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Reform taxes now

Arkansas’ system can improve by Jeremy Horpedahl and Nicole Kaeding Special to the Democrat-Gazette | November 28, 2016 at 2:32 a.m.

Arkansans, like all Americans, love to complain about their tax burden, and rightly so. Arkansas has some of the highest taxes in the country.

But taxes fund essential government services in our state. Can Arkansas reform its tax system to make it less burdensome for all Arkansans, while still maintaining state revenue? Our organizations recently released a joint report called "Arkansas: A Road Map for Tax Reform." We provide several routes for getting to the same desirable destination: a tax system that works for all Arkansans and is in line with best state practices and current academic research.

The overriding goal of our tax reform routes is to lower income-tax rates on hardworking Arkansans and our dynamic businesses. While all taxes distort markets, income taxes are the most harmful to individual entrepreneurship and overall economic growth. Academic research has long recommended lowering income-tax burdens and replacing any lost revenue with less harmful consumption and property taxes.

Our project is the result of six months of travel across the state talking to policymakers, business owners, and individual taxpayers to better understand what does and doesn't work in Arkansas' tax code. The list of complaints is long, but can be summed up this way: The tax code is "too complex" and "unfair," and taxes are "too high."

These real-life experiences match the research. The Tax Foundation's annual report, "The State Business Tax Climate Index," ranks Arkansas 38th on state tax issues, second worst in the Southeast. Three of Arkansas' bordering states rank in the top 20 (Tennessee, Texas, and Missouri).

We outline three roads Arkansas can take to reform the overall tax system. The most direct route would improve Arkansas' ranking from 38th to 15th on the Tax Foundation Index, making us highly competitive in the South and nationwide. This would involve eliminating the dozens of corporate tax incentives, the state's obscure franchise tax, and certain sales taxes on manufacturing. In exchange Arkansans get lower rates across the board and a fairer, more competitive tax environment. No longer would special tax breaks be needed to attract businesses to Arkansas since our tax system would speak for itself.

And those lower rates are not just for businesses. In two of our three reform paths, individual income-tax rates would be cut at all levels of the income distribution. The most tax cuts passed in 2015 targeted middle-class Arkansans, but Arkansas still has the highest individual income-tax rate among bordering states at 6.9 percent. Two of our neighboring states, Texas and Tennessee, do not tax individual income at all.

We propose lowering the top rate to 5 or 6 percent, coupled with the elimination of the bottom tax rate for low-income Arkansans. By expanding the sales-tax base to a variety of goods and services that currently have special-interest loopholes, income-tax rates can decrease while maintaining roughly the same amount of state revenue.

Unlike health and education reform, which can take generations to improve, tax policy can be put on the right path in a single legislative session. For example, North Carolina's tax reform in 2013 moved them from 44th on the Tax Foundation Index (worst in the Southeast) to 11th (best in the Southeast). How did North Carolina do it? They moved to a system with lower rates, fewer loopholes and exemptions, while still keeping each major tax type.

Our roadmap for Arkansas can bring about similar dramatic improvements in the tax climate. "Arkansas: A Road Map for Tax Reform" provides three routes to improve Arkansas' tax code to benefit everyone in the state, through economic growth and lower tax burdens.

Whether you are interested in tax policy or just your own high tax bill, our report will help you better understand how our tax system can be improved.


Jeremy Horpedahl is an assistant professor of economics at the University of Central Arkansas and a scholar at the Arkansas Center for Research in Economics. Nicole Kaeding is an economist at the Center for State Tax Policy at the Tax Foundation.

Editorial on 11/28/2016

Print Headline: Reform taxes now


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