Tuesday, February 15, 2011

EDITORIAL >> Shenanigans at the Ledge

The Revenue and Taxation Committee of the House of Representatives yesterday began the heady process of putting Arkansas into the same fiscal boat with the national government, Texas and a number of other states with ballooning deficits. It endorsed tax cuts that Gov. Beebe has said would wreck the state’s delicately balanced budget. 

What’s wrong, you may ask, with cutting our taxes? But they are not cutting your taxes, unless you are a big manufacturer or expect to make a big profit from the sale of appreciated stock, a business or other investment. 

These are tax cuts for a very few businesses and individuals — those who need them least and who typically are paying lower taxes than you pay. The sponsors, who are most of the Republicans in the House of Representatives, say the tax cuts would cause a big boom in hiring. They say the investors and manufacturers would use the savings to hire people and start new businesses that would hire lots of people. 

It is pure hokum. Not a single bit of evidence supports the claim for either tax cut. 

HB 1052 would further cut the already low sales tax that manufacturers pay for the electricity and gas they use. You pay a state sales tax of 6 percent for the gas and electricity for your home or business. The manufacturers would pay slightly more than 2.6 percent. Their electricity and gas are cheaper, too. Industrial customers get a break over homeowners and small businesses on their energy bills. 

But if the Tyson plants, the steel mills and other manufacturers can increase their profits by saving on their gas and electric bills, they will turn around and hire more employees and increase their production. That was the sponsors’ argument. The steel mills will increase their production and hire the new employees to do it only if they can sell the extra products. If the demand is there and they have the capacity, they will expand with or without the little savings on energy.  

Rep. Ed Garner of Maumelle, the chief sponsor of HB 1002, which would eliminate state income taxes on profits from the sale of Arkansas property, makes the same argument for his bill. The state Tax Division estimated that the tax could would cost the state at least $66 million a year, and possibly much more. Garner claims that it would create so many new jobs and new businesses that the state would gain revenue, not lose. He offered not a shred of evidence to support his claim. 

It’s no wonder. Here’s the record: Arkansas already is one of the few states that tax income from investment profits at lower rates than other kinds of income, like wages and salaries. When Arkansas cut the capital-gains rate — from about 7 percent to roughly 4.9 percent — a few years ago, Arkansas promptly fell into a slump and far from gaining jobs, it lost them. 

Republicans have made the same claims about cutting the federal tax rate on capital gains. It would spur business expansion and new jobs. The record: Between 1976 and 1987, Congress cut the capital-gains rate twice and raised it twice. Unemployment actually increased after both tax cuts and employment actually went up after the tax rates were raised. Congress cut the tax again in 2003. The economy sputtered along for a couple of years and then fell into the deepest and longest recession since the ‘thirties. 

Garner said Arkansas was at a disadvantage with surrounding states that either have no tax on capital gains or a rate lower than Arkansas’. They get jobs and investment that we could get if we only taxed people’s wages and salaries and not profits from stocks, bonds and other property, Garner maintains. 

Let’s see. Tennessee and Texas do not tax capital gains and their unemployment rates are higher than Arkansas’. You may have read that Texas faces a $27 billion budget shortfall and is going to have to decimate public education, universities and other services. Sure, throw us into that briar patch. 

Let’s be practical. No business is going to refuse to invest in jobs and production in Arkansas because of the little capital-gains tax. Unless the tax were 100 percent of the profits from the appreciation, the investor is going to make the same decision regardless of the capital-gains tax.

What businessman would forsake all profits rather than keep only 95 percent of them? 

These tax cuts serve only one purpose. They increase the income of the recipients. In the case of capital gains, people earning more than $250,000 a year take 75 percent of them in Arkansas. If the state is going to offer tax relief, there are plenty of people who should be ahead in the line. 

Gov. Beebe said he might just let the tax cuts become law without his signature and force the sponsors of the bills to designate where to cut the state budget to offset the revenue loss.

But that is dangerous. The sponsors do not have to do it, and they won’t. They will say, just take it out of waste and fraud, and it’s your job, not ours, to find them. Our job is to please our benefactors.