Crony Capitalism In Arkansas – HB1410


Crony Capitalism

Reprinted from Conduit for Commerce


Crony Capitalism

By: Conduit for Commerce
March 4, 2015

The Issue

This article addresses concerns with HB1410 currently moving through the 90th General Assembly quickly on its way to becoming law. HB1410 is an example of Crony Capitalism in Arkansas.

Crony Capitalism is a broad term to describe the mixing of private business and government. It is the working of politicians and government officials with specific businesses or industries to advance the interests of those businesses. Crony Capitalism is carried out by giving special tax breaks, permits, or grants to specific developers or areas. Politically, this is displayed by corporations underwriting contributions (in some manner) to politicians in return for specific legislation that will aid their interests. This goes beyond mere lobbying, and instead legislation is written with such particularity that government is in effect picking winners and losers.

Randol O’Toole of the Cato Institute describes Crony Capitalism in the context of Tax-Increment Financing (TIF) as “providing subsidies to developers who in turn provide . . . to politicians.” According to O’Toole, “TIF works by allowing cities to use the property . . . taxes collected from new developments to subsidize those same developments.” He states that by allowing TIF those subsidized new developments impose costs on schools, fire departments, and other services. This, he states, causes other taxpayers to incur those costs through increased taxes or a lower level of services provided to the area.

O’Toole further argues that TIF is unfair and goes against the Free-Market system by providing tax subsidies to favored developers, preventing others from true competition. Crony Capitalism is against Economic Freedom for Arkansas small businesses and individuals. It makes it harder for the “outsiders” to engage in business.

The Law

HB1410 is an amendment to Arkansas Code § 26-51-2407 and § 26-51-2412, sections of the Arkansas Central Business Improvement District Rehabilitation and Development Investment Tax Credit Act. Ark. Code Ann § 26-51-2403-12 (2015). This became Act 1166 of 2011 after it was passed as HB1118 in the 88th Arkansas General Session. Rep. Tracy Pennarts (D-HD65) and Sen. Jake Files (R-SD13) sponsored the legislation.

As background, it is important that one understands the impact of a tax credit.  State tax credits come straight off the top from money which would otherwise be collected by the state of Arkansas.  Unlike a tax deduction, a tax credit is similar to a subsidy given to the tax filer by the government.  Tax credits are subtracted not from taxable income but directly from a tax filer’s tax liability; they thus reduce taxes dollar for dollar. As a result, credits have the same value for everyone who can use them.

As currently written Act 1166 of 2011 provides State Income Tax Credits for qualified project expenditures. The current credit would be for 25% of qualified expenditures up to $500,000 for income-producing property, or $200,000 on non-income producing property. Ark. Code Ann § 26-51-2407. These credits would be issued on a first come, first serve basis with a total credit cap set at $1,000,000. Id at 2407(e)(2) . To be a qualified project, the property must:

  1. Be in a central business district;
  2. Have a full set of plans by a licensed architect;
  3. Meet all zoning and building codes;
  4. Be approved by the governing body of the business district; and
  5. Expenditures must be greater than $30,000. Id. at 2404(b).

If all the requirements for a qualified project are met, the governing body of the business district will then decide if they want that property to qualify. A governing body means “the board of commissioners of the central business improvement district.” Id. Currently, the tax credit only takes effect “if the Chief Fiscal Officer of the state certifies funding . . . is available in the General Improvement Fund.” Id at 2412(a)(1). The credit may be carried back for tax years that came before the approval of the credit, if the requirements were met during that earlier year. Id. at 2412(b).

The tax credit “may be transferred, sold, or assigned only one (1) time.” Id. at 2409(a)(3)(A). The tax credit may be carried over for 5 years if it is not fully used in one tax year. Id. at 2409(2). If the tax credit is granted to a passed through tax entity, the credit may be passed through to the partners, members, or owners. Id. at 2409(a)(4). Any assignee of a credit may use the credit to offset up to one hundred percent (100%) of the state income tax due from the assignee. Id. at 2409(b)(1).

Under the proposed Amendment in HB1410, the distinction between income-producing property, and non-income producing property would go away. Eligible expenditures for the tax credit would increase from $500,000 to $2,000,000. Also, the act would not require approval from the Chief Fiscal Officer, would raise the state annual total credit cap to $10,000,000 for all projects on a first come, first serve basis, and would allow the taxpayer to now receive additional tax credits for the same project.

