“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.
