It's unclear whether $116.6 million in economic incentives provided by the state of Arkansas benefited the state's economy, but most of the incentives appear to have served their intended purpose, according to an Arkansas Legislative Audit report presented Friday to lawmakers.
From 2008 through 2017, Arkansas issued $675 million in incentives under the Consolidated Incentive Act of 2003, the report said. Companies used $523.2 million of that money during that period, although some may still make claims for meeting their incentive requirements.
Legislative Audit selected a sample of 72 projects to review. For most incentives, auditors used an economic software model called IMPLAN to estimate local economic impacts, according to the report. Auditors studied the period of 2013 through 2017, when they first began reviewing each of the state's economic incentive packages.
Lawmakers asked few questions during the audit committee's joint House and Senate meeting.
In response to a question from Sen. Joyce Elliott, D-Little Rock, Arkansas Economic Development Commission representatives said auditors' findings were consistent with what the commission believed to be the case.
"We agree with the conclusions of the report," said Kenneth Burleson, general counsel for the commission.
Auditors did not come to a conclusion on the cost-effectiveness of $116,550,001 in economic incentives, according to the report. Auditors recommended that the commission develop a "verifiable method to capture the long-term economic benefits of the research and development initiatives" incentive programs, which totaled more than $60 million during the 10-year period.
It was unclear Friday what a new method would look like. A commission spokesman did not return a text message or email seeking comment.
Auditors said they needed to review more projects from three other incentive programs -- ArkPlus, the Sales and Use Tax Refund and Payroll Tax Credit for targeted businesses -- before drawing any conclusions.
Of those three, ArkPlus is the only program to give out more than $2 million from 2008 through 2017. The program, which provides an income tax credit of up to 10 percent of the investment in creating a new location or expanding, awarded $68 million in incentives.
Most of the state's economic incentives from 2008 through 2017 were provided through InvestArk, a now-phased-out tax credit that intended to retain businesses. InvestArk did not require job creation.
From 2008 through 2017, the state provided $396,494,317 in economic incentives through InvestArk, about 58.7 percent of all incentives.
Legislative Audit considered InvestArk incentives cost-effective if businesses funded from 2011 through 2013 were still operating five years later. Auditors did not consider whether they resulted in a net tax benefit because job creation data were not available.
From 2013 through 2017, 85.3 percent of businesses receiving the credit stayed open, the audit found. The report did not specify the number of InvestArk incentive packages for which auditors made determinations.
In 2017, the Arkansas Legislature passed Act 362, which replaced InvestArk with a higher sales tax refund to businesses to repair or replace certain machinery.
Auditors identified one negative-impact program. In-House Research and Development - Targeted Business required too high of an upfront incentive compared to anticipated return to yield a positive or neutral result, the report stated. From 2008 through 2017, the program provided incentive packages totaling $13,224,753.
"Targeted businesses" refer to companies belonging to a group of six growing business sectors. The In-House Research and Development funds for targeted businesses are awarded by discretion and allow for a tax credit of up to 33 percent of the expenditures.
Other In-House Research and Development incentives, which were rewarded based on whether the expenditure fulfills statutory requirement, totaled $47,331,041 during the 10-year time period. Because of the nature of the incentives, Legislative Audit did not conclude the cost-effectiveness. The state may have to wait years to conclude whether the expenditures will provide the state any economic benefit, the report stated.
Auditors concluded that three incentive programs other than InvestArk offered during the years reviewed were positively cost-effective: TaxBack, Advantage Arkansas and Create Rebate. More than 90 percent of each of those incentives examined by auditors proved cost-effective.
Those incentive programs are designed in a way that ensures jobs created will subsequently generate sufficient sales and use and income taxes, auditors concluded. Each gave out tens of millions of dollars from 2008 through 2017.
TaxBack is a refund of sales and use taxes paid for building materials, machinery and equipment that exceed $100,000 within four years; Advantage Arkansas is an income tax credit on jobs created based on the payroll of those employees and other requirements; and Create Rebate is a rebate of 3.9 percent to 5 percent of new, eligible payroll when a business creates at least $2 million worth of new jobs.
Metro on 11/03/2018