“Reduce the state’s income tax…repeal the state’s capital gains tax.” Murphy Commission, Policy Foundation project, 1998


(April 2013) The capital gains tax cut1 approved by the first Republican-controlled state legislature since Reconstruction is a modest step toward creating a more pro-growth economic climate in Arkansas. The measure, sponsored by House Speaker Davy Carter, R-Cabot, increases the capital gains exemption from individual income taxes from 30 to 50 percent.2  Carter defined the issue in terms of creating incentives for job creators.


The measure is a sincere effort to address Arkansas’ high tax rates on capital investment.  But it is unlikely to effect long-term private employment growth because of Arkansas’ extreme competitive disadvantage vis-à-vis states without capital gains taxes.


Tax Rates as a Factor of Economic Development


The Policy Foundation provided information on tax rates as a factor of economic development to a House panel.  Rates are a factor,3 along with a skilled work force (education); infrastructure (transportation); non-arbitrary regulatory climate; property rights, the rule of law and freedom of contract.


Arkansas’ Weak Employment Growth


The Foundation also provided information to the committee on the lack of employment growth in Arkansas.  According to the U.S. Bureau of Labor Statistics,4 Arkansas private payroll employment has expanded 2.3 percent versus 4.5 percent at the national level5 since the recession ended nearly fours years ago in June 2009.6  Arkansas private employment growth also trailed the nation in the previous expansion,7 expanding 4.6 percent versus 5.5 percent for the U.S.8


Border and Regional State Comparison


The Foundation also noted some border states have higher private employment growth rates.  These include Tennessee and Texas, which have high job creation rates (Southeast, Plains) in the current expansion.


Southeast9   Plains10  
Tennessee 6.37% North Dakota11 24.51%
North Carolina 4.64% Texas 8.98%
Louisiana 4.49% United States 4.47%
United States 4.47% Oklahoma 4.10%
Kentucky 4.36% South Dakota 3.81%
South Carolina 4.27% Kansas 2.67%
Florida 4.23% Nebraska 2.36%
Georgia 3.92%    
Virginia 3.00%    
West Virginia 2.69%    
Arkansas 2.30%    
Mississippi 2.06%    
Alabama 0.67%    


Tennessee and Texas share one factor of economic development: they do not tax capital gains.


States without capital gains taxes led both regions in the previous expansion.  Florida private employment expanded 11.7 percent versus 5.5 percent for the U.S., while Texas recorded an 11.9 percent growth rate.12


The Case of Nevada


Nevada does not levy a state capital gains tax and led the U.S. in private jobs creation in the previous expansion (2001-07), recording a 24.5 percent rate.13  Nevada also led all 50 states in two earlier expansions (1982-1990, and 1991-2001).14  Nevada recorded 64.5 percent growth in the first expansion (1982-90), and 68.3 percent growth in the second (1991-2001).


Nevada also had the highest private job creation rate among states in the West.  Three other states in the region do not levy a capital gains tax.15


States without Capital Gains Taxes as a Group


States that do not levy capital gains, analyzed as a group created private jobs at percentage rates greater than the U.S. average in all four economic expansions dating to 1982.  Private employment, in these nine states expanded 28.7, 35.5 and 11.6 percent versus the U.S. (25.3, 24.0 and 5.5 percent) in previous expansions (1982-1990,16 1991-2001,17 2001-200718), and 8.6 percent versus the 4.5 percent national average in the current expansion (2009-).19


Conclusion: Arkansas’ Competitive Disadvantage


Payroll employment is the broadest economic indicator at the state level.  Arkansas private employment growth has trailed the U.S. in both 21st century expansions (2001-07, 2009- ). Arkansas has trailed states without capital gains taxes since the 20th century.  Arkansas, in sum, cannot compete with these states, in the long run, with a capital gains tax in place.


Arkansas policymakers have emphasized spending on education, neglecting other factors including tax rates.  A new policy is required if Arkansas hopes to enlist in the ranks of the states of employment growth.


