Base tax policy on fairness, not on Texas

— Because it’s what they do, new majority Republicans at the state Legislature likely will cut income and capital gains taxes.

They probably also will oblige, with decidedly less enthusiasm, Gov. Mike Beebe’s insistence on reducing further, to near-nothing, the state sales tax on groceries.

It’s no fun opposing a Christmas tree arrayed with such dazzling tax reduction decorations. But someone must be the grinch.

My argument with Republicans comes down to a basic difference of philosophy.

They see escalating tax rates on bountiful incomes, and government extractions from investment earnings, as punitive burdens on personal responsibility and accomplishment that limit general economic growth.

Their theory is that well-to-do people, spared these taxes, would use the savings to make investments that would create jobs for regular people. It’s called trickle-down or supply-side economics, which has never been borne out either by empirical or anecdotal evidence.

I don’t recall ever meeting anyone who declined to make more money because of income taxes or capital gains taxes. Anyone out there who has turned down a pay raise for fear of tax-bracket creep-or thrown away the Powerball winning ticket because of the tax bite-is encouraged to give me a call.

I know several successful business people in Arkansas. Usually they have innate advantages by birth or marriage. But they also have personal skills they apply to seize those advantages and adapt smartly to the modern marketplace.

None demonstrates any hankering that I’ve detected to move his business to Texas or Florida or Tennessee to avoid income taxes. If any of them complain, it’s usually about the ongoing costs of trying to do business profitably. It’s not so much about the percentage taken after they’ve successfully done business profitably.

They move to a tax haven only late in life after they sell the business and get uncommonly rich.

As to business location: You frack where the gas is. You drill where the oil is. You pick oranges where oranges grow. You do research and development where the educated people are.

There is a quote I keep handy from Grant Tennille, director of the state Economic Development Commission, which is charged with recruiting employers to the state. He says no prospect has ever told him it was rejecting the state because of the income tax, or state taxes generally.

Instead prospects cite concerns about the readiness of the work force, a failing the state could only address by spending sufficient amounts of tax dollars wisely on public education.

You can find waste in the margins of the state government budget. You should dutifully eliminate that excess. But that doesn’t begin to offset the big outlays.

The other day, a particularly extreme Republican state legislator was wondering why we’d allocate a few hundred thousand additional dollars to the state library when we have a Medicaid shortage. Libraries are nice, he said, but we face a crisis.

The answer is that thousands don’t offset billions. It’s that moving the library money to Medicaid would leave the state with the same Medicaid problem . . . and an out-of-date library.

I adjudge taxes based on their sufficiency to fund essential government and on their fairness.

Income taxes are the fairest taxes of all because you only pay them if you have income. Sales taxes are the most unfair, especially when applied to the food and clothing of a working man and his kids. That is why Beebe’s tax cut should be first and only on the immediate agenda.

What we need on income taxes in Arkansas is reform, not an across-the board cut.

We ought to eliminate the current maximum 7-percent rate that kicks in unfairly much too soon, at a mere $32,600. We could make the rate 6 percent at that point. We could apply that 7 percent rate at a higher level, maybe $100,000. Then, to make up the lost money for the government, we might apply a new highest rate, perhaps 8 percent, beginning at, oh, $200,000.

What you’d do that way is cut taxes for everyone making up to $200,000, meaning the vast majority of Arkansawyers. The taxpayer with an income of $200,000 or less would pay less than the 7 percent he pays now on everything above $32,600. He’d pay only 6 percent on some, then 7 percent on some.

But you’d get the money back with a higher rate kicking in on the highest margins of the few elite Arkansas incomes in excess of $200,000.

That’s conceptual. I haven’t done the actual math on how to set the ranges and rates to hold the state treasury harmless. But you see the principle.

As for capital gains, not many Arkansas taxpayers have any. They have wages, and, if lucky, holdings in equity funds in a 401(K) that will be taxed as ordinary income when withdrawn.

So to conclude: Our tax policy should be based on sufficiency and fairness, not unsubstantiated theories or pitiable desires to mimic abutting states-Texas and Tennessee-to which we are always free to move.

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John Brummett’s column appears regularly in the Arkansas Democrat-Gazette. Email him at [email protected] and read his blog at brummett.arkansasonline.com.

Editorial, Pages 13 on 11/27/2012

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