Taking a gamble

Firms’ tax breaks too big a risk

Arkansas’ state government is focused on recruiting jobs. Unfortunately, government bureaucrats insist on doing this by issuing tax breaks and subsidies to favored firms.

Companies promise to create new jobs in exchange for these handouts, but often fail. Despite being burned continually on these deals, government officials have yet to learn their lesson.

Consider the case of Pinnacle Foods in Fayetteville. The Arkansas Economic Development Commission recently announced that Pinnacle Foods will receive a $200,000 subsidy from the Governor’s Quick Action Closing Fund, income tax credits worth 1 percent of total payroll, and sales-tax credits in exchange for creating 25 new jobs. What the commission failed to mention is that Arkansas has bet and lost on Pinnacle Foods before.

In 2010, the state government gave Pinnacle Foods $500,000 from the fund to “retain and maintain 549 full-time employees.” Yet, just three short years later, Pinnacle was asked to return a small portion of the subsidy (less than $60,000) because “they fell below [employment promises] for a period of years”, according to then-commission spokesman Joe Holmes.

Now Pinnacle Foods employs 129 fewer employees than when it first received political favors, and the state is ready to give it more. But why should taxpayers believe that results will be any different this time around? Why should government officials chase a bad bet with good tax dollars?

Using taxpayer money to gamble on firms, especially when they have broken promises before, is poor public policy. A recent policy review from the Arkansas Center for Research in Economics, “Tax Breaks and Subsidies: Challenging the Arkansas Status Quo,” explains that when governments gamble on economic development projects, they are subjecting taxpayers to unnecessary risk.

Corporate handouts inherently carry risk to taxpayers through moral hazard. Moral hazard arises when people engage in risky activities that they otherwise would not because they share the risk with others. Put more simply, people tend to take more risk when using someone else’s money instead of their own.

When politicians use financial incentives to recruit firms and projects fail, the loss falls on taxpayers. When Beckmann Volmer, a wind-turbine parts producer in Northeast Arkansas, went bankrupt after receiving $1.5 million from the Quick Action Closing Fund, it was taxpayers that lost their money—not government bureaucrats.

Rather than playing high-stakes poker with tax dollars, politicians should let the market decide which economic development projects should be funded. If business people or entrepreneurs have good ideas, private money will most likely fund the project. Banks make loans. Investment groups make investments. There is no need for government intervention.

When private money does not finance an economic development project, the market is sending a signal that the project is perceived as too risky. This “funding gap” exists for a reason. Government officials should heed this warning and avoid putting undue risk on taxpayers by offering incentives anyway.

Gambling on firms with public money is a poor economic development strategy. Instead of chasing firms with tax dollars, the state government should create a regionally competitive tax environment for all firms. We should simplify the tax code by making reliable reforms such as reducing the number of corporate income-tax brackets, aligning our income tax base with the federal income tax code, and removing archaic manufacturing taxes. We should also reduce tax rates to a more competitive level by ridding our tax code of special-interest carve-outs.

Instead of tax breaks and subsidies negotiated willy-nilly with little oversight and a poor history of success, Arkansans should demand a simple, transparent, and competitive tax environment.