A 30 percent exemption in the Arkansas capital gains tax was approved by state legislators in 1999.  This year’s measure increases the exemption to 50 percent, and represents modest progress.  But Arkansas entrepreneurs will operate at a competitive disadvantage until the state capital gains tax is abolished by cutting rates over a multi-year period.20


–Greg Kaza

1  PA 1488 of 2013

2  The House version provided a 70 percent reduction.  The Senate reduced that amount to 50 percent.

3  A firm retained by the Arkansas legislature earlier this century to survey the state’s ability to attract a manufacturing super-project also noted tax rates are a factor.  Policy Foundation research memo (November 2003), “Tax Rates and Jobs Creation”

4  www.bls.gov.  To access the data click Subject Areas, State and Local Employment; SAE Databases, Top Picks; Arkansas; Arkansas, Total Nonfarm, Government, Seasonally adjusted.  Private employment is calculated by subtracting Government from Total employment.  U.S. data is posted under the National Employment subject area.

5  Arkansas private employment: 943,000 (June 2009), 964,700 (December 2012). U.S.: 107,993,000 (June 2009), 112,817,000 (December 2012).

6  National Bureau of Economic Research (www.nber.org), business cycle chronology.

7  An economic expansion occurred between November 2001 and December 2007, according to the NBER.

8  Arkansas private employment: 952,000 (November 2001), 995,300 (December 2007).  U.S.: 109,669,000 (November 2001), 115,666,000 (December 2007).

9  Tennessee private employment: 2,178,700 (June 2009), 2,317,500 (December 2012);North Carolina, 3,170,400 and 3,317,600; Louisiana, 1,528,200 and 1,596,800; Kentucky, 1,438,800 and 1,501,500; South Carolina, 1,462,400 and 1,524,800; Florida, 6,119,700 and 6,378,600; Georgia, 3,187,600 and 3,312,500; Virginia, 2,941,800 and 3,030,000; West Virginia, 594,900 and 610,900; Arkansas, 943,000 and 964,700; Mississippi, 846,300 and 863,700; and Alabama, 1,500,300 and 1,510,300.

10  North Dakota private employment: 288,500 (June 2009), 359,200 (December 2012); Texas, 8,464,500 and 9,224,700; Oklahoma, 1,218,100 and 1,268,000; South Dakota, 325,700 and 338,100; Kansas, 1,078,900 and 1,107,700; and Nebraska, 774,900 and 793,200.

11  North Dakota leads the U.S. in private sector employment growth in the expansion.  A commodity boom (natural gas and oil fracking) has increased labor demand in the state.

12 Florida private employment: 6,102,700 (November 2001), 6,814,800 (December 2007); Texas, 7,842,000 (November 2001) and 8,774,800 (December 2007).

13  Nevada private employment: 911,200 (November 2001), and 1,134,600 (December 2007).

14  The NBER determined expansions occurred between November 1982 and July 1990, and March 1991 and March 2001.  Nevada private employment: 334,500 (November 1982) and 550,300 (July 1990), and 548,700 (March 1991), and 931,900 (March 2001).  Nevada’s growth rate was more than double the national average in both periods. U.S.: 72,793,000 (November 1982) and 91,216,000 (July 1990); and 90,046,000 (March 1991), 111,643,000 (March 2001).

15  These are Alaska, Washington, and Wyoming.  States in other regions are New Hampshire and South Dakota.

16  Private employment in states without a capital gains tax: 12,055,800 (November 1982), 15,510,900 (July 1990).

17  Private employment in states without the tax: 15,412,700 (March 1991), 20,883,900 (March 2001).

18  Private employment in states without the tax: 20,449,800 (November 2001), 22,885,500 (December 2007).

19  Private employment in states without the tax: 20,827,100 (June 2009), 22,628,100 (December 2012).

20 The Arkansas sales tax on groceries has been reduced over a multi-year period.