State Has Tools to Attract Development

As Arkansas works to boost economic development and attract manufacturing and jobs, several incentives are available to companies willing to locate or relocate to the state.  

On Nov. 2, Arkansas voters approved proposed Constitutional Amendment No. 3 — also referred to as Issue No. 3 — which had been referred by the Arkansas General Assembly. Issue No. 3 amends Amendment No. 82 to the Arkansas Constitution. Amendment No. 82 allows the state to issue bonds to provide funding for infrastructure and other needs, including land acquisition, site preparation, road improvements, rail spurs, water and waste services, employee training, environmental mitigation and training or research facilities.  

Under the original Amendment No. 82, companies were required to invest a minimum of $500 million in the state and hire a minimum of 500 employees to qualify for the super project bonds. Because few proposed projects met these requirements, Arkansas has seen several large projects go to neighboring states with more favorable incentives. In fact, because of the high investment threshold, no bonds have ever been issued under Amendment No. 82.  

Amendment No. 3, however, has lifted the original criteria, giving the Legislature the flexibility to set the criteria for the issuance of economic development bonds and the authority to issue state-backed bonds if those criteria are met. This allows Arkansas to better compete with surrounding states. 

The Governor’s Quick Action Closing Fund, authorized by Act 510 of 2007, also has helped spark economic development. The fund allows the governor to provide a cash grant to employers planning to locate or relocate to Arkansas. The grant comes from a pool of money in the state’s General Improvement Fund that’s dedicated to attracting economic development to Arkansas and supporting private sector job creation opportunities.

Under Arkansas Act 9 of 1960, cities and counties are authorized to issue industrial revenue bonds to help private companies. Taxable industrial revenue bonds permit much greater flexibility in financing because IRS rules on tax-exempt municipal bonds don’t apply to the industrial revenue bonds. Because Act 9 bonds don’t obligate cities or counties to make payment except from project income, the bonds must be underwritten on the financial strength of the private company or the credit must be enhanced by a guarantee or letter of credit.

Previously, bond insurance was often used to provide credit enhancement for the issuance of industrial development bonds, but the bond insurance market has collapsed during the past couple of years, and companies are now relying on guarantees or letters of credit. The Arkansas Economic Development Commission has the authority to guarantee up to $5 million principal per bond issue, and the Arkansas Development Finance Authority can guarantee up to $6 million. This can reduce borrowing costs on bonds issued by manufacturers.

For qualified small manufacturers, the state may issue tax-exempt private activity bonds. That status generally allows small manufacturers to obtain lower rates of interest. If the bond proceeds are used to build and equip a manufacturing facility, the interest on the bonds may be excluded from gross income for federal income tax purposes, as long as certain procedures are followed. Interest on the bonds is excluded from gross income for state income tax purposes for Arkansas residents.  

The AEDC has several other incentive programs, outlined in the Consolidated Incentive Act of 2003. Incentives include the Tax Back program, which refunds sales and use taxes for building materials and taxable machinery and equipment associated with approved projects; InvestArk, a sales and use tax credit program for businesses that invest $5 million or more in plant or equipment for new construction, expansion or modernization; and certain state income tax credits based on the payroll of new full-time permanent employees hired for a new project.  

Jill Grimsley Drewyor is a member of Mitchell Williams Selig Gates & Woodyard PLLC in Rogers.