Arkansas: Tax-Hiking Politicians Think They Are Too Big to Fail

The finances of our local governments are in bad shape, and there is a growing tendency of desperation in their measures to keep spending going. (Reforms to permanently cut spending and shrink government are not in the realm of our elected officials’ imagination…) This blog reported yesterday about a fight over a local sales tax in Louisiana that has come to a peak under the pressure of the current recession. Today we add another story, also spiced with political and fiscal desperation. The Arkansas Times reports that the city of North Little Rock, Arkansas has made a desperate attempt to raise revenues by putting a tax increase on the ballot for the November elections. This story is typical for a government that considers itself to be too big to fail:

Forty-six days is barely enough time to plan a fair-to-middling Halloween party, much less educate an entire city on the pros and cons of two new sales tax proposals, but that’s the time North Little Rock voters have to work with in considering a new one-penny sales tax — the window between an emergency meeting called Sept. 23 to approve sending the proposal to the polls and the day voters will actually enter the voting booth on Nov. 8.

This panic is not unprecedented among city governments. Recently the city of Harrisburg, Pa., had to bite the dust and file for Chapter 9 protection after a series of desperate revenue-raising stunts. Next time, how about using a little bit of foresight and cut spending?

The city is asking voters to approve a two-part tax. Half a cent would be permanent, and would go toward hiring more firefighters and police, building and staffing a new fire station in the east end of the city, and upgrading North Little Rock’s emergency communications system, among other projects. The other half-cent would sunset in 2017, and Mayor Pat Hays has said it would be set aside for roads, bridges and job creation projects.

I am hereby taking bets on whether or not that tax hike will sunset in 2017…

The odds that this new tax will go away are zero for two reasons. First, it is almost a law of nature that our elected officials cannot imagine any other change to government than to grow it. Secondly, the city plans to spend some of the money on so called economic development, an excellent way to create needs for future spending:

One of the planned projects if the taxes pass is the purchase of 2,000 acres in the eastern part of the city, which will be developed into a “business park” — possibly including a new home for the Arkansas State Fair. At their most recent meeting on Oct. 20, the Arkansas Livestock Show Association Board said that they are holding fire on the continuing search for a new location for the State Fair until they see whether the North Little Rock taxes pass or not.

The city council in North Little Rock needs to learn the lessons that other cities, counties and even states have learned the hard way: economic development does not work. If the Arkansas Livestock Show cannot do its business without help from the government, then perhaps it is time to shut down. But even if the livestock association does not move to the new “business park” the idea is that other will, and their choices of location will depend on the fact that government has purchased the land. That removes a significant investment cost which means that the city, using taxpayers’ money, artificially depresses the cost of operating a business in the new business park. This creates a need for future subsidies: as soon as businesses are faced with unsubsidized costs they will simply pick up and move on.

If both proposals are approved by voters, the additional one cent would raise the total sales tax in North Little Rock to nine percent. The emergency meeting came less than two weeks after Little Rock approved its own two-part penny sales tax. The North Little Rock tax vote will be piggy-backed onto a statewide Nov. 8 bond election that benefits road construction.

How much more can cash-strapped families in North Little Rock handle? Some people apparently know the answer:

Not everyone is a fan. Joanne Filiatreau, who lives in Sherwood and is one of the founding members of the Arkansas Tea Party, said the group plans to go door-to-door and hand out 5,000 flyers in opposition to the tax. “It doesn’t matter if they rammed it through in an hour or a month,” she said. “In this economic climate today that each and every family is living in, it is just the wrong time to increase the tax.”

Economic development through taxes is a bit like trying to fund schools through taxes. When property taxes were not enough, a lot of states created lotteries. When the lotteries have proven inadequate, they turn to the federal government for even more money. When Title I and No Child Left Behind funds were not enough, the states took extra stimulus money to pay for their schools – and education is still not getting better. In a similar way, economic development creates nothing but new needs for spending. It always sprawls into new areas of spending: from creating “business parks” to buying sports arenas to fun parks to convention centers to… In the Harrisburg, Pa., case the city had built a new trash-to-power facility, naively thinking that it would pad the pockets of the city. Instead, it became a perpetual spending item in the city budget.Why? Because the investment calculations were based on the fact that the city had tax money to pay for and initially operate the facility. No one listened to what the free market had already told the city: if the facility does not exist independently of government, then it is probably not a good business idea.

North Little Rock should take notes. If the business park that politicians envision does not exist now, there is a pretty good chance the market has said no to creating it, and done so on sound economic terms.