Columns » Ernest Dumas

The low tax myth

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The Tax Foundation has come out with a massive study of the states with the best and worst tax structures for business. Let’s hope that CEOs turned the page when they saw the news or else Arkansas is dead meat. On the other hand, if we want to be really prosperous maybe we should get the word out. Arkansas is down there near the bottom with a bunch of high-income and fast-growth states. A good state for business is one where it doesn’t have to pay many taxes, and an even better state according to the Tax Foundation is one is where no one pays much in taxes. That describes South Dakota, which ranks far ahead of all the other states in the Tax Foundation’s index. It collects sales and excise taxes and not much else and spends little on education or much else besides highways. South Dakota falls on the low side of the states in personal income. Next door to South Dakota is Minnesota, which suffers under the third worst tax system in the Tax Foundation’s reckoning but which enjoys one of the highest per-capita incomes. Arkansas ranks 43rd among the states and the District of Columbia because it has slightly graduated corporate and personal income taxes, an unemployment tax that the Foundation considers punitive, a relatively high sales tax that even requires businesses to pay sales taxes the same as individuals on a few of their purchases like office furnishings, and overall state tax collections that are not low. Arkansas ranks pretty high in overall state tax collections because it collects most of the money for the public schools. The Tax Foundation, which has been looking after the tax interests of business and the upper crust for many years, doesn’t buy the old bromide that taxes are the price of civilization. Taxes that fall on businesses and business owners and executives impair investment and growth and discourage entrepreneurship. But here, this will give you an idea of the Tax Foundation’s underpinnings. The day after the general election its director announced that great days were ahead because President Bush would make his first-term tax cuts permanent and move the country toward a flat-tax system that would be fairer to investors. He warned that it would spell political trouble because to reach a fair tax system taxes would have to be raised on low- and middle-income people who were the only beneficiaries of Bush’s first-term tax cuts. I’m not making this up. The Tax Foundation said the four rounds of Bush tax cuts relieved taxes on working folks and the very poor and shifted them to “the rich” on a massive scale. His definition of the rich was those making above $55,000 or so a year. The Bush tax cuts went principally to those earning more than $200,000 a year. The Tax Foundation wanted state legislatures to take notice. If they want to stimulate business growth they should get in line with the best states in its index by cutting or eliminating corporate income taxes, eliminating taxes on capital stock (like Arkansas’s little corporate franchise tax), flattening personal income taxes at a low rate, excusing businesses from paying sales taxes and lowering unemployment taxes. But should they? The District of Columbia had the worst tax system in the country, but from 1998 to 2004 D.C. enjoyed the greatest growth in per-capita income in the country. New Mexico, Vermont, Massachusetts and Maine, which the Tax Foundation condemned for their heavy business taxes, were among the 10 fastest-growing states. Nevada, a tax haven for corporations and the Tax Foundation’s sixth best state, happens to be the only state where per-capita incomes have actually fallen since 1998. There is just no favorable correlation between low business taxes and general prosperity. Three relatively prosperous states with low or nonexistent corporate taxes happen to be there because their government is financed heavily by mammoth severance taxes on oil, gas and coal. The Tax Foundation’s central message was another downer for Arkansas. It said states that tried to compete with one another with massive tax-giveaways to industries were making a big mistake and that they should just cut taxes instead. Arkansas voted last month to dip into the state treasury to give a company up to $220 million in infrastructure improvements if it will locate in Arkansas and hire 500 people. The jobs may not come or may not stay, the foundation said. It pointed out that Ohio gave five years of tax goodies to a moving company, which did not hire the 100 people it promised and fired 98 instead. Florida gave big tax refunds to a major credit card company to open a call center but lawmakers were shocked this year when the company closed the center and laid off 1,100 workers. Prosperity has many agents, but low taxes and meager services are not among them. States that do what they have to do to insure that people, the workforce, are educated and healthy will come out on top nearly every time.

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