THE THREE DECADE ‘IDEAS BATTLE’ TO ENACT INCOME TAX CUTS

(June 2024) The tax cuts enacted by policymakers this month are the latest action in a decade-long ‘ideas battle’ that began more than a quarter-century ago with the Murphy Commission, a Policy Foundation project.

“The state’s income tax should be reduced … an across-the-board cut, reduce marginal rates, exempt taxpayers below a certain income level from ﬁling, and expedite indexing for inﬂation.” Improving Productivity by Reducing Taxes and Taxes and Savings in Arkansas. Policy Foundation, 1998 studies

After then-Gov. Mike Huckabee took office, the Commission devoted almost three years (1996-1998) to a detailed study of Arkansas state government. More than 100 community leaders and volunteers developed recommendations to make Arkansas government smaller, more cost-effective and more accountable to taxpayers.

Congressman Hill’s Observation

The Commission produced two 1998 fiscal studies: Improving Productivity by Reducing Taxes (1) and Taxes and Savings in Arkansas.(2) The studies were “intended to help the public become more informed about tax issues and possible changes in tax policy and the structure of Arkansas taxes.”

Congressman French Hill (AR.-2nd District), a then-Policy Foundation board member explained the studies “provide the reader with more information to better understand complicated Arkansas tax reform issues that loom just ahead.” Hill chaired the Commission’s tax policy panel. In the late 1990s, Arkansas policymakers were being encouraged to raise the state income tax. By contrast, the studies advanced several ignored principle:

Arkansans are not under-taxed;
Taxes matter when seeking higher economic growth;
Double taxation discourages saving and investment;

Hill also noted the “out-migration effect” of capital fleeing to states with “lower or zero taxes” such as Florida, Texas, and Tennessee, terming “this capital exodus devastating for Arkansas entrepreneurs and community needs.”

Hy and Veasey on Arkansas’ Fiscal Crisis

Professors Hy and Veasey maintained “that it is virtually impossible for any legislative body to cut government spending, especially if that spending reduction is to be based on any meaningful assessment of the efficiency and effectiveness of government programs.” Legislatures, they argued “are more interested in authorizing expenditures than they are with reducing spending.”

Spending growth led to a crisis: Arkansas ranked first in per capita state and local tax burden growth, well above the U.S. average. Taxes were growing faster than personal income. According to public opinion surveys, Arkansans were aware of this development and sought “more bang for their tax buck.”

The study proposed making state government, “at least indirectly, more aware of the efficiency and effectiveness of government programs by cutting taxes.” Hy and Veasey argued, “Reduced revenues will encourage the state to make difficult choices about where scarce state revenues will be spent.” The ultimate purpose of the proposal was “not to punish state employees,” but to increase accountability and responsibility for programs and expenditures” using strategies such as “natural attrition” to “budget cuts (excluding education).”

Berry on High Growth States

Professor Berry noted “states with lower marginal income tax rates have higher economic growth.” To move Arkansas “from a low-wage to a high-wage economy,” he maintained the state needed “to decrease the marginal tax rates on high-income employees, in order to attract those workers to Arkansas.”

In terms of state corporate income taxes, Berry said they represent a type of “double taxation.” Corporate profits are taxed at both the corporate level and the personal income tax level, when dividends are paid.” He noted Arkansas’ top capital gains rate “loomed even larger than it did before” after passage of the federal Taxpayer Relief Act (1997), which reduced the capital gains tax rate to 20%. “That makes Arkansas less competitive in attracting capital as compared with states with lower or no capital gains tax rates,” he wrote.

Policymakers Take Action

The next year, state Sen. Jim Hill, D-Nashville, sponsored SB23, a 30% capital gains cut. A Democrat-controlled state legislature passed Hill’s measure, and it was signed into law (PA 1005 of 1999) by Republican Gov. Mike Huckabee.

Governors Lead on Issue

Arkansas governors’ later took leadership roles on the income tax. The top income tax rate was reduced from 7.0% to 4.9% during Gov. Asa Hutchinson’s eight-year tenure (2015-2022). The first tax cuts benefited low-income filers, followed by middle-class and higher-earning taxpayers. Under Gov. Sarah Huckabee Sanders, the top tax rate has been reduced from 4.9% to 3.9%.

Employment Growth, Expansions and Surpluses

The Policy Foundation, in the 21st century has published more than 100 research memos and opinion columns in news media that note the relationship between states without an income tax and employment growth.

States such as Florida, Tennessee and Texas have higher job creation rates in periods of economic expansion when compared to states with income taxes. According to the National Bureau of Economic Research, three expansions have occurred in the 21st century (November 2001 to December 2007, June 2009 to February 2020, May 2020 to present).(3)

The Policy Foundation also noted the relationship between expansions and Arkansas revenue surpluses. Expansion is the natural state in a market-based economy, with occasional recessions (2001, 2007-09, 2020). Over a three-decade period, surpluses generally occurred in expansion years, with several exceptions. The fiscal policy underlying income tax cuts relies on surpluses.

More recent research has noted Arkansas’ tax base has broadened since 2015.

— Greg Kaza

References

(1) Hy, Ronald John and R. Lawson Veasey, Univ. of Central Arkansas. Improving Productivity by Reducing Taxes (September 1998) Policy Foundation

(2) Berry, Keith. Taxes and Savings in Arkansas. (September 1998) Policy Foundation

(3) www.nber.org