Greater Opportunity Through Innovative Change

LOSING THE GAME

Arkansans would rightfully question the judgment of a football coach who opted to kick into the wind after winning the coin toss. Or grounding the team’s All-American passing quarterback in favor of running the ball against the state’s best ground defense. Common sense suggests the coach making these questionable decisions is likely to lose the game.

Economic proposals, like football, make no sense when they give the opposing team an advantage against Arkansas. Sound economic policies expand production, create new jobs, and increase family and individual incomes. Unsound policies cause manufacturers to close factories and leave Arkansas, eliminate jobs and reduce workers wages.

The proposal that would increase Arkansas’ income tax rate-already the South’s second highest, and the highest among bordering states-will not help Arkansas win the economic game. Arkansas’ top individual income tax rate of seven percent starts at $25,900, and includes a new three percent surcharge signed into law earlier this year by Gov. Mike Huckabee. The proposal would add personal income tax rates of eight and nine percent. It would also create a new Arkansas corporate income tax rate of seven percent. The corporate rate is currently 6.5. percent.

Arkansas’ top individual income tax rate with surcharge trails only North Carolina (8.25%) in the region. Other states are Alabama (5%); Mississippi (5%); Virginia (5.75%); Georgia (6%); Kentucky (6%); Louisiana (6%); Missouri (6%); Oklahoma (7%); and South Carolina (7%). (Source: Federation of Tax Administrators, Washington, D.C.) Florida and Texas do not have an individual income tax and Tennessee taxes only dividends and interest.

Corporate rates in the region are Texas, which imposes a franchise fee (4.5%); Mississippi (5%); South Carolina (5%); Florida (5.5% or a 3.3% Alternative Minimum Tax); Georgia (6%); Oklahoma (6%); Virginia (6%); Missouri (6.25%); Alabama (6.5%); Arkansas (6.5%); Tennessee (6.5%); North Carolina (6.9%); Louisiana (8%); and Kentucky (8.25%).

Proponents of raising Arkansas’ income tax argue the state has a regressive tax structure that relies on the sales tax. Arkansas does levy regressive taxes like the sales tax on food, which falls disproportionately on poor and low-income families. But Arkansas also has a highly progressive tax structure that levies taxes on individual and corporate income at high rates compared to other states in the Southeast region.

The regressive nature of the sales tax on food is one reason why an Arkansas citizens group tried unsuccessfully to repeal the tax in 2002. It is ironic that those who favor raising the income tax to allegedly “help the poor” also support taxing low-income Arkansans when they buy food at grocery stores. It is inconsistent to support raising the state income tax and taxing food to aid Arkansas’ large population of poor people. The sales tax on food should be repealed and the income tax must be reduced to attract capital investment and create jobs and income growth.

One consequence of Arkansas’ progressive tax structure is its weak economic record when compared to other states in the region. Once upon a time economists believed tax rates did not matter. But a growing body of research in journals and reviews has found rates are a factor or one of many considered by entrepreneurs.¹ Tax rates are not the only factor affecting economic development but they are important. Officials have ignored this lesson at great economic cost. . Arkansas production, employment and income growth has trailed many states in the region:

(Gross State Product) Real U.S. GSP grew 26 percent and 23 percent in the region between 1995 and 2001 but only 16 percent in Arkansas. Production expanded at higher rates in states including Georgia (33%), Texas (32%), Florida (27%), Virginia (25%) and Tennessee (21%).

(Per Capita Personal Income) Arkansas ranked 49th in per capita personal income (1971) and ranked 48th (2001) (U.S. Bureau of Economic Analysis). Significant income and sales tax increases occurred in Arkansas during this three-decade period.

(Employment) Arkansas private job growth was less than the U.S. average between 1996 and 2002. Florida, Texas, Georgia and Tennessee were among states in the region that created new jobs at higher rates. (U.S. Bureau of Labor Statistics)

You do not win a football game by dropping a brick on the kicker’s foot before he is sent into the game to kick the winning field goal. Or asking the quarterback to throw the winning touchdown pass after hundreds of passes in pre-season practices have left him with a sore shoulder. Nor does a state win the economic game by raising fiscal disincentives on entrepreneurs who seek to produce a good or service of use to their fellow citizens, creating jobs and income growth in the process. The proposal to raise the income tax is a scheme to lose the economic game.

--Greg Kaza

1 APF memo, ‘An Introductory Survey of Journal Articles on the Issue of Tax Rates’ (2002)