Friday, January 14, 2011

EDITORIAL >How do we grow?

Warren Stephens, the head of the financial powerhouse Stephens, Inc., outlined a new growth strategy—new in these parts anyway—for Arkansas’ municipal leaders. They should go to states that are in unusually deep distress in this long economic slump and pick off some big companies.

Stephens, who inherited one of the biggest investment banks off Wall Street from his father and uncle, said Arkansas should start recruiting businesses in Illinois to move their headquarters to Arkansas. He noted that Texas was doing that in California.

Illinois and California have grave budget problems—so does Texas, for that matter—and are slashing state spending and raising taxes to get their budgets in balance. The governor of Wisconsin this week invited Illinois businesses to come to Wisconsin to avoid the higher taxes that Illinois is about to levy to balance its budget.

Stephens’ strategy sounds a little ghoulish, feeding on the misery of people in other states, but that has become what economic development is all about—not the creation of new business and opportunity but stealing others’. Everybody does it, so if it seems a little amoral, we have to look out for ourselves in this Darwinian world.

But what do we tell them that Arkansas has that they do not have in Illinois, California, New Jersey or Florida that should cause them to leave the states where they apparently have operated successfully and set up shop in Arkansas?

Well, we have a state government that is much sounder fiscally than those states and, in fact, sounder than just about any in the country except several states in the northern plains. (What business executive wants to move his offices up to those iceboxes—the Dakotas and Wyoming?) Our jobless rate is lower than that of the distressed states, although why that is so may not be something we want to brag about. We didn’t have the manufacturing and technical jobs that companies have been shedding by the millions since this malaise all began in the summer and fall of 2007.

Stephens had a suggestion for putting ourselves in a better position to raid the distressed states: lower our income taxes. That’s where we thought he was heading. The legislature assembled this week and there is talk about lowering state taxes on the wealthy, especially those with high investment income.

Stephens said Arkansas tax rates are higher than those in surrounding states. He was corroborated by Greg Kaza, executive director of the Arkansas Policy Foundation, a think tank that lobbies for lower taxes on business and investors. He said that our neighbors Texas and Tennessee do not have income taxes. That is not exactly true. Tennessee does not tax wages and salaries, but it does tax investment income from dividends and interest. (By the way, it also taxes rich inheritances, which Arkansas does not.) While Texas and Tennessee do not call their taxes on corporations “income taxes,” both do tax them.

Kaza said states that do not have income taxes or have very low ones fare better than those with higher tax rates. Stephens and Kaza would have a hard time proving that. Let’s see. How do they measure stability and prosperity besides a sound government budget? What about joblessness? Yes, it’s pretty high in Illinois and California.

But the unemployment rate in Arkansas is lower than all the surrounding states except Oklahoma, and that includes Texas and Tennessee, the two that do not have a broad-based income tax. So our income tax is not the driver of unemployment. Of the seven states with no individual income tax of any kind, only the frost-belt states of South Dakota and Wyoming have a lower jobless rate than Arkansas. Florida, where people like Mike Huckabee flee to reap big profits without having to pay state income taxes, has one of the highest jobless rates in the country, 12 percent. Don’t throw us into that briar patch.

Arkansas’ income tax is, indeed, regressive. It reaches the top bracket at around $33,000. The structure ought to be more progressive. But all the surrounding states are just as regressive. They reach the top marginal rate at much lower income levels than Arkansas.

It simply makes no sense that the executive of a big company in Chicago or Los Angeles would decide to move his headquarters to Arkansas or even a state with no income tax at all so that his top executives would not have to pay quite as much income tax. State income taxes are made considerably smaller by the federal deduction for the taxes. The differential in impact of state income taxes is minuscule.

Neither does the tax record support the notion that cutting taxes on investors produces growth and jobs. We cut taxes on investment income by 30 percent in the tax year 2000. The state fell into a slump and Gov. Huckabee raised the income tax for two years to stabilize the state budget. Then we began to grow again.

No, it is not our tax structure that discourages economic development. If that were so, Arkansas would have been an economic powerhouse for the first century and a half after statehood when we had the lowest per-capita taxes in the country, by far. Investment decisions are made on far more pragmatic concerns: proximity to markets, raw materials and resources, the climate, infrastructure, a qualified work pool, energy availability and cost.

Gov. Beebe has a different idea. The big goal in his inaugural address Tuesday was to double the number of college graduates. He thought that was the key to prosperity. He may be on to something.