The dumbness of tax cuts | Arkansas Blog

The dumbness of tax cuts



It's too late to stop the Arkansas legislature — much less educate them.

Nonetheless, with the Senate poised to zip along millions in tax breaks today, it's worth an early read of Ernest Dumas' column on all the, to put it kindly, misunderstandings on which these tax cuts are based and the future state disaster they might cause.

(I'm glad somebody said something about giving an enormous tax break for the gas electric utilities burn in part to generate electricity to sell at a profit in other states. That's a real job creator, increasing profits for multi-state utilities off their generating business.)


The drive to slash the taxes of Arkansas’s wealthiest people and biggest corporations rests on a single premise: People are too dumb or pay too little attention to know what is being done to them by their elected representatives.

That does not put too fine a point on the narrowly targeted tax cuts that the Senate and House of Representatives are whooping through this week. The tax cuts on capital gains and manufacturers’ energy apply almost altogether to 1 percent or fewer of individual taxpayers and businesses—the most affluent 1 per cent and those who least need help.
Any political manual would advise you that sponsoring or voting for such legislation would mark you for defeat in the next election. Corporate profits are hitting records and the very rich are soaking up a bigger and bigger share of the nation’s wealth every year while everyone else is losing ground or hanging on, yet the tax relief goes to those who are most well off.

But the Republicans have a different theory. They believe that all you have to do is say “tax cuts” and most people will assume it’s for them or that the benefits will reach them somehow. To vote against a tax cut is supposed to be suicide, and Democrats seem to believe it, too.

That political calculus has tended to be proven. The big Reagan tax cuts of 1981 and the George W. Bush tax cuts of 2001 and 2003 proved to be highly popular, although most of the benefits in all three rounds went to the top 4 percent of taxpayers and some low-income families actually had to pay higher taxes under the Reagan round. That the tax cuts produced gargantuan budget deficits never made it into the public consciousness.

It worked politically because they were general tax cuts, and the Republicans could say truthfully that most Americans got something, even though it was too small to be felt.

The two big special-interest tax cuts this week do not do that. The elimination of income taxes on the capital gains from the sale of Arkansas property will benefit no more than 10,000 of the state’s 2.9 million residents, and some 70 percent of the $64 million in tax savings will go to a handful of those taxpayers, those whose incomes are more than $250,000 a year. The $20 million reduction in sales taxes on electricity and gas will go only to manufacturers and the big electric utilities that burn gas to fire generating boilers. They are some of the nation’s most profitable businesses: Tyson Foods, Pilgrim’s Pride, ConAgra, Georgia Pacific, Cargill, Whirlpool, Entergy.
You can’t sell people on the idea that they will benefit from these tax cuts when they know they will have no capital gains and do not own a manufacturing plant. But the ruse this time is that the tax cuts would create jobs for all the unemployed Arkansans. Who can oppose jobs?

Neither tax cut would produce even one new job unless investors and plant owners suddenly start making business decisions upon completely irrational impulses rather than upon the prospect of making a profit.

Let’s take the capital gains tax cut first. Arkansas is one of the few states that treats capital gains—profits from the sale of tangible property, stocks, etc.—different from earned income from wages and salaries. The top income tax rate is 7 percent, but Arkansas taxes investment income on average at a little under 4.9 percent. That is because since 1999 it has excluded 30 percent of capital profit from taxes. Incidentally, when Arkansas excluded the 30 percent from taxes its unemployment shot up—the opposite of what the tax cutters said would happen.

Also, Arkansas taxes are deducted on federal tax returns, which means that when you eliminate the Arkansas tax on capital gains nearly 35 percent of the tax savings go to the federal government, not the taxpayer.
So the effective tax rate on capital gains in Arkansas is only about 3.3 percent.
Here is why the sponsors of the bill say it will create thousands of jobs in Arkansas: An investor has an idea that he can make $1 million (choose your own figure) by buying an Arkansas business or starting one and then selling in a few years. But if he looked at the Arkansas capital gains treatment and realized that he would be able to keep only $967,000 of the $1 million profit he would pass. He would rather have nothing than only $967,000, so there would be no job creation.

Is that how the business mind works? Of course not, which is why no capital gains reduction in Arkansas or at the federal level has ever caused a spurt of hiring.

In addition to the revenue loss, the state will have to pay dearly to defend this unconstitutional legislation before it is invalidated. A long line of precedents say you can’t favor in-state investments.

The manufacturers’ tax cut ought to make the average homeowner and businessman even madder. Under utility tariffs, industries pay much less for the electricity and gas they use than do homeowners or small businesses. The manufacturers’ lobby, which includes the state and local chambers of commerce, got the legislature and Governor Beebe to slash the sales tax on their energy two years ago. Now they are back for a bigger bite.

If their sales taxes, which are a minuscule part of their energy bills, are sliced to a little more than 2 percent (yours are 6 percent plus a city or county levy) they say they might put someone else on the payroll or may not shut down.

Is ConAgra or Tyson going to hire someone because its profits are a trifle higher owing to their energy sales tax savings? Of course not. They will hire another worker if demand for their products increases and they need another worker to meet it.

Altogether, all the tax cuts making their way through the legislature will reduce revenues by some $120 million a year by 2014. That’s how the fiscal crisis in Washington and at the state capitals of Wisconsin, Texas, Oklahoma, Florida and other states began. They want Arkansas to be next.

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