Guest writer

How to cut taxes

Fiscal policy effect should be focus

— Arkansas’ state revenue is expanding because the business cycle’s current state is expansion, not contraction, albeit that growth is slow in a weak recovery that dates to June of 2009. State revenue is likely to exceed forecasts by more than $100 million, which means modest tax cuts can occur in 2013.

The policy climate has shifted dramatically, with Republicans winning the state Senate, 21-14, and state House, 51-48-1, for the first time in 138 years. The stage is set for a serious policy debate around the question of how to cut taxes in Arkansas. Democratic Gov. Mike Beebe has proposed further reductions in the grocery tax. Republican legislators have discussed cutting income and capital gains taxes.

Fiscal policy in this new environment should focus on the potential effect on Arkansas household budgets, job creation and state revenue.

Arkansas per capita personal income achieved a record high after the grocery tax was reduced from 6 percent to 1.5 percent, a fiscal policy our nonprofit recommended in 2002. That income is 81 percent of the per capita personal income of the nation, according to the U.S. Bureau of Economic Analysis. Gov. Beebe explained at a 2007 forum hosted by our group that the tax could be phased out, and his latest proposal would reduce it to 0.125 percent.

But existing fiscal policy has failed to boost Arkansas nonfarm payroll employment, the broadest economic indicator. Arkansas employment has grown an anemic 0.5 percent three years into the current expansion, versus 2.3 percent for the U.S.

The problem is greater when Arkansas is compared with states that do not tax capital gains. Employment in these states has increased 3.3 percent in the expansion. They also created jobs at higher percentage rates than the U.S. and Arkansas in the last two national expansions. Two (Tennessee and Texas) border Arkansas, and a third (Florida) is in the southeast region.

Current policy also punishes middle-class household budgets. They pay the top 7 percent rate for income near $35,000, a threshold less than Arkansas median household income ($41,302) reported by the Census Bureau. The problem dates to the 1970s when the top rate was increased to 7 percent without indexing for the Consumer Price Index (CPI). The federal tax cuts enacted in the early 1980s by Republican President Ronald Reagan and a Democratic-controlled Congress, in contrast, included a CPI adjustment.

Inflation’s effect is reflected in a 1996 state report that found the failure to adjust rates to CPI pushed Arkansas’ middle class into a top bracket that would have started at $90,270 with indexing. Today, that threshold is nearly $135,000 due to inflation.

There are two ways to help middle-class households. The number of brackets could be reduced. Or the number could remain the same with lower rates. Support for income and capital gains cuts have emerged in recent years, with the Democraticcontrolled state House passing measures sponsored by Rep. Ed Garner, R-Maumelle, in 2007, 2009 and 2011.

Critics dismiss the idea of tax reduction without due consideration. Yet state reports have raised the issue. The Fluor GLS report in 2002, commissioned by the Legislature, included a lengthy discussion of Arkansas’ tax rate disadvantage with other states in the region. The state Economic Development Commission’s 2006 annual report noted, “Arkansas continues to rank near the bottom in several economic indicators,” and included a proposal to reduce capital gains rates.

Compromise is part of the process. Spending increases or a stand-alone grocery tax cut fail to recognize the legitimate concerns of the centerright side of the policy spectrum.

Further tax cuts depend on expansion at higher growth rates, and an exemption review led by state Rep. Davy Carter, R-Cabot. He explained at a March forum hosted by our group that the review will be completed before early 2013, allowing policymakers “to get out in front.” Savings from repealing exemptions could be applied to further cuts.

A modest reduction in grocery and income taxes while reducing tax rates on capital to encourage job creation is feasible, given the business cycle’s current state and surplus state revenue.

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Economist Greg Kaza is executive director of the Arkansas Policy Foundation (arkansaspolicyfoundation.org), a think tank founded in 1995 in Little Rock.

Editorial, Pages 21 on 11/24/2012

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