The Players

HB1410 is sponsored by Warwick Sabin (D-HD33). Sabin is the Executive Director of the Arkansas Regional Innovation Hub, Inc (“AR Innovation Hub”). According to their website they are located in the “Argenta Arts District”. This Arts District is within the larger Argenta District, which includes the Argenta Downtown Council Business District. These districts are located just west of the Verizon Arena in North Little Rock, AR.  According to the AR Innovation Hub’s website, the following are Partners and Collaborators for the AR Innovation Hub:

  1. Arkansas Manufacturing Solutions
  2. Delta Regional Authority
  3. Tenenbaum Reclying Group Foundation
  4. Arkansas Scient & Technology Authority
  5. East Initiative
  6. Arkansas STEM Coalition
  7. Ben E. Keith Co. – Foodservice Distributors
  8. Kiva Zip
  9. Verizon
  10. Arkansas Fellowship
  11. Diamond Bear
  12. Plastic
  13. The City of North Little Rock
  14. DataPath
  15. Taggart Architects
  16. Hydco Construction
  17. Argenta Wealth Management
  18. Garver Engineering
  19. West Little Rock Rotary
  20. Glazers

According to the Secretary of State’s website the incorporator of the AR Innovation Hub is Donna Hardcastle, and directors include Harry Hamlin, John Gaudin, and Jamie Fugitt.

The Argenta Downtown Council may be considered the “governing body” of the Argenta Business District. The current directors of the Argenta Downtown Council include:

  1. Harry Hamlin (Chairman), Mitchell Williams Law Firm
  2. Holly Fish (Vice Chair), EGP, PLLC, Director of Client Services
  3. Chris Kent (Secretary)
  4. Kyle Pitts (Treasurer), Ifrah Financial Services
  5. James Alger, Delta Trust Invements, President
  6. Joseph Brajcki, Artist, Designer
  7. Phyllis Britton, Arkansas Times
  8. Gary Clements, Clements & Associates/Architecture, Inc.
  9. George Collins, Arkansas Garden Center
  10. Josh Davenport, Davenport Contracting
  11. Mike Davis, Police Chief, North Little Rock
  12. Louis France, Reno’s Argenta Café
  13. John Gaudin, Argenta Wealth Management
  14. Fletcher Hanson, Newmark Grugg Arkansas
  15. Bob Hardin, Hardin and Grace, P.A.
  16. Charlie Hart
  17. John Crow, 107 Liquor, Owner
  18. Ashely Hight, NLR Chamber of Commerce, EVP
  19. Michelle Ketzscher
  20. Tom Marr, Department of Arkansas Heritage
  21. Russ Melton, Diamond Bear Brewing Co.
  22. Greg Nabholz, Newmark Grugg Arkansas
  23. Larry Pennington, Pennington Studio/Claytime Pottery
  24. Thomas R. Pownall, P.E., Thomas Engineering Company
  25. Kathleen Rea, Regeneration Fitness
  26. Christian Shuffield
  27. Bob Stroud, Foundation Pro, Owner

Ex Officio Members:

Mayor Joe Smith, Sandra Taylor Smith, Todd Larson, Harold Tenenbaum, Terry Hartwick, Summer Toyne, Marbeth Bowman.

According to the Secretary of State’s website, the registered agent for the council is Donna Hardcastle, who is also the incorporator of Sabin’s AR Innovation Hub. The contact email for the Argenta Downtown Council is dhardcastle@argentadc.org.

According to the Argenta Downtown Council website, over 70% of the property owners in the Argenta District voted to become the Argenta Downtown Central Business Improvement District No. 31 of North Little Rock, Arkansas. By electing this status, properties within the district would have initial qualification for the tax credits. They must then meet the other requirements to become a qualified project, with final approval decided by the Argenta Downtown Council Board of Directors.

Note a needed caveat.  This article is not to be interpreted that the persons, legislators, or entities mentioned are engaging in Crony Capitalism. Names are simply used to identify individuals and entities involved with the Argenta Business Improvement District and potential application of this law. The individuals mentioned on the Council would simply be those who would determine if a person might qualify for a tax credit in that district.

The Game

Under the setup that Rep. Sabin’s bill brings, there is a potential for Crony Capitalism to take place within the Argenta Business District. Sabin’s AR Innovation Hub includes board members (Harry Hamlin, Chair; John Gaudin) who are on the governing board that will have the final say on whether a property owner may qualify for a tax credit. Some of the “partners and collaborators” of the AR Innovation Hub include businesses within the Argenta Business District, including Sabin’s own non-profit AR Innovation Hub, or are located just beyond the district. Those entities would also have the inside track on the architecture, construction, engineering, and distribution work to be done at the properties. AR Innovation Partner “Taggart Architect” could gain more business because any qualifying project must have plans designed by a licensed architect.

