Note: This article is revised and re-posted for use by the reader for the following three purposes:
1) Assessing the laws passed as “tax reform” by the 92nd Arkansas General Assembly of 2019;
2) Use for future tax reform which will strengthen the Arkansas state economy; and
3) Assessing the effective job of this tax task force as we consider whether a task force is useful in producing better state policy (as opposed to using the committee system already in place.)
We are reminded here that under our Revenue and Stabilization Act, Arkansas government spends all it takes in. Therefore, the best tax reform for Arkansas remains to be one springing from capped and reduced government spending starting with the question —“How much do Arkansans want to pay their state government for its services?” BVT–June 12, 2019.
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‘Tax Reform and Relief Task Force’ Recommendations
By Brenda Vassaur Taylor, JD, LLM (Taxation)
October 30, 2017
Disclaimer—These are the views and opinions of the author only and may not be shared by others.
It is the objective of Conduit for Action (CFA) to offer to the Tax Reform and Relief Legislative Task Force recommendations for legislative changes which, not only reduce the size of government and therefore increase economic freedom for all Arkansans, but also:
- Modernize and simplify the Arkansas tax code;
- Make the Arkansas tax laws competitive with other states in order to attract businesses to the State;
- Create jobs within the State; and
- Ensure fairness to all individuals and entities impacted by the tax laws of the State of Arkansas.[i]
(Note: These recommendations come from experienced Arkansas tax attorneys, certified public accountants, economists, and small Arkansas manufacturers who live and work in Arkansas.)
How Can Arkansas Afford to Cut Taxes?
Before we can have tax reform in Arkansas, it is absolutely necessary that we recognize that in Arkansas, we simply budget and spend all we take in. Therefore, in Arkansas, as a direct result of the Revenue Stabilization Act (RSA 1945), the level of government spending in Arkansas is directly determined by the tax system not the budget process.
While we appreciate that the RSA requires that we balance the budget, under the current A, B, C priority budgeting system, the legislature, with help, designs an annual budget that always “cries for more money.” Under this system, as state dollars come in, “needs” are met (priority A), next the “wants” (priority B) are funded, and in good years the “wish list” (priority C) is filled. Surpluses are also dumped into “rainy day funds” or the now unconstitutional “general improvement fund”—guaranteeing all annual revenues are spent.
The fact that the tax system determines revenues as well as spending was illustrated in a recent answer by the Arkansas Bureau of Legislative Research in its RFP No. BLR-170002- Q1 to a prospective tax policy consulting firm with the response that the tax task force with the assistance of its chosen Consultant will determine the amount of revenue that the state needs to raise for public service.
In Arkansas, the partnership of the RSA with those seeking more government solutions means there is no “getting spending under control” in our state as echoed at the Federal level.
It is merely a question of
“how much do the people of Arkansas want to pay for government?”
The authors of a recent research paper sponsored by Mercatus Center, George Mason University expressed this fact in the following terms:
“Taxes are the “tail that wags the dog” in Arkansas budgeting. If taxes are raised, government spending is guaranteed to go up. If taxes are cut, spending is guaranteed to go down. The level of spending is set by the tax system itself. Understanding this fact is crucial to understanding why government spending has increased in Arkansas. …[I]n large part, the absolute size of Arkansas’s spending is determined by the tax system”.[ii]
Therefore, if you want spending reduced in Arkansas, if you want smaller government, you simply cut taxes!
1-What We Pay & Can Afford: So if spending is too high, how much do we pay in taxes?
Again, citing the Mercatus report,
“Arkansas uses all the major tax instruments available to states, including income, sales, and property taxes, while some of Arkansas’s neighbors do not have certain taxes (notably, Tennessee and Texas have no personal income tax).
The overall state-and-local tax burden—10.1 percent—is the highest among the competitor states, and it is the 17th highest in the nation.
Arkansas has the second-highest average state-and-local sales tax rate, at 9.3 percent. The top marginal state income tax rate is 6.9 percent, the second highest among our competitor states …, and two border states have no individual income tax (Texas and Tennessee).
The corporate tax rate is also the second highest among Arkansas’s competitor states, at 6.5 percent… All these data points show that taxes are high in Arkansas compared with border and competitor states, and even compared with the nation in some cases.[iii]
It took BLR, 192 pages to summarize all 10 categories of taxes in Arkansas for the legislature in October 2016 in its bi-annual preparation for the general session.[iv] These also include the regulator taxes and fees not mentioned by Mercatus. It includes not so visible taxes like the 2.5 percent tax on insurance premiums which yielded over $169 million, a 43% increase in receipts from the previous year (FYE June 30, 2015.) (It is also worth noting—insurance companies like all big corporations do not pay taxes—they simply pass on the cost of the tax to the consumer—i.e. the 19.3% increase in insurance premiums recently announced by Arkansas BCBS starting January 2018.
