Asa Hutchinson, the presumptive Republican nominee for governor, made another embarrassing blunder last week when he was telling a State Chamber of Commerce audience what he thought would be music to their ears. As governor he would cut business taxes.
Hutchinson said he wanted to make the tax code more friendly to industry. Specifically, he would let manufacturers skip the sales tax on their electricity and natural gas. Mind you, Hutchinson would not exempt homeowners from the sales taxes on their heating and light bills. The utility tax is the unfairest tax of all because it lands most heavily on the poor, who live in energy-inefficient houses.
But Hutchinson said manufacturing concerns shouldn’t have to pay. Arkansas lost a big steel mill to Mississippi this year, he said, because the company would have to pay sales taxes on its electricity in Arkansas.
Hutchinson told an Arkansas Democrat-Gazette reporter that he had a good source on the mill’s real reason for building in Mississippi: no taxes on electricity.
His source was not the mill’s owner, who said the next day that the tax was not a factor. For a very good reason: Arkansas already exempts steel mills from sales taxes on energy and his mill would have been exempt from the tax. That has been the law for nearly 20 years, thanks to Gov. Bill Clinton. Hutchinson acknowledged then that he did not know that. But he will extend the tax exemption to all manufacturers, he said.
Hutchinson can be forgiven for not knowing an intricate little bit of recent history.
No, his shortcoming is more serious. He honors the hoariest and most thoroughly discredited and laughable myth in Arkansas history, which is that Arkansas’s economic development has been held back these many decades by high taxes. Hutchinson is not the first politician to promise to attract industry by exempting industry from taxes on assets or commercial activity that others have to pay. It has been a political staple since the Redeemer Democrats wrested control from the tax-and-spend Republicans after Reconstruction.
One more time, a little primer is in order.
From the day it won statehood in 1836 until Mike Huckabee became governor, Arkansas ranked at the bottom of the states in the combined state and local taxes per person, rising every few years to 49th or 48th for a year before falling back to 50th. Its taxes were so far below all the other states during the Great Depression that the federal government singled out the state. If Arkansas did not levy some taxes for the relief of its starving and to educate its children (Roosevelt had Arkansas teachers, janitors and bus drivers on the federal payroll), Washington was going to cut off all aid. Fearing riots from desperate citizens, Gov. Futrell and legislature in 1935 legalized and taxed whiskey and racetrack betting and levied the first temporary sales tax.
But three years later, leaders were still convinced that even Arkansas’s paltry taxes must be driving industry away, so they passed a constitutional amendment eliminating for up to 10 years the property taxes on any manufacturing or processing company that built or expanded in Arkansas. The property tax was the stiffest tax Arkansas had, although it was the lowest in the United States.
If low or nonexistent taxes were really a draw, Arkansas by World War II would have been the manufacturing hub of the world, a phalanx of smokestacks from Blytheville to Texarkana.
And so it would be today because the tax philosophy changed little until the last 10 years. According to the compilations of the Bureau of the Census, in 1965 state and local taxes per capita in Arkansas were 60 percent of the national average, the lowest among the states. Arkansas was still dead last in 1975. It eased past Mississippi and Alabama by a single percentage point in 1980, after Bill Clinton raised a few highway taxes and got beat for it. By 1982, when he was elected again, the state was back comfortably in 50th, where it pretty much stayed until near the end of the decade, when Clinton pushed a few more taxes through the legislature and cities and schools raised local taxes. The legislature raised the income tax on corporations by half a percent on incomes above $100,000 and hiked sales, cigarette and motor-fuel taxes.
So did economic development slump? No, for a time Arkansas was a national leader in the creation of manufacturing jobs. How do you account for such a perverse combination as rising taxes and job growth? It was not an anomaly. When Gov. Dale Bumpers slightly raised just about every tax on the books except the sales tax rate early in 1971 and said the state should move aggressively against industrial pollution and quit chasing smokestacks, Arkansas enjoyed four years of unprecedented job growth.
Hutchinson missed the real message of the steel-mill story. The entrepreneur said a big reason he did not build in Arkansas was the high cost of energy in the state. Not so long ago Arkansas had some of the cheapest energy in the country but now it is higher than nearby states. Arkansas is a rich gas-producing state and imposes the lowest severance tax on natural gas in the nation, by far, but homeowners and businesses would not deduce that from their gas bills. Now that is something that a governor can influence.