, chiefly in the manufacturing sector, according to Robert Turner of Skidmore College. Turner found that governors seem to strategically locate incentives in counties that they lost in the last election — no doubt hoping to win these counties over.

Nathan Jensen of the University of Texas, Edmund Malesky of Duke University and Matthew Walsh of the National Geospatial-Intelligence Agency studied municipalities and found that incentives from elected officials were bigger and had less oversight than those from unelected city managers.

UCA Associate Professor of Economics and ACRE Scholar David Mitchell, Daniel Sutter of Troy University and Scott Eastman of the Tax Foundation explain in their research that targeted policies usually help small, well-organized interest groups. The grants, rebates and tax breaks prove to be a large enough incentive to encourage lobbying by these small groups. In contrast, the cost of these programs is spread so thinly over so many people that the taxpayers do not find it worthwhile to resist these policies.

To better stimulate economic growth, the QACF should be replaced with general tax reform. A broad-based reduction in taxes will reduce the amount of politics involved in government development policy. Because most states have their own QACF policies, ineffective as they are, being the only state without one may be politically costly to incumbents. To overcome the state-level political hurdle, Melvin Burstein and Arthur Rolnick of the Federal Reserve Bank of Minnesota propose that Congress should prohibit states from enacting targeted development policies as means of removing this type of interstate competition and enabling all states to quit wasting their money.

Erica Smith is an ACRE Undergraduate Research Fellow at the University of Central Arkansas. Her views do not represent those of UCA.