You probably know that Arkansas gives tax incentives to businesses for creating jobs. But can a company get those same incentives even if no new jobs are created? That may sound silly, but an incentive package offered to a Canadian custom metal parts manufacturer by the Arkansas Economic Development Commission (AEDC) does just that.
On Aug. 2, Canadian manufacturer DBG announced that it was buying IC Corp.'s Conway plant to establish its U.S. headquarters. In return for buying IC Corp.'s plant, the state of Arkansas agreed to provide DBG with a $650,000 cash grant from the Governor's Quick Action Closing Fund and cash rebates worth 3.9 percent of the annual payroll of new full-time employees under the state's Create Rebate incentive.
There is something very interesting about DBG's incentive package, though. DBG is not promising to create any new jobs, but only to retain the 200 existing employees currently working at IC Corp.'s facility. Yet, the AEDC rulebook states that "the Create Rebate Program requires businesses to create a minimum payroll, comprised of new full-time employees, of $2 million" within two years of signing the agreement.
You might think this would disqualify DBG from receiving the Create Rebate incentive. However, because DBG and IC Corp. are unrelated entities with no common ownership between them, the 200 IC Corp. employees that will be retained are considered to be new employees of DBG. Put more simply, the state considers the 200 retained employees to be personnel that used to work for a different company but now work for DBG, making them new employees that are eligible to count towards the necessary $2 million in new payroll for Create Rebate.
The state may consider the 200 employees to be new, but simply reclassifying existing employees as new employees does not add jobs to Conway's economy.
The problem is not a one-time questionable deal, though. Rather, this deal highlights a much larger problem with targeted economic development incentives--political favoritism. Rather than creating an even playing field for all firms to compete on quality and price, public officials use these incentives to provide special privileges to individual firms.
In a market economy, the government plays two important roles: rulemaker and referee. As a rulemaker, government officials are responsible for making the regulations under which market participants operate. As a referee, government officials are responsible for enforcing and interpreting the regulations when there is conflict. However, when politicians create special tax breaks and subsidies and provide them to select firms, they are making and enforcing rules that favor a few privileged firms over the others.
To better illustrate this, let's use Arkansas high school football as an example. The Arkansas Activities Association (AAA) designates the rules and referees enforce them. Just as governments establish and enforce rules in a market, the AAA establishes the rules under which football games will be played while the crew of officials enforces those rules.
Now, imagine that for a season the AAA instructs referees to allow all Springdale, Jonesboro, Little Rock, and Fort Smith high school teams to play with 12 players, while all other teams are only allowed to play with the customary 11. It would give the high school teams in Springdale, Jonesboro, Little Rock, and Fort Smith a tremendous advantage to beat the high school teams in the rest of Arkansas' communities. Presumably, the favoritism would cause players, coaches, and fans across the state to call for a leveling of the playing field.
The favoritism displayed in our football analogy, though, is the same favoritism Arkansas' public officials display when they provide a select few firms special tax breaks and subsidies.
When Arkansas officials provide a cash subsidy to a privileged company, they are literally forcing existing firms to pay taxes to provide an advantage to their competitor. Similarly, providing a tax break to a specific firm while imposing the state's broad tax policy on all other firms tilts the playing field in favor of the politically favored firm.
Arkansas' public officials would do better by establishing and enforcing an even playing field for all firms to compete. Reforming Arkansas' tax system to be simple, fair, and transparent with a broad base, low rates, and no special favors would be a great opening play.
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Jacob Bundrick is a policy analyst with the Arkansas Center for Research in Economics (ACRE) at the University of Central Arkansas. The views expressed in this column are those of the author and not the University of Central Arkansas.
Editorial on 08/26/2017