Needing advice on tax policy, we would never have turned to the Tax Foundation, a Washington-based research group that has been a reflexive critic of taxes in almost any form for as long as we have known of it. Now it turns out that we were too reflexive ourselves in our judgment about the organization.
An economist with the Tax Foundation tendered quite a bit of advice to the legislature about taxing and budgeting strategy last week, and the lawmakers would be well advised to follow it. Governor Beebe no doubt resented Joshua Barro’s counsel since some of it contradicts his program for the 2009 session. He should consider them a perfection of his own plans and embrace Barro’s suggestions.
Here is what he advised:
Instead of lowering the sales tax on groceries another penny, from 3 percent to 2 percent, as the governor is proposing, target the tax savings to those who really need it, which are working households with low incomes. That could be done by a fundable income-tax credit for low incomes covering the annual estimated sales tax that families pay on groceries. Several states do that in some form. A state earned income-tax credit similar to the federal credit would do the same thing. To enlarge on Barro’s proposal, the tax credit might be adjusted to reflect the costs of sales taxes on gas, electricity and water for the working poor. That tax is even more regressive than the tax on groceries because some 300,000 of the poorest Arkansas families, those who receive federal food stamps, are already exempt from paying sales taxes on food they buy with stamps but not from utility taxes.
Forget about declaring a sales tax holiday for back-to-school shoppers each year, as a few legislators are proposing. Barro said tax holidays on the purchase of clothing and supplies just do not stimulate economic activity. It is regressive, too, for those benefiting the most are well-to-do families that spend much more on children’s clothing.
Abolish the corporate franchise tax and consolidate it with the corporate income tax, which Barro suggested be made a flat tax. The current marginal rate of 6.5 percent would be a good starting point.
All those steps would produce a slightly more stable tax base, which would bear up in economic bad times and preserve state services when they are most needed. Governor Beebe and the legislature are apt to see the wisdom of his advice before very long as the economy plunges ever deeper into malaise.
Beebe promised in his campaign in 2006 to phase out the tax on groceries in phases. He and the legislature cut it in half in 2007 and he thinks he can take another penny off next year without jeopardizing important services. He does not want to welsh on a campaign pledge, which is admirable.
But shrinking the tax base has long-range consequences that come home to roost when the economy worsens. The sales tax is the stable revenue source in such times. Income taxes boom in prosperous times and now account for the $300 million surplus in the treasury.
When the job market goes south, as inevitably it will even in a state with a nearly nonexistent manufacturing base, the sales tax keeps the government in business. The grocery tax indeed punishes low-income working families who get no nutrition assistance, but a fundable tax credit for food would meet that need without shrinking the tax base. A grocery- tax exemption for those with comfortable incomes offers no more social benefit than an exemption for French furniture. The aggregate of taxes that a family pays, not the source of any individual levy, is the crucial thing.
Barro’s idea of eliminating the franchise tax, which in Arkansas is little more than a nuisance to most businesses, and merging it with the corporate income tax ought to have no effect on revenues, but it would relieve businesses of paperwork and the government of administrative burdens.
Texas combines a franchise tax with an income tax and calls it something else. It enables the state to boast that it does not have a corporate income tax while collecting billions of dollars annually in a fairly progressive way from the biggest corporations. Arkansas should not make a habit of emulating Texas, but this is a little Longhorn innovation that we could copy without apologies.
