By Caleb Taylor
ACRE Policy Analyst Jacob Bundrick and ACRE Scholar Dr. Tom Snyder discussed the unintended consequences and opportunity costs of Quick Action Closing Fund (QACF) spending at the State Agencies & Governmental Affairs – Senate Constitutional Issues Subcommittee on February 5th.
Bundrick and Snyder explained the conclusions of their working paper titled “Do Business Subsidies Lead to Increased Economic Activity? Evidence from Arkansas’s Quick Action Closing Fund” which takes an empirical dive into the relationship between QACF subsidies and private employment and private establishments in Arkansas’s counties.
The study was released by the Mercatus Center at George Mason University and accepted for publication in the academic journal The Review of Regional Studies.
The Quick Action Closing Fund
The Quick Action Closing Fund (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.
Bundrick and Snyder in their research 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. They 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.
Unintended Consequences — Including Fiscal Cost
At the meeting, Bundrick said regarding the possible unintended consequences of QACF subsidies:
“There are lots of different things that you might not intend to happen with these subsidies that do happen that have these negative effects. The first one we’ll call crowding out. Basically what that means is we’re giving an artificial cost advantage to select companies through this subsidy. With that artificial cost advantage, they have the ability to perhaps pay higher wages to their employees than existing firms. Naturally, employees would like to make more so they shift from one employer to another. It could be that they use that artificial cost advantage to offer their products and services at a lower cost so they can sell their goods at something lower than what their competitors can. In some markets where it is relatively saturated you actually get an effect where you create jobs at the subsidized firm and the existing business has to close down. We don’t really see that effect reported that often in things like [AEDC’s] annual report for the Quick Action Closing Fund but there’s lots of academic research that shows that happening. A second unintended consequence there is fiscal cost. This program isn’t free. It costs money and revenue to use it. One way you can raise that revenue is by increasing taxes. We haven’t seen that a whole lot at the state level. Where you can see that pretty clearly is at the county level. Some of these counties will raise sales taxes to fund these types of programs. Just a couple of examples there, Jefferson County and Clark County, have increased their sales taxes to fund these types of program.”
Bundrick also mentioned the possible opportunity costs of the program:
“The other side of that coin is that you could shift public resources from other types of expenditures into the Quick Action Closing Fund. Instead of spending money on highways or paying for comprehensive tax reform or education or something along those lines, you use that money for the Quick Action Closing Fund. Maybe those other expenditures are the ways you could’ve used this money in a way that would’ve been more productive for the broader economy.”
“These Funds Aren’t Actually Effective”
Snyder said he found there to be “no overall effect on employment or business establishments” from the QACF.
Snyder said:
“What we see is that most of the literature says the same thing that these funds aren’t actually effective. This money could’ve been spent elsewhere. What we’re doing is taking taxpayer money and then directing [it] to some businesses. What would happen if we didn’t take that money and spent it in other ways such as infrastructure? Some studies have actually shown that with infrastructure spending there is a good return on that.”
A summary infographic of Bundrick and Snyder’s work can be found here. For more on the pros and cons of targeted economic development incentives, be sure to check out Bundrick’s Policy Review Tax Breaks & Subsidies: Challenging the Arkansas Status Quo.