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The Hidden Costs of Arkansas’s Economic Development Incentives

By Caleb Taylor

What are the costs of Arkansas’s economic development incentives?

ACRE Policy Analyst Jacob Bundrick discussed this and more with the Faulkner County Tea Party on Thursday, May 9th at Larry’s Pizza in Conway.

During his presentation, Bundrick discussed the fiscal costs, opportunity costs and the “crowding out” of existing businesses that arise from Arkansas’s economic development incentive policies.

Fiscal Costs

According to the Arkansas Department of Finance and Administration, Arkansas has spent approximately $2.32 billion (inflation adjusted) on tax incentive programs from 1984 to 2017. From 2001 to 2017, the Arkansas Economic Development Commission (AEDC) signed 1,569 total incentive agreements with 82,410 jobs being proposed.

Opportunity Costs

While attracting jobs and investment to the Natural State is a laudable goal, Bundrick says these policies have opportunity costs.

Bundrick said:

 

Opportunity costs are what you give up to get something. If we’re using tax dollars to finance these incentive agreements, that means we don’t have those tax dollars to finance education, road projects or broad tax cuts…police or fire protection. We’re foregoing these other uses of public money. The question we have to answer if we want to be responsible with public money is: Which of these uses has the biggest return?”

 

Bundrick said the “bar isn’t very high”  to find other worthwhile uses of taxpayer dollars since most of the academic literature finds that incentives are ineffective. Policies that focus on the “broader business environment” like tax reform, occupational licensing reform and investments in education and infrastructure are better alternatives.

Crowding Out

Bundrick also states that “crowding out” existing businesses is another potential harm done by economic development incentive agreements.

Bundrick said:

We’re trying to attract new businesses and help certain businesses expand at the expense of other businesses. This happens because we’re providing an artificial cost advantage to the incentivized company. We give an incentive or tax break to a certain company, we’re helping them perhaps be able to sell their services or product at a lower cost than existing businesses. They’re able to perhaps take market share that might cause existing businesses some troubles. It might be that because of the artificial cost advantage they’re able to pay higher wages…they shift employees from existing businesses to incented companies. The real problem there is in places where there are workforce quality issues…the skilled employees end up at the incented companies and existing businesses can’t find people to do the work they need to do. That doesn’t leave them much choice…sometimes the existing businesses have to close down.”

To download a copy of Bundrick’s  presentation slides, go here.

For more of ACRE researchers’ work on targeted economic development incentives, go here.

Bundrick’s latest publication, “Government Accountability – 5 Fixes for Arkansas’s Quick Action Closing Fund” is a policy review highlighting five ways Arkansas officials could improve the Quick Action Closing Fund.

For a summary of the costs of Arkansas’s Quick Action Closing Fund, go here.