A big advantage within this structure is that these tax credits are transferable and assignable. For example, a property owner (probably a business entity) may qualify for the tax credit. That credit may then be assigned to another person to offset up to 100% of that person’s income tax due. The credit is allowed to be carried over for 5 years. So, for up to 5 years a person who receives this tax credit may be paying $0 in state income tax, even on taxable income from beyond the intended improvement district.

According to the Secretary of State website, John Gaudin is associated with at least 10 “Argenta” entites. Remember, Gaudin is both on the board for Sabin’s AR Innovation Hub, and the Argenta Downtown Council. He could theoretically receive tax credits on each of these 10 entities, if they own property, then turn around and assign the credits to offset his individual state income taxes, or any other entities that are not even in the Argenta Business District.

In addition, Greg Nabholz, Harold Tenenbaum, and John Gaudin are all listed as directors on the Secretary of State’s website for the “Argenta Place Property Owners Association.” All three of these individuals are directors for the governing body (Tenenbaum is ex-officio) that has the say on whether a person qualifies for the tax credit. If they got enough votes together, they could hypothetically only ever approve their own entities for the tax credits. Then they may assign those tax credits to their other entities to avoid state income taxes.

These same scenarios could play out with various other individuals and entities. This structure is open to abuse and avoidance of state income taxes. The intended purpose of promoting development in this district could be used to avoid state income taxes for individuals and entities not even in the district.

Hypothetical Scenario

Company X decides to build a new café in the Argenta Business District. The expense of this will cost $900,000. The company will apply and be granted the tax credit described above for the amount of $225,000. Company X’s CEO has incurred state income tax due of $45,000. The board of Company X decides to assign the tax credit of $225,000 to the CEO, who then uses the credit to offset his state income tax due of $45,000 for each of the next five years.  The state of Arkansas has given $225,000 of its general tax revenue to the CEO of Company X… Crony Capitalism.

Five years have passed, and Company X decides to build four new properties in the Argenta Business District with total expenditures of $32 Million. The four properties are all in the name of four separate LLC’s the company has set up. So, each entity gets a $2 Million tax credit. One of the credits is used to offset the state income tax due. Another credit is sold for $3.4 Million to Company W. The third credit is given again to the Company X’s CEO for personal tax relief. The fourth and final $2 Million credit is given to a business in Southern Arkansas, to establish a “good working relationship.”  The state of Arkansas has given $8 Million of its general tax revenue to underwrite the personal agenda of Company X…… Crony Capitalism.

Company X now wants to build a new skyscraper in the Argenta Business District. Since the expense would be so high, he contacts his Senator, and he quickly adjusts the law to allow for a 75% expenditure use limit rather than 25% and increases the total cap to $100 Million. The law passes through the legislature and includes an emergency clause, to avoid the economic development that may be lost if the skyscraper is not built. Twenty-seven different entities have a property interest in this new skyscraper, and they all receive a $1 Million tax credit and all use them for different purposes.  The state of Arkansas has given $27 Million of its general tax revenue to the schemes of Company X…… Crony Capitalism.

Conclusion

This hypothetical scenario shows how quickly and dramatically Crony Capitalism can reap negative effects for Arkansans.  Certain entities and individuals benefit, while others may be left out of the process entirely. The tax credit program developed through HB1410 may undermine the economic development it is intended to foster. Rather than those funds staying in the local businesses and community, the tax credits may be sold or transferred to others throughout the state, and possibly the nation.   Rather than letting the free market dictate this development, crony capitalism is on the verge of being unleased in the Argenta Business District. An elected official’s friends and business partners could gain significant tax credits through HB1410.

HB1410 and current law go beyond just providing special considerations for certain businesses that are friendly with the bill sponsoring House member. This bill and law may allow entities and individuals outside the improvement district to receive tax credits to offset their state income taxes for up to five years while piling up other credits on the same project.  If they structure their assignment of the credits correctly, they could potentially sustain that with new credits assigned from a new qualifying project every year, creating a new five year window to carry forward the credit.

Conduit for Commerce believes in free markets because they are better for business and individuals. In a free market, if the value is there to sustain these new businesses then the new businesses will be built. A free market allowing all to compete for new development is fair.

Sources

Randy O’Toole, “Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing”, Policy Analysis (Cato Institute), May 18, 2011, http://object.cato.org/sites/cato.org/files/pubs/pdf/PA676.pdf .

http://www.taxpolicycenter.org/briefing-book/background/issues/credits.cfm

Arkansas Secretary of State Business Entity Search

Arkansas General Assembly Website

Ark. Code Ann § 26-51-2403-12 (2015).

Argenta Downtown Council Website

Arkansas Innovation Hub, Inc. Website