Resist the urge

Tax incentives not best option

Kimberly-Clark Corp. is considering closing its Conway location after nearly 50 years of operation. Not only would the company’s closure hurt the local economy, it would significantly affect the lives, families, and communities of the roughly 350 Arkansans Kimberly-Clark employs.

As one might expect, state and local officials are considering an incentive package to entice the company to keep the plant open. While emotions will run high on this issue, politicians must ask a hard and unpopular question: Are special tax breaks and subsidies for select businesses good public policy?

Information about a company’s location decision is uneven. Company leaders are in the best position to know which locations are best for them. They have the greatest information about their company and the greatest incentive to make a good choice. Public officials are necessarily more ignorant of the companies’ specifics and have very different incentives. This creates an information gap between business leaders and public officials.

This information gap provides leverage for business leaders. Executives who are motivated to maximize profits for their company may threaten to move unless state and local officials provide tax breaks and subsidies, even if they have no intentions of locating elsewhere. Yet the only way for government officials to know whether these threats are credible is to call the company’s bluff and refuse to provide government aid.

Research from Drs. Todd Gabe and David Kraybill published in the Journal of Regional Science found that business leaders take advantage of the knowledge gap by exaggerating job promises to obtain larger incentive packages.

What’s more, statistical evidence indicates that tax breaks and subsidies, on average, do not influence business decisions. In a 2017 study published in the Journal of Public Policy, University of Texas at Austin economist Dr. Nathan Jensen found no discernible difference in the hiring practices of businesses that received incentives from Kansas’ Promoting Employment Across Kansas (PEAK) program and similar businesses that did not. Jensen’s survey data also revealed that “very few firms would have left the state if they had not benefited from [the PEAK] program.” Additional research by Jensen published in Research and Politics similarly found that the primary incentive programs in Maryland and Virginia “had essentially zero impact on job creation.”

It is easy to say that targeted economic incentives change the decisions businesses make, but rigorous analysis disagrees.

We have seen this story play out in Arkansas. For instance, in January 2016, the Arkansas Democrat-Gazette reported that incentives provided by state and local officials did not influence the decisions of both Peco Foods and Bad Boy Mowers to expand in Independence County. Officials for both companies said that they would have expanded operations in Arkansas regardless of the incentives.

Nevertheless, some will claim that incentives are necessary because there are individual cases where tax breaks and subsidies do make a difference in a company’s decision to locate, expand, or remain in Arkansas. Yet this is still problematic. What keeps a company that located in Arkansas because of government aid from moving to another state when offered a larger sum? Or, perhaps more likely, what keeps them from threatening to leave unless Arkansas provides more incentives?

Officials need only look to Washington State to see this behavior. In November 2013, U.S. News reported that Boeing threatened to leave Washington state unless it provided $8.7 billion worth of tax breaks. But giving in to a flighty firm’s pay-for-jobs demands is not only expensive to taxpayers, it fails to provide lasting economic benefits.

No one wants to see fellow Arkansans lose their jobs when a company such as Kimberly-Clark decides to close its doors. But churn in the economy is inevitable, and good intentions are not always the best guide to public policy.

Despite the urge to “do something,” public officials should refrain from designing economic development policy so narrowly focused as to try to prevent an individual business from making its decisions based on its unique circumstances and best knowledge.

If officials want to “do something,” they should focus on broad, fundamental reforms that create an environment where Arkansans adversely affected by one company’s decision have other options. By creating good business soil, we will not need to fertilize individual plants. Policymakers can improve our business soil by lowering marginal rates on the most economically harmful taxes and reducing artificial barriers to employment, among other policies.

We should not be surprised that a struggling business would ask the government for subsidies. But we should expect our politicians to create policies that benefit all Arkansans.