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Are Targeted Business Subsidies Good For Economic Growth?

Can Arkansas’s public officials stimulate the economy with targeted business subsidies? ACRE policy analyst Jacob Bundrick and scholar Dr. Thomas Snyder investigate this question in a working paper titled “Do Business Subsidies Lead to Increased Economic Activity? Evidence from Arkansas’s Quick Action Closing Fund.” The study, released by the Mercatus Center at George Mason University and accepted for publication in The Review of Regional Studies, takes an empirical dive into the relationship between Quick Action Closing Fund (QACF) subsidies and private employment and private establishments in Arkansas’s counties.

Created in 2007, the QACF allows the state to provide cash grants to select entities in the hopes of attracting and retaining businesses within Arkansas. These subsidies are awarded to businesses primarily at the discretion of the governor. The $176 million QACF has been used to subsidize more than 75 projects, including $10 million to Hewlett-Packard in Conway, nearly $7 million to LM Wind Power in Little Rock, almost $3 million to Caterpillar in North Little Rock, and more than $2 million to Neckbone Productions for the filming of the movie “Mud”.

In June of this year, the AEDC reported that the QACF is directly responsible for creating or retaining nearly 20,000 jobs in Arkansas. Proponents of the QACF argue that there is even more job creation than that as a result of the multiplier effects the subsidized businesses and their employees send through the local economy. But does the empirical evidence agree with this take?

The short answer is “no”. Bundrick and Snyder find that QACF subsidies provided to businesses within a given county have no statistically meaningful relationship with private employment per 1,000 population and private establishments per 1,000 population over a four-year period after the subsidies are disbursed. The researchers also find no evidence to suggest that a given county experiences any meaningful employment or establishment spillover effects related to QACF subsidies awarded to businesses in neighboring counties. Bundrick and Snyder conclude that the evidence provides reason to be skeptical of the QACF as a job creator.

This work carries significant policy implications. If Arkansas’s politicians are aiming to develop policy that will positively affect job creation in Arkansas, they should look to more proven policy reforms. For instance, simplifying Arkansas’s tax code while broadening the base and lowering marginal rates is a more effective strategy than trying to pick winners and losers with targeted subsidies. Moreover, the state could make significant headway by reducing the barriers to employment imposed by Arkansas’s onerous occupational licensing laws. These broad-based, comprehensive reforms are likely to lead to better economic outcomes for the state than continuing to provide select businesses with subsidies from the Quick Action Closing Fund.

For more on the pros and cons of targeted economic development incentives, be sure to check out ACRE’s Tax Breaks & Subsidies: Challenging the Arkansas Status Quo.