How to change taxes

Memo to Arkansas legislators

Tuesday, November 20, 2012

— NOW THAT the Arkansas legislature has a Republican majority in both houses for the first time in more than a century, the odds are taxes will be cut. What’s more, a Democratic governor has already proposed reducing the state’s sales tax on groceries, long known as The Shame of Arkansas, from 1.5 percent to an eighth of a percent. Estimates are that the savings to taxpayers would amount to some $69 million a year.

As legislators consider these proposals, they need to consider what type of tax reductions could help the state the most.

Governor Beebe has already made great progress in reducing the grocery tax from 6 to 1.5 percent. In terms of simple fairness, that’s been a great step forward, making it easier for the poorest of us to buy the basic necessity of life-food.

But which approach would help low- and middle-income folks the most: another cut in the grocery tax, or that step in combination with other tax reductions? Such a combined approach could stimulate economic growth, providing jobs and higher wages, which would certainly help folks toward the bottom of the income scale.

The Arkansas Policy Foundation estimates that cutting the state’s tax on capital gains by 10 percent would reduce the burden on Arkansas taxpayers by $9.25 million. And reducing the state income tax from 7 to 6.75 percent would save them $45 million. This compares to a tax savings of $25 million if the sales tax on groceries were reduced from 1.5 to 1 percent.

PERHAPS the most important question in this discussion is how would any of these tax reductions affect economic growth. And the greatest stimulus for economic growth would be population growth. So how could Arkansas attract more people to the state, investing and spending their money here? And so boost the state’s economy?

For now Arkansas is at a significant disadvantage if you compare our state’s tax structure to that of, say, Texas or Tennessee, both of which have no income tax. And now Oklahoma, too, is talking about abolishing its state income tax.

But the Arkansas income tax has provided a solid base of revenue for state government for many years now, and abolishing it would require all other taxes to increase-and Arkansas’ sales tax is already high, with a sales tax in Little Rock now higher than that of San Francisco and New York.

One idea for enticing people to move to Arkansas would be to declare a five year moratorium on income taxes for new residents of the state. Which would put Arkansas on a more favorable footing when it comes to competing for future residents, who might also be considering Texas or Tennessee.

We haven’t seen any estimates on what such a tax moratorium for new residents might cost. But it might not cost much, and even add to the total revenue of state government, since all those who move here would be paying all kinds of other taxes-like sales taxes and property taxes. Not to mention the boost such a moratorium would give the state’s economy in general.

THIS MUCH the state can count on: More people are going to continue migrating from many parts of the country to the South. What with California increasing its state income tax-to a top rate of 13.3 percent-the migration out of that heavily taxed state is going to continue. What’s more, Democrats now enjoy a super-majority in California’s state legislature, and will be able to raise taxes even more.

Result: A lot of Californians are moving out of that state. One favorite destination is Austin, Texas, because of its low taxes, mild climate, and low cost of living-at least compared to California. Why not put Arkansas in competition for these same people and the jobs they bring with them?

Yes, it could be argued that after living in the Natural State for five years, a newcomer might leave and avoid Arkansas’ income tax altogether. But we all know what a small, wonderful state Arkansas is, and how when people move here, they love it and tend to stay. Our guess is that after five years, many of these folks would gladly pay Arkansas income taxes in order to enjoy the benefits of living here in the Natural State.

So whatever the Ledge decides about state taxes, let’s hope it’ll consider reducing taxes in a way that will help the state the most, and that means helping its population and its economy grow. That way, Arkansas could generate enough additional taxes to phase out all of the taxes now being collected on groceries once and for all.

Editorial, Pages 14 on 11/20/2012