The late, great Leland Duvall, the farm and business writer for the Arkansas Gazette, occasionally invoked Moreland’s Laws of Economics to explain the conduct of institutions of finance or commerce. Moreland’s Sixth Law might be “Profits are never high enough.” Moreland’s Fourth Law could be “Taxes are never low enough.” Moreland was the Ozark mountain community where Duvall was reared. His numbering was a matter of whim and varied according to the occasion.
Duvall’s formulation on the optimum level of business taxes would explain the Arkansas State Chamber of Commerce’s presentation this week to the legislature’s Joint Revenue and Tax Committee. It hired a big accounting firm to analyze Arkansas’ various taxes on corporations and those of the surrounding states and, for some reason, Kansas.
What do you think the chamber’s study showed? Exactly. It showed what the chamber wanted it to show. Arkansas needs not to impose so many taxes on corporations. They would grow and hire more people if Arkansas taxed them like states with lower corporate tax burdens.
The chamber and the corporations for which it fights want the legislature to lower tax rates and create more exemptions when it gathers again in regular session, in 2013, or in the 2012 session in January if the governor and the legislature could be persuaded to extend its fiscal session for the purpose of helping industry and creating jobs. Who can blame them? You would like to pay fewer taxes, too, wouldn’t you, if your state and local governments could provide the essential services without them?
You could be forgiven your skepticism if you doubted the efficacy of a comparative study of state tax climates. So disparate are the tax laws of the states that you can massage the tax rates, exemptions, credits, deductions and special deals for this or that kind of business to show whatever you want the study to show. This one is a good case in point.
The study concluded that when you weighed the various taxes that affect investments by a corporation, Arkansas was near the top in a number of categories. The overall “effective tax rate” on corporations ranged from Texas’ 9.1 percent to Louisiana’s 12.7 percent. Arkansas’ rate, the corporate accountants said, was second highest at 11.5 percent. The differences actually don’t look so forbidding, but another scholar might establish an entirely different set of numbers.
Texas was supposed to levy negligible income and franchise taxes while Arkansas levied a tiny franchise tax, but an income tax that graduates to 6.5 percent on net income above $100,000. Arkansas’ income- tax rate is higher than those of Texas, Mississippi and Oklahoma but lower than Tennessee’s, Missouri’s, Louisiana’s and Kansas’. (Kansas’ is commonly listed as a 4 percent tax, but on net income over $50,000 it rises to 7 percent, higher than Arkansas.)
While Texas does not have a corporate income tax, it has a margin tax that reaps huge revenues for the state. It is not based on a company’s net profits but—big difference—upon its total revenues or gross receipts after wages and salaries. Also, unlike Arkansas, the states of Kansas and Texas require combined reporting by multistate corporations so that they pay taxes on all the revenues the companies collect in those states. Arkansas permits the corporations to shift their Arkansas income to subsidiaries in tax havens to avoid paying taxes in Arkansas. The chamber’s accounting scholars would consider the effective tax rate of one of the big oil companies high in Arkansas, but it really would be negligible.
Arkansas’ property taxes are considerably lower than those of the competing neighbors. We impose a high sales tax, but corporations, particularly manufacturers, have won exemptions for their major transactions.
Did they factor in severance taxes on minerals? Energy is Texas’ big industry. While Texas’ margin tax on the big oil and gas producers and Oklahoma’s income tax on them are not particularly high, the states charge the companies 6 to 7 percent of the market value of the gas they produce. Arkansas collects less than 2 percent.
But the more important consideration is that the effective state corporate tax rate has little to do with business expansion. While every business would love to pay lower taxes, there are far more critical factors that determine when and where you launch or expand. If Arkansas’ income tax rate is a little higher than, say, Mississippi’s or Texas’, the Arkansas business takes a greater deduction when it pays its taxes to Uncle Sam.
Here is why the chamber’s lobbying for lower corporate taxes is important to you: If corporate taxes are lower, then at some point taxes on everyone else—consumers and workers—will need to be higher. It just works that way. That explosion of economic growth and new government revenues that is supposed to follow tax cuts for corporations and investors never happens.
Let’s hope the legislature keeps that in mind when it ponders the chamber’s tax study.
