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Arkansas proposes constitutional amendment to encourage economic development
Credits & Incentives talk with Deloitte
“Credits & Incentives talk with Deloitte,” is a monthly column by Kevin Potter of Deloitte Tax LLP, featured in the Journal of Multistate Taxation and Incentives, a Thomson Reuters publication. The February edition, co-authored with Michael G. Krajcer and Linda Bonelli of Deloitte Tax LLP, discusses economic incentives in Arkansas that have been bumping up against the state's constitutional limitations for decades.
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Economic development projects
Economic incentives are offered throughout the country by state and local jurisdictions to promote and compete for economic development projects. These projects enable communities to incentivize growth and investment in their jurisdictions. Whether and how states and localities incentivize a project, however, may be limited by a state's constitution.
For example, economic incentives in Arkansas have been bumping up against the state's constitutional limitations for decades. In the upcoming 2016 election, Arkansas voters will be asked to amend their constitution again to help encourage economic development.
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Excerpts from this month's issue
State Uniformity Clause limitations upon property tax incentives
Arkansas' constitution prohibits local government from abating or waiving property tax to induce industry to locate within an Arkansas county.1 More than 20 years ago, the Arkansas Attorney General issued an opinion that county property tax waivers violated the constitutional requirement of equal and uniform property taxation throughout the state.2
Arkansas, however, allows for a Payment in Lieu of Tax (PILOT) program, which effectively provides the benefits of a partial property tax abatement through the lease or sale of tax exempt city or county property to a for-profit entity.3 Under a PILOT arrangement, the for-profit entity that leases or purchases tax exempt property agrees to pay at least 35 percent of the aggregate amount of property taxes that would be paid if the property were on the tax rolls, with certain exceptions.4
Arkansas is not alone. According to the Lincoln Institute of Land Policy, an estimated 39 state constitutions have uniformity clauses, with qualifications varying by state.5 To Arkansas' east, Tennessee's Constitution provides that "all property, real, personal or missed shall be subject to taxation."6 While this generally requires uniform taxation of similar properties, Tennessee's Constitution does allow for exemptions for property held by state and local governments, as well as by charitable, religious, scientific, and educational organizations.7
To Arkansas's north, Missouri's Constitution requires that taxes levied shall "be uniform upon the same class or subclass of subjects within the territorial limits of the authority levying the tax."8 Communities across both Tennessee and Missouri use PILOTs and other programs to help incentivize projects.
Prohibition on funding chambers of commerce with sales tax revenue
Under current Arkansas law, local governments may levy a voter-approved sales and use tax for certain economic development projects, including public infrastructure improvements or the establishment and operation of local economic development programs.9 State law also allows this Economic Development Tax (EDT) revenue to support a public corporation for economic development, as well as the contracting of services with community-based not-for-profits, such as a chamber of commerce and industrial development corporations.10 Across the state, a number of communities have used the EDT to fund private regional economic development agencies.
Other states also leverage local revenue sources to support economic development projects. Chapter 380 of Texas's Local Government Code, for example, provides statutory authority for municipalities to establish economic development programs using local sales tax revenues for making loans and grants, providing municipal services, and promoting state and local economic development.11
In 2015, a Pulaski, Arkansas circuit court judge issued a summary judgment enjoining Little Rock and North Little Rock from making payments to regional chambers of commerce for economic development services.12 The payments were viewed as a violation of the Arkansas Constitution, which currently prohibits counties, cities, towns and any other municipal agencies from appropriating money for-or loaning its credit to-corporations, associations, institutions or individuals.13 Shortly thereafter, the State Attorney General declined to provide an opinion on the City of Russelville's EDT payments to the Arkansas Valley Alliance for Economic Development, Inc., whose staff members were also employed by the Russellville Chamber of Commerce.14