Subsidy snags

Job creators? Maybe not so much

Can Arkansas’ government create jobs by providing cash subsidies to select businesses? Arkansas officials often aim to do just that with an economic development incentive program known as the Quick Action Closing Fund.

Created in 2007, the Quick Action Closing Fund allows Arkansas officials to provide cash grants to select companies to attract and retain businesses within Arkansas. The fund’s grants are largely awarded at the governor’s discretion. Arkansas Code Annotated § 19-5-1231 states that Quick Action Closing Fund grants must only be approved by the governor and subsequently reviewed by the Legislative Council.

Since the fund’s inception, at least 77 job creation or retention projects have been funded in part by its grants. These include grants of $10 million to Hewlett-Packard in Conway, nearly $7 million to LM Wind Power in Little Rock, and almost $4 million to Nordex in Jonesboro.

Are more Arkansans employed because of these subsidy projects?

My colleague Dr. Thomas Snyder, an associate professor of economics at the University of Central Arkansas, and I investigate this question in a working paper recently released by the Mercatus Center. We empirically examine the relationship between Quick Action Closing Fund subsidies and employment in Arkansas’ county-level economies. Our research has been peer-reviewed and accepted for publication in The Review of Regional Studies.

In theory, Quick Action Closing Fund grants can increase or decrease county-level employment. The grants may increase jobs if they are used to successfully attract new businesses that otherwise would not have located in Arkansas. The grants may also encourage existing businesses to expand. Not only would this increase employment directly, but it may also have a “multiplier” effect. That is, subsidizing certain projects may attract additional suppliers or related businesses, increase demand for local suppliers, and increase consumer spending as a result of increased wages. All of these activities may lead to additional employment.

Alternatively, Quick Action Closing Fund subsidies could negatively impact job creation. The cost of funding the subsidies may lead to higher taxes or decreases in other more productive public expenditures. Business leaders may also spend time and resources on lobbying to secure the grants rather than on creating goods and services. Moreover, the artificial cost advantage the state provides favored firms may decrease business activity for existing companies. Arkansas’ unsubsidized firms are forced to compete on a tilted field with the firms that state officials choose to subsidize.

It is also possible that Quick Action Closing Fund subsidies have zero measurable effects on job creation. The jobs created by subsidies may be offset by the jobs destroyed by subsidies. Moreover, businesses receiving subsidies may have chosen to locate or expand in Arkansas regardless of whether they received a grant from the fund. For instance, the Arkansas Democrat-Gazette reported in January 2016 that both Bad Boy Mowers and Peco Foods would have expanded in Independence County without receiving incentives from the state.

Our empirical investigation finds that after controlling for other factors that influence economic activity, Quick Action Closing Fund subsidies have no meaningful relationship with county-level employment. In the four-year period following the disbursement of those grants, there is no statistically significant increase or decrease in employment per 1,000 population in the county in which the subsidized project located. Moreover, our results suggest that a county does not receive any positive or negative employment effects from projects locating in the county’s bordering counties.

Overall, we conclude that there is reason to be skeptical of the Quick Action Closing Fund as a job creator at the county level.

Great fanfare surrounds the job announcements tied to these subsidized projects. However, focusing our attention solely on the benefits to the subsidized company ignores the costs to the local economy.

Quick Action Closing Fund subsidies are not free money. Tax dollars spent on subsidies could have been spent by taxpayers elsewhere and still have increased economic activity. Similarly, public officials could have used these tax dollars for other potentially more productive public expenditures such as highway funding.

If state officials are aiming to increase employment in Arkansas, broad fundamental reforms are likely to be more effective than issuing subsidies to select companies. Simplifying the tax system while broadening the base and reducing rates, eliminating barriers to employment such as occupational licenses, and continuing the governor’s efforts to “implement strategic regulatory reforms” are great places to start.