“States with lower marginal income tax rates have higher economic growth … Dependence on revenues from taxpayers in high marginal tax brackets exposes the state government to revenue instability, which makes forecasting much more difficult.” Policy Foundation, 1998 report1
(April 2015) Critics of capital gains and income tax cuts used fallacious reasoning in numerous failed attempts to defeat tax cuts in 2013 and 2015. One logical fallacy, the ad hominem argument, was trotted out to attack Arkansas entrepreneurs and argue only the wealthy pay capital gains taxes. Another fallacy, the argumentum ad lapidem,2 consists of dismissing tax cut proponents’ claims without examining their content. This is not ‘A is A’ reasoning. These claims must be rebutted for Arkansas to build on the tax cuts enacted in 2013-15 and move forward.
More Arkansans Pay Capital Gains Taxes Than Critics Concede
Critics of the capital gains tax cut enacted in 2013 and reauthorized this year claim only the wealthy benefit. Records obtained from the state Department of Finance and Administration suggest a different picture: the average number of Arkansas resident filers with capital gains totaled nearly 115,000 from 2005 to 2013.3 These forgotten taxpayers nclude Arkansans4 within all income groups: upper-, middle-, and lower-income.
The revelation that more than 100,000 Arkansans paid state capital gains in six of these years should not surprise students of the economy. According to the Internal Revenue Service (IRS):
“Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the basis in the asset and the amount you sell it for is a capital gain or a capital loss … You have a capital gain if you sell the asset for more than your basis. You have a capital loss if you sell the asset for
less than your basis. Losses from the sale of personal-use property, such as your home or car, are not deductible.”5
Upper-income households aren’t the only Arkansas households to own “a home, personal-use items like household furnishings, and stocks and bonds held as investments.” The three great bull markets of the last quarter-century have created various capital gains for many Arkansans.
The Policy Content Behind Capital Gains Tax Reduction
Tax cut critics dismiss arguments for repeal without examining content. One tactic is to dismiss the 1998 Policy Foundation report, while ignoring the Fluor GLS report later funded by the General Assembly. In fact, both reached a similar conclusion: the capital gains tax places Arkansas at a competitive disadvantage with other states. In terms of jobs creation, Arkansas is near only one state without the tax in the current expansion:
| State | June 2009 | March 2015(p) | Growth Rate |
| Texas | 10,285,500 | 11,753,200 | 14.3% |
| Florida | 7,221,100 | 8,022,900 | 11.1% |
| Washington | 2,861,700 | 3,152,300 | 10.2% |
| Tennessee | 2,605,700 | 2,844,700 | 9.2% |
| Nevada | 1,144,400 | 1,237,200 | 8.1% |
| South Dakota | 403,400 | 429,200 | 6.4% |
| Alaska | 319,600 | 337,700 | 5.7% |
| New Hampshire | 628,400 | 654,000 | 4.1% |
| Wyoming | 284,900 | 295,200 | 3.615% |
| Arkansas | 1,161,300 | 1,203,200 | 3.608%6 |
Conclusion
Critics of the state capital gains tax cut enacted in 2013-15 use fallacious reasoning. One fallacy is that only the wealthy pay the capital gains tax. DFA records show average Arkansas resident capital gains filers totaled nearly 115,000 (2005-2013). Another ignores content. States that do not levy a capital gains tax have higher job creation rates than Arkansas.
–Greg Kaza
1 Murphy Commission report, Taxes and Savings in Arkansas (September 1998)
2 Latin for “against the man” and “appeal to the stone.”
3 DFA, 2005-2013 Capital Gain Statistics: (2005) 141,825; (2006) 145,220; (2007) 162,751; (2008) 104,368; (2009) 67,308; (2010) 84,558; (2011) 93,406; (2012) 107,131; and (2013) 126,654. The “revenue instability” discussed in the Foundation’s 1998 report is illustrated by the decline below trend around the Great Recession, which occurred between December 2007 and June 2009.
4 The average annual number of non-resident filers with capital gains totaled 22,398 between 2005 and 2013.
5 IRS, Topic 409, “Capital Gains and Losses.” http://www.irs.gov/taxtopics/tc409.html. The IRS explains, “Capital gains and losses are classified as long-term or short-term. If you hold the asset for more than one year before you dispose of it, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term. To determine how long you held the asset, count from the day after the day you acquired the asset up to and including the day you disposed of the asset.”
6 U.S. Bureau of Labor Statistics
