Nearly half of the 45 projects funded with state incentives from 2005 to 2012 reviewed in a special report released Tuesday had “unfavorable cost-benefit ratios” to the state, according to the Division of Legislative Audit (DLA). Primarily, when people think of state-funded economic development programs, they usually assume those funds go towards “creating jobs,” but this recently-released report shows that just isn’t the case in Arkansas for the Consolidated Incentive Act (CIA) of 2003.
According to this report:
Of the 45 projects reviewed, 21 had unfavorable cost-benefit ratios, as calculated by DLA staff; all 21 were InvestArk-only projects. The primary reason for this result is that job creation is not required to receive this incentive.
According to the Department of Finance and Administration, InvestArk is a “sales and use tax credit to qualified, established businesses in Arkansas that invest $5 million or more at a single location in plant or equipment for new construction, expansion, or modernization. All project cost must be incurred within four (4) years from the date the project is approved by the Arkansas Economic Development Commission. In order to qualify a business must have been in continuous operation in the state for at least two (2) years.”
The general assembly created CIA which allows for various tax credits and refunds for businesses in an attempt to encourage expansion and job creation.
However, the InvestArk program isn’t paying off so far for taxpayers, according to the DLA report:
InvestArk-only projects do not return positive cost-benefit ratios because they do not require job creation. Therefore the only potential tax benefits identified are potential construction benefits. InvestArk projects may result in new or updated facilities or equipment.
CIA incentives are divided into two groups, statutory and discretionary. Statutory incentives are available to any qualifying business applying for funds, and discretionary incentives are awarded at the at the discretion of AEDC’s Director, Grant Tennille, in “competitive situations,” according to the DLA report.
DLA officials also in their report detail how these statutory incentives can sometimes lead to the state funding projects through tax credits and refunds that would have likely been done regardless.
The report states:
Statutory incentives are awarded if the company applies and meets the requirements for the incentives. Essentially, any company with knowledge of incentives available will know upfront what it is allowed to claim and will incorporate this into the decision to create jobs or build a new facility. It is likely then that the existence of statutory incentives will cause some companies to claim incentives for projects they would have pursued in the absence of incentives.
Of the $540.5 million CIA funds distributed to businesses from 2003 to 2013, approximately 61 percent ($327.9 million) are claimed through the InvestArk program, which doesn’t require job creation in order to receive a state sales and use tax credit.
It appears that a substantial portion of the half a billion dollars in special tax exemptions for businesses have been poured down the drain.
The report will be reviewed by the Joint Audit Committee at 9 a.m. Friday.