RAZORBACK PRODUCTION ZONES

Little Rock (Dec. 22) A state fiscal structure that features lower overall tax rates is preferable to Arkansas' system, which is riddled with special exemptions. In 1998, the Policy Foundation recommended creation and empowerment of a "sales tax exemption and exclusion taskforce" to eliminate exemptions. The recommendation was part of a proposal to create a fiscal structure with lower rates on capital investment.

There is little to suggest policymakers are prepared to reduce Arkansas' tax rates to a border-state or regional average. Indeed, they have been moving recently in the opposite direction. Earlier this year a three percent surcharge was added to the state individual income tax, and proposals are pending in a special legislative session to raise the individual and corporate rates, and repeal the modest capital gains reductions enacted in the late 1990s. Proponents are ignoring last year's finding by Flour GLS, retained by the Arkansas legislature, that tax rates are a factor of economic development:

"A state's tax structure can be beneficial or detrimental to a company's long term profitability. Firms seeking to locate or expand a facility understand that taxes are a necessary burden that enables the government to provide services to all businesses and citizens of the community. Businesses realize that any location they choose will result in a tax burden for the company. Therefore, companies take into consideration the tax and assessment rates at which taxes are levied in areas being evaluated."

"The State of Arkansas must understand this fact and take the necessary steps to minimize the state tax burden on companies interested in locating or expanding their operations in the state." (1)

Enterprise zones are no substitute for a fiscal structure that features low overall tax rates on investment. The Policy Foundation's proposal for Razorback Production Zones is no panacea. Rather, it is a tentative response to the post-1995 decline in Arkansas Manufacturing, documented in federal data (Gross State Product, employment, income).

Tax-Free Production Zones

A premise of enterprise zones is that entrepreneurs respond to economic incentives, including tax rates and regulation. President Ronald Reagan (1981-89) and Jack Kemp, head of the U.S. Department of Housing and Urban Development under President George H. Bush (1989-1993) proposed them as a tool to foster economic development in depressed urban areas. More recently, states with large industrial bases have debated the idea to retain and expand Manufacturing production, especially Durable Goods.

All taxes would be waived in a Razorback Production Zone for a multi-year period except property taxes for K-12 public education, and, if applicable, emergency services. These would include sales, use and income taxes identified by Flour GLS in their 2002 study, which found many Arkansas' rates were higher than those imposed by other states in the region. (Example: Arkansas' state sales tax on industrial material used and consumed in the manufacturing process is among the highest in the Southeast). They would also include individual income taxes on employees, other property taxes, and all other taxes, including municipal and county levies.

Razorback Production Zones would be limited to Arkansas three sites where Manufacturing superprojects employ at least 3,000.

(1) "The Flour GLS Study And Arkansas' Hunt For A Manufacturing Superproject," Arkansas Policy Foundation research memo, 2002.