Spring 2016

“Comprehensive tax reform would attract more business, make existing businesses perform better, and make the entire tax system fairer and more transparent. Focusing on tax reform rather than tax handouts also signals to all businesses and citizens that Arkansas has a tax system that does not privilege particular firms or industries.”

Dr. Jeremy Horpedahl discusses ways to make Arkansas more business friendly through means other than corporate handouts. Tax code should be reformed to be more comprehensive, promoting fairness and transparency. Doing so will signal to businesses that Arkansas favors all commerce, not just companies selected for corporate welfare.

The Tax Foundation currently ranks Arkansas as being tied for having the worst business climate in the South and as having the second highest average sales tax rates in the nation. This ranking makes sense when considering the complexity of our code; for corporations, there lies a six bracket tax code that makes business planning confusing and punishes companies for being successful. Simplifying the code would be easy – reduce brackets. We could also remove tax incentives for the politically privileged and reduce the tax burden overall.

Horpedahl says there are other policy reforms that could make the state more business competitive. Generally, we should have reform that simplifies and lowers taxes for everyone, not just for those who are politically connected.

“Arkansas may indeed be the best place for FMH Conveyors and Bekaert Corp. Then again, Arkansas might not be. But by distorting the economy with corporate welfare, the only thing we know for sure is that we are making Arkansas taxpayers worse off.”

Policy Analyst Jacob Bundrick makes the case that Arkansas’s use of financial incentives is pushing the economy to invest in industries that might not have a comparative advantage in the state. Comparative advantage is the notion that locations have industries in which they are able to produce most efficiently compared to other products and other regions.
Recently, government officials gave FMH Conveyors and Bekaert Corp. cash rebates, sales-tax breaks, and an additional $1 million subsidy for FMH Conveyers to invest in the state. If we had a comparative advantage in conveyer and steel cord manufacturing, then these companies would invest without having to receive incentives; the location alone would be enough to be attractive.

Bundrick says that using incentives interferes with market price and profit signals, leading Arkansas to accumulate and use resources in areas and activities in which they are not best used. Therefore, the state is discouraging productivity and making tax payers worse off. We should let FMH and Bekaert locate where it is most cost effective, and allow resources to delegate themselves to uses that are most productive for Arkansas.

“Rather than taxing Arkansans to gamble with public money, the state should let the market decide which economic development projects are viable. If private investment is willing to finance an economic-development project, the state should let the market run its course. There is no need to spend tax dollars on corporate welfare when private money is willing to fund a business.”

ACRE Policy Analyst Jacob Bundrick explains that using tax payer money to fund economic development projects is a risky bet. To illustrate why that is, Jefferson County recently committed $3.9 million to Energy Security Partners to build an industrial gas to liquids processing plant, a project to bring 225 jobs that pay up to $40 a hour. Despite how good it sounds, Energy experts say that such a plant is one that is hard to fund because of large capital costs and a profit that depends upon natural gas remaining cheap and for oil prices to rise. In other words, there is a decent chance the plant will fail. This is why Energy Security Partners came to the government for assistance; they likely had trouble finding funding from the private sector.

Bundrick says Jefferson County’s tax commitment is evidence of the moral hazard of handing out incentives: officials are likely to use tax payer money irresponsibly as they face little costs if the project fails. Instead, the burden is pushed on collectively to tax payers. This is bad public policy. If the private sector won’t fund a risky project, neither should the government. Officials should try their best to avoid these projects and not gamble with tax payer money.

  • Celebrate School Choice op-ed published February 13, 2016 by Policy Analyst Dr. Mavuto Kalulu in the The Jonesboro Sun.

“The beauty of school choice is that students are not restricted to schools that are not performing well. Students from schools that are performing poorly have the opportunity to transfer to schools that are performing better. The fear of losing students should be an incentive for all schools to provide a better education in order to retain their students or, better yet, attract more students.”

ACRE Policy Analyst Dr. Mavuto Kalulu tells readers to recognize the progress Arkansas made with Public School Choice ACT of 2013. The act allows students to attend schools that most fit their individual needs through out of district transfers, though a cap remains. School choice is important because it promotes competition, incentivizing schools to be effective in order to retain enrollment, improving overall quality. Not only that, if parents are able to choose where their children attend, they are more likely to be involved with their kid’s education – an important factor in a student’s education outcome.

Jonesboro, for example, demonstrates the beauty of school choice. The town currently has five high schools; four are public, one is a charter. Jonesboro students can also attend a Christian private school and a statewide online charter school. According to the Arkansas Department of Education, four percent of Jonesboro students are attending schools outside of their residential area.

We should continue embracing school choice. Doing so will create better outcomes for students in Arkansas.

  • It’s broken? Fix it. op-ed published February 6, 2016 by ACRE Policy Analyst Jacob Bundrick in the Arkansas Democrat-Gazette.

“Corporate welfare is nothing more than smoke and mirrors. Issuing subsidies and tax breaks will not fix Arkansas’ policy-driven competitive disadvantages. Rather than trying to use financial Band-Aids, Arkansas should focus on creating a more competitive business environment through lower taxes, higher economic freedom, and better education”

Policy Analyst Jacob Bundrick addresses Executive Director of the Arkansas Developmentlaim that using tax breaks and subsidies are needed to “stay competitive where we might have disadvantages–wherever that might be in our current tax structure, corporate income tax rate, things like that–these incentives really help us overcome those deficiencies.”

Bundrick responds by questioning why, if our state understands our tax code deficiencies, we continue to implement ineffective corporate welfare rather than fixing the problem at its core? Recently, the Tax Foundation found that Arkansas had the highest overall state/local tax burden and the third highest corporate income tax among nine regional states. Evidence shows that states with higher tax burdens see slower and less growth than otherwise. Arkansas also has a poor economic freedom ranking from the Fraser Institute, a circumstance that results in unfavorable labor market outcomes. Finally, education is lacking in Arkansas and firms are not attracted to regions where they will be unable to hire skilled employees.

If Arkansas focused on these issues instead of corporate welfare, the state might see larger economic growth and opportunity.

  • ACRE Director Dr. David Mitchell and Policy Analyst Jacob Bundrick joined The Paul Harrell Program to talk about the Governor’s Quick Action Closing Fund, Opportunity Costs, and the Arkansas Workforce. Listen here.