How weak is the current Arkansas jobs market? The recession officially ended in June 2009 (National Bureau of Economic Research) but the number of employed Arkansans is less than December 2007 when it started. In fact, Arkansas nonfarm employment has declined to 2004 levels, according to the U.S. Bureau of Labor Statistics (BLS). Arkansas entrepreneurs created world-famous businesses prior to the mid-1970s when the last income tax rate including capital gains occurred. They can do so again with the right incentives.
Once upon a time many economists did not accept the idea tax rates are a factor of economic growth. That is no longer the case. Tax rates are a factor of growth along with private property, the right of contract and rule of law; infrastructure; a functional education system that produces a skilled labor force; and non-arbitrary regulations. Rates are not the only factor, but entrepreneurs do take them into consideration when making decisions about job creation.
Arkansas must reduce its high capital gains tax rates if it hopes to successfully compete with other states for businesses that create good-paying jobs and raise income levels. Grocery tax reductions are one factor in Arkansas’ improvement from 48th to 44th in per capita income. New Mexico has also addressed its regressive grocery tax, and cut income and capital gains tax rates under Democratic Gov. Bill Richardson. New Mexico, as a result, has improved from 47th to 43rd in per capita income. Arkansas has moved well beyond the days when ‘Thank God for Mississippi’ was the unofficial state economic motto. Arkansas is no longer competing with Mississippi, which perennially ranks last (50th in the U.S.) in income. Arkansas is looking up, and anticipating the day when it finally achieves 100 percent income parity with the U.S.
We noted earlier this year there are three ways to cut capital gains taxes. The narrowest tax cut is another 30 percent reduction. The 82nd General Assembly, in 1999, approved a proposal by state Sen. Jim Hill, D-Nashville, to exempt thirty percent (30%) of a capital gain from the state income tax (PA 1005 of 1999). The Democratic-controlled House, in 2009, approved a measure to exempt net capital gains from the sale of Arkansas property owned more than one year. Eliminating the taxation of long-term and short-term capital gains would provide the broadest tax cut. One way to implement this policy is by phasing-out the capital gains tax over a multi-year period, even a decade. The grocery tax is being phased-out in a similar manner.
Recommendation
∙ Arkansas capital gains taxes should be reduced over a multi-year period.
