Arkansas a leader in tax incentive evaluation

Arkansas is one of 13 states “Leading the way” on the evaluation of tax incentives for economic development, according to a recent report from the Pew Center on the States.

The report, released April 12, noted that the 13 states are “meeting both criteria for scope of evaluation and/or both criteria for quality of evaluation.”

In addition to Arkansas, the states leading the way were Arizona, Connecticut, Iowa, Kansas, Louisiana, Minnesota, Missouri, New Jersey, North Carolina, Oregon, Washington and Wisconsin.

Oklahoma was among 26 states “Trailing behind,” with Texas one of 12 states with “Mixed results.” The report also included the District of Columbia.

According to the Pew report, researchers reviewed nearly 600 documents and interviewed more than 175 government officials and experts to determine how states measure tax incentive results. And although Arkansas and 12 other states are doing a good job, the Pew report concluded that better analysis is needed.

“But no state regularly and rigorously tests whether those investments are working and ensures lawmakers consider this information when deciding whether to use them, how much to spend, and who should get them,” Pew noted. “Often, states that have conducted rigorous evaluations of some incentives virtually ignore others or assess them infrequently. Other states regularly examine these investments, but not thoroughly enough. The good news is that a wealth of promising approaches exists for lawmakers to emulate.”

Pew officials provided four basic criteria that states should use to determine incentive effectiveness.
• Build evaluation of incentives into policy and budget deliberations to ensure lawmakers use the results.
• Establish a strategic and ongoing schedule to review all tax incentives for economic development.
• Ask and answer the right questions using good data and analysis.
• Determine whether tax incentives are achieving the state’s goals.

In judging Arkansas’ incentive review status, Pew officials reviewed a 2009 performance audit conducted by the Arkansas Legislative Joint Auditing Committee. That review assessed 93 projects that received $49.834 million in incentive support between 2006 and 2008. (Link here for the PDF of the 2009 report.)

The report cited a study by the Institute for Economic Advancement, University of Arkansas at Little Rock, which included a cost-benefit ratio. The results of study included the following ratios for six Arkansas incentive programs.
Advantage Arkansas: 2.37 (every $1 in incentive generated $2.37 in gross state product)
Tax Back: 3.27
InvestArk: 2.41
Create Rebate: 1.82
ArkPlus: 1.02
Payroll tax credit/In-house R&D: 3.32

“We are doing better than most states, and we know that when we compare our packages to other states,” said Paul Harvel, president and CEO of the Fort Smith Regional Chamber of Commerce and a former member of the Arkansas Economic Development Commission. “One of the main things that really help us stand out now is that Quick Action Closing Fund that the Governor has.”

Harvel, who has 44-years of experience in community and business development, said Arkansas could do better with incentives if it enacted some form of an income tax exemption. Harvel said he is “personally convinced” Arkansas has lost jobs to states like Florida and Texas that do not have personal income taxes.

Sen. Jake Files, R-Fort Smith, and chairman of the Joint Committee on Tax Policy, said the Pew report is “certainly a positive for Arkansas, and I think it is a positive for us as other businesses look at Arkansas.”

“Having said that, by no means are we at the end of the road,” Files continued. “In a competitive economy, we have to find incentives that work. As a Legislature and as citizens, we have to know that is the global environment and that we have to always be competitive. … We have to know what is a good incentive and what is just throwing money away to get a business.”