As you would expect in this season of discontent, taxes will be on the minds of Arkansas legislators when they assemble in January. They will be talking about tax cuts rather than increases, but that is not necessarily a good thing. Impetuous tax cuts can imperil fairness and solvency. The Arkansas tax system already is grossly unfair and barely supports a weak program of services.
The blue-ribbon highway committee has proposed a big package of new taxes or a diversion of taxes to build and repair highways, roads and streets, but it will be dead on arrival at the Capitol. The legislature clearly will be in no mood to raise taxes. Even the Chamber of Commerce plea to raise unemployment taxes to avert a harsher federal levy to replenish the federal coffers for extended jobless payments in Arkansas will meet resistance because many legislators ran on a pledge never to raise a dime of taxes for any purpose even when their masters ask for one.
The real danger comes from a tax-cutting euphoria, a sense that voters this year were angry about taxes and spending, wherever and for whatever purpose. Voters are always more discerning than that.
Governor Beebe wants the legislature to shave another half-penny off the sales tax on groceries, lowering it to 1.5 percent and putting Beebe a step closer to his goal of eliminating the tax (except the small part that is embedded in the Constitution). That would reduce revenues by $20 million a year, which the budget can accommodate only if the slow economic recovery continues. The state cannot go beyond that without cutting back aid to communities, which accounts for most state spending.
The most improvident proposal is the one that has the broadest support, repealing or phasing out income taxes on capital gains. The Arkansas Policy Foundation, the rich man’s think tank, is back arguing that ridding investors of taxes on their profits is the best thing the state can do to stimulate the economy and create jobs. A bunch of legislators want to sponsor the bill. Legislators, having heard their masters’ voice, will find the legislation irresistible. Beebe may have to exercise his veto, although the legislature can override it by a simple majority.
The philosophy behind special capital-gains treatment is that government should collect income taxes only on the wages of workers, not on the income of investors. The myth that taxing investment profits discourages hiring will not go away, although the record over and over disproves it.
In 1999, the legislature excluded 30 percent of long-term capital gains from taxes to stimulate jobs, Governor Huckabee and the sponsors said. Employment declined the next three years. The record is just as consistent at the national level. Capital-gains taxes were raised under President Gerald Ford and the economy rebounded. President Jimmy Carter cut capital-gains taxes and economic growth decelerated. President Ronald Reagan cut them in 1981 and the nation immediately fell into the deepest recession since the 1930s. He raised it in his big tax-reform bill in 1986 and hiring accelerated the next two years. President George W. Bush lowered the taxes and the act was followed by the worst jobs performance of modern times.
If lawmakers want to give special help to the 15,000 or so Arkansans with the lion’s share of capital gains—those with incomes above $200,000—they should be frank about it and not claim that they’re doing it for the unemployed. They’re not.
Better yet, just don’t do it.