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The policy disaster that almost happened

By   /   June 26, 2015  /   No Comments

Photo by: Shutterstock

Photo by: Shutterstock

By Greg Kaza | Watchdog Opinion

Think of it as ‘The Policy Disaster That Almost Happened.’

Two decades ago, a blue-ribbon panel of more than 100 Arkansas citizens spent three years reviewing state government.  The Murphy Commission, as it was called, issued a series of reports and recommendations in 1998.  These included a recommendation to reduce Arkansas’ income and capital gains tax rates, and to reform a K-12 public education system that bore the policy imprint of Bill and Hillary Clinton.

“There is significant evidence,” the Murphy Commission noted, “that reductions in marginal state tax rates encourage state economic growth.”  The panel recommended, “Tax rates on productive behavior should be reduced.”

Liberal critics blasted the Murphy Commission and its recommendations.  But Arkansas’ Democratic-controlled state legislature worked with Republican Gov. Mike Huckabee to advance several of the panel’s ideas in 1999.  These included charter schools and a 30 percent exemption to the state capital gains tax rate.

The capital gains exemption was sponsored by state Sen. Jim Hill, a Democrat from the small town of Nashville in southwest Arkansas, not far from the Texas border.  The Murphy Commission noted Arkansas faced a competitive disadvantage in terms of fiscal policy when competing with states like Texas,  Florida and Tennessee.  Texas and Florida do not have an income tax, while Tennessee only taxes dividends and interest.

Capital flight to Texas had become such a problem that Texarkana, a border town, was exempted from Arkansas’ punitive seven percent income tax rate in the 1970s.

Early in the 21st century, a study commissioned by the Arkansas legislature also noted the competitive disadvantage in terms of tax rates.  The Fluor GLS study noted, “A state’s tax structure can be beneficial or detrimental to a company’s long term profitability.”  The study’s authors observed, “The State of Arkansas must understand this fact and take the necessary steps to minimize the state tax burden on companies interested in locating or expanding their operations in the state.”

Arkansas policymakers ignored the issue for more than a decade while evidence of the state’s competitive disadvantage grew in scope.  Non-farm payroll employment is the broadest state-level economic indicator.  Texas’ economy created new jobs at a rate more than double Arkansas’ in the 2001-2007 economic expansion.  Texas’ job creation rate is more than triple Arkansas’ in the current expansion that started in mid-2009, according to U.S. Bureau of Labor Statistics data.

Republicans took control of the Arkansas legislature in 2013 for the first time since Reconstruction.  House Speaker Davy Carter, a banker, advanced a 50 percent exemption to the capital gains tax, a move supported by Democratic Gov. Mike Beebe.

Enter ‘The Policy Disaster,’ a tax increase.  Legislative Republicans, in 2014-15, squabbled internally over whether to expand Medicaid.  The infighting created a lack of focus on pro-growth economic policies.  The Republican-controlled state Senate reduced the exemption to 30 percent, much to the chagrin of job creators.

It appeared decades of hard-fought work were threatened.  Then state Rep. Matthew Shepherd from El Dorado, in south central Arkansas, stepped forward with a proposal to restore the 50 percent exemption.  It passed the House and the Senate concurred.

‘The Policy Disaster’ was avoided.  The bad news is that Arkansas has generated hundreds of millions of dollars in surplus revenues in recent years. Yet policymakers failed to phase-out of the capital gains tax.