Of the various tax reductions that have been approved in recent years, the state's new governor and Republican legislature are considering elimination of the one that would be most beneficial for Arkansas' economic growth: the capital gains tax reduction.
Currently Arkansas exempts 30 percent of capital gains, reducing the net tax from 7 to 4.9 percent. In 2013 the Legislature increased the exemption to 50 percent, reducing the net capital gains tax to 3.5 percent. While in Texas, there is no state tax at all on capital gains. It's zero percent. No wonder capital is flowing to that state.
Reducing this tax in Arkansas would attract more capital, that is, investment and therefore jobs to Arkansas, which this state very much needs. Reducing this tax also makes Arkansas more attractive to companies--and their key people--to come here. And to keep those companies already in the state.
Keeping investors in Arkansas is another reason for the other part of the lower capital-gains tax, which eliminates any tax on capital gains of more than $10 million. It's said eliminating this provision of the tax would affect only a handful of people. Those may be people who are bedridden or otherwise unable to move out of state. Just about everybody else affected by taxing all capital gains, especially those who sell their business, would be very much tempted to leave the state in order to avoid such a huge, mostly one-time, tax.
Many such taxpayers already have done so by relocating to Texas or Florida when they decided to sell their businesses. And when they leave the state, Arkansas loses the revenue derived from the capital-gains tax on the first $10 million in capital gains, too. Then Arkansas loses all the income taxes they would have paid here in future years had they not moved. And it is not just state government that loses the revenues from those relocating out of state. Their local banks may well lose their accounts and deposits. Their towns and cities, which may have been their hometowns for decades, stand to lose the philanthropic and civic contributions these wealthy citizens make to their communities, contributions that make Arkansas a better place to live for all of us.
Eliminating the tax on capital gains of more than $10 million would also help attract new investors, capital, and companies to Arkansas, benefiting not just those they employ but the Arkansas companies they do business with as suppliers and contractors.
Arkansas stands to gain economically by keeping its capital-gains tax low. It's easy enough to fall for the Tax the Rich panacea for every economic desire, but on closer examination it turns out to be just the same old snake oil. And both Asa Hutchinson and the Ledge should know as much.
That's why they need to retain the state's capital-gains tax as it was enacted in 2013, which means retaining its benefits for all of Arkansas and her people.
Editorial on 01/27/2015