The Mercatus report also cites comparisons showing Arkansas spending per capita at $7,674 as the highest spending per capita among the boarder and comparable states.
“Arkansas spends almost 24 percent more per capita than the state with the next-highest spending, Mississippi. On average, Arkansas spends over 59 percent more than its competitor states, which spend an average of $4,815 per capita. Compared to its border states, Arkansas still spends 51 percent more than their average of $5,072.[v]
Removing federal government spending,
“Arkansas still has by far the highest state government spending compared with the competitor states. The amounts for other very poor states, such as Mississippi, do drop significantly …., but Arkansas remains at the top. The full group of competitor states spends on average $3,192 per capita, and Arkansas spends almost 72 percent more, at $5,481.”
Spending may be acceptable if one can afford it (and it gets you where you want to be!) But Arkansas’s gross domestic product (GDP) per capita trails the national average of $55,295 in 2015 and ranks among the lowest compared to its peers.
“In 2015, Arkansas’s per capita GDP of $41,299 trailed the per capita GDP of Texas, Louisiana, Missouri, Tennessee, Oklahoma, and Florida, but exceeded the per capita GDP of Mississippi (Figure 1a). Each state in the region except Texas is below the national average.” [vi]
The high overall state spending in Arkansas is most notable for such a poor state! It is time to let the people take charge of their own money to seek a better outcome.
2-Specifics Reforms: What changes are needed? CAVEAT: One must clearly understand that in no way should legislators consider broadening the tax base or elimination of exemptions unless and until tax rates are significantly cut. Waiting to cut rates while broadening the tax base and eliminating exemptions is simply a tax increase.
Corporate Tax Reform:
- Totally Eliminate the Corporate Income Tax.
- This income stream is the most volatile and is in fact double taxation passed on to the consumer.
- The state already recognizes reducing taxes on companies increases economic development when it regularly choses certain companies for give tax give a-ways.
- Pair this with a complete repeal of corporate welfare spending programs which include state and local tax incentives.
- Corporate Welfare picks winners and losers, distorts the economy, and shifts current businesses tax dollars to competing companies. BLATENTLY UNFAIR!!
- End the Corporate Welfare Quick Action Closing Fund Tax Incentive Program.
- Repeal Corporate Welfare Tax Subsidies including: Create Rebate, ArkPlus, Equity Investment Tax Incentives, Research and Development Credits, and Advantage Arkansas.
- This will also allow local taxing authorities to keep more tax dollars.
- Eliminate the Corporate Franchise Tax.
- Stifles growth in business creation in Arkansas
- If necessary increase the initial filing fee when creating the entity to offset some lost revenue.
- Eliminate Sales Tax on Inventories
- Improves competitiveness with other state
Individual Income Tax Reform:
- Individual Income Tax Rates Reduction and Simplify the Schedules to a single, flat rate of no greater than 9%.
- Continue the current low-income exemptions and deductions
- For pass-through business filers, allow complete expensing in year of purchase rather than depreciation
- AR residents will likely lose the state and local tax deductions at the federal level which is basically a tax increase on AR residents. This should be an added deduction on the state level in order to compensate for the increase in tax at the federal level.
- Extend the number of years for a carryforward of a Net Operating Loss (NOL)
- Allow for a carryback for a NOL
- Freeze spending at last year’s level, and implement automatic triggers for rate reductions to be implement for the individual income tax rate reductions over no more than a three-year period as revenue grows.
Reforms to Avoid:
- Eliminating exemptions without first significantly reducing rates.
- Broadening the tax base without first significantly reducing rates.
- Reforms that do not lead to a reduced amount of money going to Government.
- An Internet Sales Tax or Gas Tax Increase.
Offer to augment tax reform:
Government Spending Reform
- Recommend a Proposed Constitutional Amendment for a Tax-Expenditure Limit to Contain Government Growth.
- Tie the limit to the growth in inflation plus population growth.
- Include a tax rebate mechanism automatically triggered at certain thresholds to return revenue collected above the spending limit.
- A proposal like Colorado’s TABOR (Taxpayer Bill of Rights) should be considered.
