LITTLE ROCK John Brummett and I recently discussed income-tax relief in front of a packed house in Fayetteville. His Sunday column covered his argument against reducing income taxes on all workers, and I’m going to lay out the case in favor.
This is less about taxes and more about the goal of improving quality of life for all Arkansans. Numerous studies have concluded that we rank between 42nd and 48th among the 50 states on quality-of-life measures like median income (good jobs) and adult college graduates, while we rank near the top on negative measures like child poverty and teen pregnancy.
I have met thousands of Arkansans and can say with absolute confidence that we are just as good as the people in the other states, so we deserve better. Would we keep the same playbook if the Razorbacks were ranked near the bottom, decade after decade? No, we’d fix it.
We have run one play for too long in state government—sending new taxes and spending straight up the middle of the field, play after play. From 1997 through 2008, state spending across all categories grew 16 percent faster than the state’s economy, and to keep a balanced budget, taxes went up, too.
So what needs to change? We need a new play and small course corrections. Just imagine, Arkansas on the path to winning the qualityof-life championship! The more you tax something, the less you get, and Arkansas taxes income—in other words, work—more than any state that borders us. It costs more to hire a worker in Arkansas than it does to hire a similar worker in a neighboring state. Common sense tells us labor costs help determine where employers add jobs, so Arkansans lose.
Barack Obama’s former chief economic advisor, Christina Romer, studied tax laws enacted during the past 50 years and concluded that changing taxes by 1 percent could change output (gross domestic product) by 3 percent, sustained over several years. Tax relief for workers grows the economy by triple the amount of the tax reduction.
The “Rich States, Poor States” study also showed the impact of taxing work. From 2000-2009, incomes, jobs and population in the nine noincome-tax states grew faster than the nine highest income-tax states. This drove 30 percent faster growth in state government tax revenue for the no-income tax states, too.
Brummett said that, overall, taxes in Arkansas aren’t that high. Using federal numbers, total Arkansas state tax revenue on everything from income to fishing licenses in 2011 was $2,634 per person, which ranked us 35th of 50. However, as a percentage of personal income, Arkansas had the ninth-highest taxation rate in the country! States with higher percentages included special cases like Alaska (energy tax revenue included), North Dakota (energy taxes) and Hawaii (tropical island). Even California and New York took a lower share of personal income than Arkansas.
Our top income-tax rate is 7 percent on earned income above $33,200. My plan would give all workers tax relief and simplify the system. We eliminate two of the six tax brackets—the 2.5 percent and 7 percent rates—which drops the new top rate to 6 percent. We then phase in higher income levels (six-figure earners) for the 6 percent rate over time.
The result is a dramatic tax break for low-income workers (60 percent reduction from 2.5 percent to 1 percent), strong relief for middle-class working families (35 percent cut from 7 percent to 4.5 percent), and a modest drop for high-income workers and job creators (14 percent from 7 percent to 6 percent).
We can phase in tax relief at a pace that maintains state government spending, keeps the budget balanced, and includes other priorities such as eliminating the grocery sales tax and targeted spending increases. We do it by slowing the growth in state spending.
This year, Arkansas general tax revenue will be up about $150 million, and that’s after we reduced five taxes in 2011: grocery sales, clothing (salestax holiday), used cars, low-income single parents, and manufacturers’ electricity tax. We’re expecting a surplus of $70 to $100 million. We’ve seen recent court decisions which suggest school-desegregation-assistance payments, currently $70 million per year, are likely to end. The governor’s prison-reform bill will help us avoid $70 million to $90 million per year in new prison costs. Based on national statistics, Medicaid fraud legislation could save between $40 million and $50 million more per year.
Turning Arkansas into a good jobs magnet will require more than just income-tax relief. Of course, excellence in education is critical to our future. We must lessen frivolous litigation, reduce wasteful regulation and improve innovation to accelerate long-term job creation. This new course will put Arkansans to work in good jobs and will generate more resources for essential government services than our current punishing tax rates on work.
Charlie Collins of Fayetteville represents District 89 in the state House of Representatives.