A good sign

Arkansas taxpayers are about to enjoy two significant tax cuts, a reversal from a nearly century-old policy that underestimated capital flight and interstate economic competition.

Fiscal conservatives, inspired by citizen involvement, have successfully advanced two policy ideas in the 21st century that will be acted upon in the next 120 days.

The first is a significant reduction in Arkansas’ income-tax rate, a policy advanced by Gov. Asa Hutchinson and the Tax Reform and Relief Legislative Task Force, which spent a year and a half reviewing ideas before issuing recommendations in November.

The second is the virtual elimination (0.125 percent) of the regressive grocery tax. On Jan. 1, Arkansas will join 37 other states, Federation of State Tax Administrators records show.

The tax cuts will be achieved while the annual state budget—excluding unfunded liabilities—is balanced, a policy in stark contrast to federal fiscal practices.

The state motto, Regnat Populus, is Latin for “the people rule.” Arkansans create vibrant civil society when they reject angry voices and volunteer to solve problems within a broad policymaking process.

The two tax cuts emerged as serious ideas because of extensive citizen action: the Murphy Commission (1996-98), a non-legislative ballot initiative (2002), and the moral authority of the Democrat-Gazette’s editorial page during this long era.

Capital flight is an economic problem in Arkansas. Entrepreneurs have fled Arkansas, which has the highest top income tax rate (6.9) among border states. Three in the region (Florida, Tennessee, Texas) do not levy an individual income tax.

Payroll employment is the broadest state-level economic indicator. So how does Arkansas fare in terms of jobs creation versus local states without income taxes?

U.S. Bureau of Labor Statistics records show job-creation rates in Texas (23.1 percent), Florida (22.9 percent) and Tennessee (18.7 percent) outpace Arkansas (8.0 percent) in the current expansion, which dates to June 2009. Tennessee taxed dividends and interest, but a 2016 measure phases out the income tax by 2022.

This is not the only example. Florida (11.4 percent) and Texas (8.6 percent) outpaced Arkansas (5.2 percent) in the preceding expansion (November 2001-December 2007). Florida (35.4 percent) and Texas (33.2 percent) also topped Arkansas (24.5 percent) in an earlier expansion (March 1991-March 2001).

Lowering the top income tax rate to 5.9 percent, as proposed by Governor Hutchinson and state legislators, would bring Arkansas closer to the regional average (4.9 percent).

It would also send a message to markets that Arkansas is turning a page in its economic history. Since the income-tax law of 1929, Arkansas policy has been to raise taxes for education. A skilled work force is an economic development factor. But it has been treated as the only factor. Factors such as tax rates and infrastructure have been neglected, contributing to decades of sub-par employment growth.

Policymakers wisely rejected a proposal to maintain the grocery tax at its current rate (1.5 percent). The two pending tax cuts will benefit all Arkansans, and are a sign that fiscal conservatism has not only emerged in Arkansas, it is maturing.