POST-MURPHY
COMMISSION TAX CUTS
"There
is significant evidence that reductions in marginal state tax rates encourage
state economic growth ...Rates on productive behavior should be reduced." Murphy
Commission, Policy Foundation project,1998
(April 2014) The Murphy Commission, a
Policy Foundation project, spent three years reviewing Arkansas' tax system
before publishing two studies1 in 1998 that concluded
rates were a factor affecting economic development.
The Murphy Commission identified two
taxes that were later reduced: the state income tax and the tax on capital
gains. The top income tax rate was cut from
7.0 to 6.9%.2 The capital gains rate was cut from 7.0 to
3.5%.3
Critics of the tax cuts criticize the
Murphy Commission, and dispute an observation made by the panel: Arkansas
economic growth must improve. They ignore
another study, commissioned by the state legislature more than a decade ago
that also found Arkansas tax policy was uncompetitive.
Tax
Rates, Jobs and Paychecks
Tax cut critics ignore Arkansas' weak
economic growth. Payroll employment is the broadest economic indicator at the state
level. U.S. Bureau of Labor Statistics
data4 show Arkansas payroll
employment growth (2.5%) is about half the national average (5.3%) in the
current expansion that dates to June 2009.5 Weak employment growth has contributed to
weak median family income and per capita income readings for Arkansas.
Arkansas has also failed to secure a
manufacturing super-project, a long-sought goal of some state politicians. That failure, in an earlier decade, led the
late state Sen. Bill Gwatney, D-Jacksonville to
persuade his colleagues to commission a report that examined Arkansas' ability
to compete for projects. The Fluor GLS report echoed key Murphy Commission
findings.6
The
Fluor GLS study, more than 500 pages in length, compared Arkansas' business tax
rates to 12 regional states, and found they are an important factor that firms
consider when making site decisions for super-projects.
Fluor GLS' authors observed:
"A state's tax structure can be
beneficial or detrimental to a company's long term profitability. Firms seeking
to locate or expand a facility understand that taxes are a necessary burden
that enables the government to provide services to all businesses and citizens
of the community. Businesses realize that any location they choose will result
in a tax burden for the company. Therefore, companies take into consideration
the tax and assessment rates at which taxes are levied in areas being evaluated."
"The
State of Arkansas must understand this fact and take the necessary steps to
minimize the state tax burden on companies interested in locating or expanding
their operations in the state."
Murphy
Commission and Fluor GLS reports reached a similar conclusion: tax rates are an economic factor that inform commercial decisions about
jobs and paychecks.
An
Unreported Success
Key Fluor
GLS tax policy recommendations7
were later approved by the legislature and governor, a success widely
unreported in Arkansas' popular press. Examples include reductions in the
capital gains tax, and in the sales and use tax on energy used in the
manufacturing process. The state
electricity manufacturing tax has been cut to 3.25%8
since Fluor GLS issued its report.
Conclusion
The
Murphy Commission and Fluor GLS both examined Arkansas' tax system more than a
decade ago and concluded state commerce was at a competitive disadvantage with
other states in the region. Federal data
show Arkansas continues to trail the U.S. in employment and income growth. Arkansas has also failed to secure a
manufacturing super-project.
The
Murphy Commission and Fluor GLS both examined the state capital gains tax, cut
by 50% since 1999. Some local states9
do not levy the tax.
--Greg
Kaza
1 Taxes And Savings In Arkansas (Dr. S. Keith Berry) and Improving Productivity By Reducing Taxes
(Dr. Ronald John Hy and Dr. R. Lawson Veasey). They are posted online at the Policy Foundation's
site (www.arkansaspolicyfoundation.org) at the Murphy Commission link.
2 The income tax
reduction, enacted in 2013, is effective in 2015.
3 The capital gains reductions were enacted in
1999 and 2013.
4 United States: (June 2009) 130,944,000 (March
2014) 137,928,000; Arkansas: (June 2009)1,161,300 (March 2014) 1,189,800.
5 National Bureau of Economic Research business cycle chronology
6 "The Fluor GLS Study and Arkansas' Hunt
for a Manufacturing Super-project" (Policy Foundation research memo), 2002
7 Other Fluor GLS
recommendations included accelerated
depreciation on industrial equipment, and reducing or eliminating the state
sales tax on construction materials, and on industrial
materials used and consumed in the manufacturing process.
8 Arkansas DFA:
http://www.dfa.arkansas.gov/offices/exciseTax/salesanduse/Pages/StateTaxRates.aspx
9 Texas is one example.