State Tax Credit Drawing Intense Scrutiny

A new tax credit program passed during the 2013 legislative session of the Arkansas General Assembly has caused concern within the agency that has been tasked with overseeing the program.

The New Markets Jobs Act of 2013 passed with overwhelming bi-partisan support earlier this year.

According to rules and regulations approved and issued on Sept. 25, the program creates a tax credit program against state insurance premium tax liability that issues tax credits to insurance companies that make “qualified equity investments in qualified community development entities (QCDEs) that in turn leverage that capital and invest, through debt and/or equity instruments, in eligible qualified active low-income community businesses.”

Bryan Scoggins, director of business finance at the Arkansas Economic Development Commission, said the tax credits are really just a financing mechanism.

“They’re providing money to the QCDEs for project finance and their real interest is to maintain the viability of the tax credits,” he said. “It’s just a source of finance for the CDE (so) that they’re not having to come up with (funding) themselves.”

The rules for the New Markets Jobs Act elaborate further, stating that the QCDE makes investments in companies “meeting the definitions of ‘qualified active low-income community business’ and ‘eligible businesses.'”

QCDEs cannot, the law states, invest more than 25% of its allocation into any one project. However, AEDC Director Grant Tennille has said there is a way around that rule.

“In the law, there is nothing to prevent two of these CDEs or more from coming together and putting $5 million (each) into one deal and we suspect that is going to happen. You could end up with each of the nine putting into one deal and it being a $45 million deal. If you talk to original sponsors of the legislation, they didn’t contemplate that when they started this thing. But there is nothing to prevent it.”

Tennille added that the legislation also does nothing to ensure that all of the tax credit goes to job-creating projects versus in the pockets of the QCDEs.

“The best we’ve been able to determine looking at this program and similar programs across the country, somewhere between 25% and 30% of the value of the tax credits make it to the end-project company. That means 70% of the value of the tax credit is going someplace else. Where? I’m not sure anyone is completely sure,” he said.

Scoggins said it initially appeared to be a responsible bill, which is why he believes it received such strong bi-partisan support.

“It has a lot of phrases and terms and things that sound very good. But it’s not until you read it several times and get down in the weeds (that you can see loopholes). It looks (good). Who’s not going to go for jobs?”

House Minority Leader Greg Leding, D-Fayetteville, was one of several co-sponsors of the legislation and he still backs it today.

“A number of other states have tried this. Some have been successful. Some haven’t. It’s worth looking at those states to see what went wrong. But I think it’s absolutely worth trying in Arkansas because, as Rep. Darrin Williams said, it was the bi-partisan jobs bill of the 2013 session. I think time will tell (whether it works) and we’ll see what happens.”

Leding said of the states that have used similar tax credits, thousands of jobs have been created.

“I know like in Missouri, it created something like 4,000 jobs. In Florida, it was like 5,000 jobs created in the state. I don’t know that there was ever a prediction about Arkansas,” said Leding.

To prove how successful the tax credits were in Florida, Leding pointed to figures showing more than $420 million in private investment that occurred in the state along with jobs with an average starting salary of $47,000 per year.

But Tennille said the Florida program funded hotel construction, which actually created many low-wage jobs. The Arkansas program, he said, would not fund hotel construction.

“If you’re Florida, hotels are a big deal. But in terms of creating jobs, we don’t do a whole lot of hospitality here largely because the jobs created by hotels are maids and counter workers and jobs like that that aren’t high paying jobs.”

Leding even conceded the point, saying the high salary average could be tilted.

“I suppose there could be a CEO in there that could be skewing things,” he said.

But Leding, the House Minority Leader, said the economic impact to Arkansas would still be worth having the legislation as law.

“I know they also talked about how in other states, for every $1 in tax credits redeemed, (places like) Missouri saw $1.50 in new revenue for every dollar redeemed.”

According to The Missouri Times, the state’s new markets tax credit was set to sunset this year and was not renewed, largely due to the Missouri House and Senate failing to reach an agreement on reforms to the program. Tennille made a point of saying Missouri was not the only state to reject the New Markets Tax Credit legislation.

“While we were passing it, Missouri did not re-authorize it. There was a lot of coverage of it. Georgia rejected it at the same time we were approving it. Texas rejected it. Now Nevada approved it. Florida has had, I suppose, the best success with the program, but they would measure success different than we would. They re-authorized it. But there it has built gigantic hotels,” he said.

Regardless of what other states have done or the incentives passed during Arkansas’ legislative session, Tennille said if the incentives are going to be available, the General Assembly has a responsibility to impose stricter rules on which companies get the credits and how those funds are administered by the companies.

Those companies include: Advantage Capital Partners, Arkansas Capital Corp. – Heartland Renaissance Fund, Enhanced Community Development, Community Development Venture Capital Alliance, Pacesetter CDE, Stonehenge Community Development, Urban Development Fund, USBCDC, and Waveland Community Development.

“We have introduced a whole other layer into this thing and a bunch of that whole other layer isn’t even from Arkansas. You have money managers from Missouri, Louisiana, New York and Texas. The jobs of the people sitting around this table talking to you right now [Tennille speaking of himself, Scroggins and AEDC Business Finance Expert Greg Wolfe] is to help create jobs in Arkansas and to use the state’s resources to help do that. The jobs of the money managers from Missouri, Louisiana and Texas and New York is to help make money with their investors,” he said.

“What we’ve been doing ever since it passed is trying to find a way to wrap the tiger by the tail and get back into the business we’re supposed to be in. But ultimately still, we don’t have a lot of teeth,” Tennille said.

He also said he will continue advocating for tightening the rules and regulations associated with the new markets tax credits.

“Look, my fondest hope is that this does everything everyone says it should do and create a minimum 32 new companies employing a few hundred people and say this has been a resounding success, let’s do it again. But there are a lot of questions here. And I just want to make sure that everyone needs to be watching this thing closely because there’s a lot of money at risk. One of the things to remember is the premium tax credit is ultimately the money ends up in general revenue. We are taking money that normally would go to schools and prisons and sick people and colleges and universities and gambling it,” which Tennille said would amount to a $96.28 million gamble.

Leding said the tax credits program, which he said was revenue-neutral, was a worthwhile effort at job creation and he is willing to make changes if need be.

“I certainly trust Grant. I think this legislation is less than a year old and it’s worth us seeing how it plays out over the next six months to another year before we make any final assessments,” said Leding. “We get focused on legislation in session, it gets passed and that’s that. I have a habit of writing down different bills that I want to follow-up on in a year. I don’t know if there’s been any plan to follow up or not, but I certainly plan to. It certainly sounds like I need to visit with Grant.”