Issue 3 and Local Economic Development

By Mr. Jacob Bundrick

Will Issue 3 bring jobs or bankruptcy taxes? Issue 3 proposes to allow local governments to appropriate tax dollars directly to private companies for economic development projects and to pay private organizations for economic development consulting work. Issue 3 would also expand the type of projects for which local debt can be issued as well as increase the number of taxes that can be authorized to retire economic development bonds.

The proposal to loosen the restraints on municipalities stems from a 2015 Pulaski County Circuit Court ruling that payments made by the cities of Little Rock and North Little Rock to local chambers of commerce were unconstitutional. Proponents argue that passing Issue 3 will resolve the legal question and enable local governments to offer enough incentives to attract businesses.

Mike Preston, executive director of the Arkansas Economic Development Commission, claims that “when a local community has no defined ability to spend funds for economic development purposes, it is at an immediate disadvantage versus communities that have this ability.” Issue 3 would allow all communities to develop defined spending plans that might help cities and counties develop both direct and indirect employment.

Randy Zook, president and CEO of the Arkansas State Chamber of Commerce/Associated Industries of Arkansas, argues that “ambiguities in our state Constitution have left our communities with their hands tied when it comes to using local resources to recruit employers.” However, voters should remember that constitutions are put in place to limit government power. Expanding government officials’ ability to use local tax dollars and public debt to finance private economic development projects comes with costs.

For example, Fayetteville city attorney Kit Williams warns that allowing cities and counties to finance private economic development projects means that “Arkansas cities will likely be invited into bidding wars with each other for new ‘economic development’.” Businesses could threaten to leave for the neighboring town if their current host city did not provide more incentives. This would put Arkansas cities into contests with each other to see who can write the biggest check, which ultimately drives up local tax burdens. Little Rock would compete not just with Oklahoma City and Nashville, but also with Conway and Rogers. Rather than spurring job creation, existing jobs would simply be moved from one Arkansas city to the next.

Furthermore, local governments take on significant financial risk when tax dollars and local debt are used to finance private businesses. Port St. Lucie, Florida, provides a cautionary tale. In March 2015, more than one-third of Port St. Lucie’s debt ($335.5 million) was from “failed or faltering economic-development deals for which the city fronted money with a promise of repayment.” This means that taxpayers in Port St. Lucie are being forced to pay $335.5 million (plus interest) for projects they will see little to no economic benefit from. The city’s struggle with economic development debt led to a credit rating downgrade from Moody’s. If Issue 3 passes, how many Arkansas cities would follow the path of Port St. Lucie?

While many government officials are cautious about such projects, others might not be as diligent – or they might be mistaken. There is always the chance that city and county officials would take risks hoping that they will pay off and, perhaps, also gambling that if their bet fails, the state might step in and pick up the bill. After all, Arkansas taxpayers have seen this before.

In the 1920s, Arkansas’s municipalities ran up incredible amounts of debt to finance road construction projects. Yet, the debt burden quickly became insurmountable for municipalities. In an effort to rescue the failing road districts, the State of Arkansas assumed local road debts. However, Arkansas was hit hard by the 1927 flooding of the Mississippi River system and the Great Depression that followed a few years later. By 1933, Arkansas was drowning in its debts and became the first and only state to declare bankruptcy during the Depression.

Using local tax dollars and public debt to finance economic development projects brings both risks and rewards. Relaxing the constitutional restraints on local governments may enable Arkansas’s communities to attract new economic development, but at what expense? Arkansas voters must ultimately weigh the cost of higher tax burdens and the risk of bankruptcy against the possibility of new employers.