1. Jacob Bundrick
Policy Analyst
Arkansas Center for Research in Economics
Targeted Economic Development Incentives The views expressed do not necessarily reflect those of the University of Central Arkansas.

2. Question
How much does Arkansas spend on tax incentives annually?

3. Cost of Business Tax Incentives
Total: $2.32B
Source: Arkansas Department of Finance and Administration. Values reflect 2017 dollars.

4. Arkansas Tax Incentives
22 different tax incentive programs cost AR money in Does not include subsidies, loans, etc.

5. Arkansas Tax Incentives
AEDC reports that from 2001 – 2017:
1,569 total incentive agreements signed
82,410 total jobs proposed

6. AEDC Signed Incentive Projects
Faulkner County
0.4 projects per 1,000 42nd most
Source: AEDC Annual Activity Reports (Act 1282 of 2001).
Note: Map excludes 9 projects proposing 401 jobs.

7. Proposed Jobs from Incentive Projects
Faulkner County
33 jobs per 1,000
16th most
Source: AEDC Annual Activity Reports (Act 1282 of 2001).
Note: Map excludes 9 projects proposing 401 jobs.

8. Faulkner County – AEDC Signed Incentive Projects
Total: 40
Source: AEDC Annual Activity Reports (Act 1282 of 2001)

9. Faulkner County – Proposed Jobs
Total: 3,777
Source: AEDC Annual Activity Reports (Act 1282 of 2001)

10. The Argument For Incentives
Broad goal of spurring economic growth
Theory rests on idea of multiplier effects:
Economists put this theory to the test
Direct Effect
- Incented Firm
Indirect Effect
- Related Firms
Induced Effect
- Unrelated Firms

11. What Does the Evidence Say?
Most academic literature = no clear evidence incentives are effective
Recent examples:
Bundrick & Snyder (2018)
AR’s QACF
Byrne (2018)
MO’s TIF
Jensen (2017)
KS’s PEAK
What drives this result?

12. “But For” Problem
Would project have taken place but for the incentives?
Business decisions depend on many factors
Incentives typically not driving force
Ex: Bad Boy Mowers, Peco Foods
When incentives do drive decision
Risk of “flighty firms”

13. Costs of Incentives Have to pay for subsidies/tax breaks Fiscal Costs
Forgo tax collections
Increase taxes
City of Russellville – 1% sales tax
Clark County – 0.5% sales tax
Opportunity Costs
Forgo other productive expenditures
Russellville – 2002, 2007, Set to expire in Not all of 1% goes to econ development
Clark County – 2007, Used solely for economic development. Set to expire in 2021.

14. Crowd-Out Existing Businesses
Attract businesses at the expense of others
Incentives provide artificial cost advantages
Selling price
Wages
Borrowing costs

15. If Not Incentives, What Then?
Focus policy on broader business environment
“Crops won’t grow if the soil isn’t right”
Some of this is out of our hands
But some of it is completely within our control
Government’s role can be thought of two-fold

16. Avoid Being an Impediment to Growth
Tax Environment
Broad base, low rates
Cut income taxes to 5.9%
More room to go
Appropriate tax structure
Extended NOL from 5 years to 10 years
Match federal rule – 20 years
Regulatory environment
Occupational licensing
5.9%
5.9%

17. Help Overcome Market Failures
Attributes of the market sometimes prevent efficient outcomes
Human capital
Education?
Training policies targeted toward local industry needs?
Opportunities to work with anchor institutions?
Infrastructure
Transportation networks?
Specialized infrastructure for local industry needs?

18. Jacob Bundrick Policy Analyst
QUESTIONS?
Jacob Bundrick Policy Analyst