Government Efficiencies Reform
- Implement Performance Based Budgeting
- Implement Activity Based Cost Accounting
3-Research or Recommendations Similar to one or more CFA Recommendations: Below is a list of the most respected and conservative groups and foundations in the state and nation who spend millions developing good economic tax policies. Guess what! They have posted research or positions that we find supportive of one or more of our recommendations. This does not imply any of these organizations embrace our recommendations in this article but only to point that their research or recommendations have included positions similar to one or more of our recommendations. The articles on point are referenced in our footnotes.
It is certainly hoped that the members of the tax task force (and all members of future legislative sessions) will take the time to build their own knowledge base so that they will have a bench mark to test their own consultant (and proposed bills.) It is likely that, like most task forces, this one has a pre-determined outcome. But it is hoped that its members will reconsider, meet the challenge and learn what is at stake. Again, the following are all directly on point with at least one or more of the issues discussed under section #2 above:
- Trump Administration[vii]
- Heritage Foundation[viii]
- The Heartland Institute[ix]
- American Legislative Exchange Council[x]
- CATO Institute[xi]
- American Enterprise Institute[xii]
- Freedom Works[xiii]
- The Club for Growth[xiv]
- Reason Foundation[xv]
- Recent Arkansas US Senators vote to eliminate deductions for state and local taxes[xvi]
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- Tax Foundation/ Arkansas Center for Research in Economics[xvii]
- AR Policy Foundation (Murphy Commission)[xviii]
- Arkansas Republican Platform[xix]
Conclusion: It is not a matter of how much we are to spend on government or whether there is a spending problem or a revenue problem. The question is—how much do the people of Arkansas want to pay for government services? That is all that determines what is spent in our state. The current mood in our country has sent a clear message to DC and to Little Rock. The people want to keep more of their freedoms and more of their own money and want government to have less. It will be left to another day to discuss the quality of service Arkansans receive for the money now being spent.
[i] Act 78 of 2017 Tax Reform and Relief Act of 2017
[ii] http://uca.edu/acre/files/2016/06/Theres-Nothing-Natural-about-the-State-of-Government-Spending-in-Arkansas.pdf
[iii] http://uca.edu/acre/files/2016/06/Theres-Nothing-Natural-about-the-State-of-Government-Spending-in-Arkansas.pdf
[iv] http://www.arkleg.state.ar.us/bureau/fiscal/Publications/H.%20%20Tax%20Handbook/2016%20Tax%20Handbook.pdf
[v] http://uca.edu/acre/files/2016/06/Theres-Nothing-Natural-about-the-State-of-Government-Spending-in-Arkansas.pdf
[vi] https://files.taxfoundation.org/20161206233223/Arkansas-The-Road-Map-to-Tax-Reform.pdf
[vii] https://www.treasury.gov/press-center/press-releases/Documents/Tax-Framework_1pager.pdf
[viii] http://www.heritage.org/taxes/report/analysis-the-unified-framework-fixing-our-broken-tax-code
[ix] https://www.heartland.org/publications-resources/publications/research–commentary-maryland-corporate-income-tax-reform
[x] https://www.alec.org/model-policy/statement-alec-principles-of-taxation/
[xi] https://www.cato.org/publications/research-briefs-economic-policy/do-corporate-taxes-hinder-innovation#full
[xii] http://www.aei.org/?s=STATE+CORPORATE+INCOME+TAX
[xiii] http://www.freedomworks.org/content/state-state-income-taxes
[xiv] http://www.clubforgrowth.org/issues/taxes/
[xv] http://reason.org/news/show/the-facts-about-the-corporate-incom
[xvi] Cotton and Boozman voted this week in favor of eliminating the deduction for state and local taxes-ADG-Oct 20, 2017. See the argument in favor: http://dailysignal.com/2017/10/17/state-and-local-tax-deductions-stump-growth-says-legislators/
[xvii] https://files.taxfoundation.org/20161206233223/Arkansas-The-Road-Map-to-Tax-Reform.pdf
http://uca.edu/acre/files/2016/06/Theres-Nothing-Natural-about-the-State-of-Government-Spending-in-Arkansas.pdf; Note added 6/12/2019: since the initial publication of this article, the author was contacted by Nicole Kaeding with the Tax Foundation personally to voice her objection that the original article implied agreement by the Tax Foundation were referenced by this author. Ms Kaeding stated that the Tax Foundation did not agree with the conclusions of the author. I suggest that the reader personally study all reports referenced in these footnotes.
[xviii] http://www.arkansaspolicyfoundation.org/policy/murphy_summary.html (this one is a little dated but still good policy.)