Is Arkansas justified in giving tax breaks to specific corporations? Or should we lower the burden on everyone?
Popular intuition is that corporate welfare is unfair and expensive. As my colleague Jacob Bundrick argued in a prior op-ed, tax breaks may also be unproductive, not generating any benefits while still being unfair and expensive. But Mr. Randy Zook and Mr. Matthew Boch responded that Arkansas must engage in this process of corporate handouts.
Why? Because everyone else is doing it!
Mr. Zook and Mr. Boch allude to a much clearer and fairer path forward: We can reform our corporate tax code. Comprehensive tax reform would attract more business, make existing businesses perform better, and make the entire tax system fairer and more transparent. Focusing on tax reform rather than tax handouts also signals to all businesses and citizens that Arkansas has a tax system that does not privilege particular firms or industries.
Arkansas currently performs poorly on many national rankings of business-friendly tax policy. "Business friendly" does not mean giving firms handouts. Instead, tax analysts use this phrase to describe a general tax and regulatory climate which is hospitable to business, but does not engage in picking winners and losers.
The Tax Foundation ranks Arkansas as having the worst business tax climate among neighboring states, essentially tied for worst in the South. Arkansas also has the second-highest average sales-tax rate in the nation, and by far the highest combined state-and-local tax burden in the South, at 10.1 percent of state income, harming consumers as well.
What can be done?
First, Arkansas has six brackets in its corporate tax code, which is the second-highest number in the nation. Of the states that have corporate income taxes, most (30 states) have just one bracket, including Arkansas' neighbors Missouri, Oklahoma, Tennessee and Texas. A progressive corporate tax structure like Arkansas' penalizes businesses for being successful, and creates confusion for tax planning as businesses cannot always accurately forecast which bracket they will fall into.
The fix here is easy: Reduce the number of tax brackets. Arkansas can easily do this in a way that doesn't reduce revenue, but we should also look at lowering the absolute burden at the same time. If what businesses need to locate and stay in Arkansas are lower taxes, why not lower the rate for everyone rather than only for the politically privileged?
Furthermore, Arkansas does not index its corporate tax brackets for inflation. Yet most other states do. Arkansas is also one of only two states that uses a different corporate tax base than the federal income tax code. Not only is this unnecessarily complicated, but the two different tax bases provide two different sets of incentives, which pulls businesses in opposite directions.
Again, these are very simple fixes: Index the brackets for inflation and use the federal base for tax calculation.
There are other fixes to the corporate tax code that are worthy of discussion, such as apportionment for multistate firms, or carryback and carryforward rules. But my point is that we should be discussing broad changes that apply to everyone, not special breaks for politically favored firms.
Mr. Zook and Mr. Boch claim that even with significant reforms, Arkansas will still need to give tax incentives. But Arkansas should reform the tax system first, and then have that conversation.
While creating jobs sounds like a laudable goal, there is little evidence that tax handouts have a net positive effect. Since 1980, there have been 26 peer-reviewed academic studies of the effects of tax incentives on the local economy. Of those 26 studies, 25 found no impact or a negative impact on the economy.
Arkansas should heed this loud warning that the academic research shouts. We should focus on creating a fair, transparent, and efficient tax system for all consumers and businesses, not one that promotes lobbying and corporate welfare.
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Jeremy Horpedahl is an assistant professor of economics at the University of Central Arkansas and an affiliated scholar with the Arkansas Center for Research in Economics.
Editorial on 04/29/2016