Tax Justice Digest stories about Arkansas
For nine states -- Arkansas, Hawaii, Montana, New Mexico, North Dakota, Rhode Island, South Carolina, Vermont, and Wisconsin -- one straightforward approach would be to repeal the substantial tax breaks that they now provide for income from capital gains. In tax year 2008 alone, these nine states are expected to lose a total of $663 million due to such misguided policies, with individual losses ranging from $10 million to $285 million per state. A new ITEP report explains that repealing these tax preferences would help states reduce their large and growing budgetary gaps, enhance the equity of their current tax systems, and remove the economic inefficiencies arising from such favorable treatment.
This report explains what capital gains are, how they are treated for tax purposes, and who typically receives them. It also details the consequences of providing preferential tax treatment for capital gains income for states' budgets, taxpayers, and economies in nine key states. Lastly, it responds to claims about both the relationship between capital gains preferences and economic growth and the role capital gains taxation plays in state revenue volatility. (Appendices to the report provide detailed state-by-state estimates of the impact of repealing capital gains tax preferences.)
Read the report.
Arkansas voters approved a measure to institute a state lottery. While the state could certainly use the additional revenue, Arkansans should be wary of funding their government through regressive revenue sources such as the lottery.
Maine residents rejected an increase in the alcohol and soda taxes to fund health care. While it’s certainly a bad thing that these taxes are regressive (as well as unlikely to exhibit sustainable growth in the coming years), the ludicrousness of the fervent opposition this relatively minor tax created can be read about in this Digest article and this blog post.
Maryland residents also decided to secure additional revenues for their government via expanded gambling, in the form of 15,000 new slot machines. Check out this Digest article to learn about some of the problems with this proposal.
Missouri also attempted to increase its haul from gambling. Increased gambling taxes and the elimination of limitations on the amount of money one is allowed to lose were approved by voters this Tuesday. This Digest article explains how the proposal leaves much to be desired.
Minnesota voters decided to go through with a 3/8ths percent sales tax hike. While the environmental causes to which the funds will be dedicated are undoubtedly worthy, the regressive way in which voters decided to go about funding the projects (through the sales tax) is far from ideal.
Nevada residents voted to amend their constitution to require that all new sales and property tax exemptions be subjected to a benefit-cost analysis, and accompanied by a sunset provision that will force their reexamination in the future. While the proposal sounds good in theory, its requirements are relatively loose in practice. It will be up to Nevadans to carefully watch their representatives to ensure that the spirit of this law is adhered to. Learn more about this proposal here.
Kansas Governor Kathleen Sebelius this week again voiced support for a 50 cent cigarette tax hike, proposing that the revenue be dedicated to expanding health care coverage to more low-income Kansans. This story should sound familiar, as numerous tax-phobic states in search of ways to pay for popular government services have recently turned to the cigarette tax.
The benefits that a higher cigarette tax would produce in terms of reduced smoking deaths and improved public health are well-documented in the recommendations included in a recent report from the Kansas Health Policy Authority. But it’s the tension such an arrangement would create between efforts to reduce smoking, and efforts to fund health care, that is controversial.
Arkansas this year attempted to pass a similar cigarette tax hike dedicated to funding a new health trauma system. South Carolina pursued similar legislation (eventually vetoed by the Governor) that was designed to direct new cigarette tax hike revenues into a popular health-care expansion.
In each of these cases, legislators were seeking to fund vital programs (each of which naturally increases in cost over time) with a revenue source that is sure to decline with time. South Carolina briefly considered one interesting approach to this problem (indexing the amount of its tax to a measure of medical cost inflation) but that proposal was ultimately dropped from the final bill.
Sustainability issues arise not only from inflation, however, but also from decreases in the popularity of smoking, and increases in the incentives to purchase cigarettes in low-tax areas. This latter component of the sustainability problem, in particular, has received a good bit of attention as of late.
With cigarette tax rates having increased substantially in many parts of the country, the rewards to smokers associated with shopping in low-tax areas have grown. A recent study by Howard Chernick entitled “Cigarette Tax Rates and Revenue” found that a 10% increase in the cigarette tax rate of one state can boost the revenue collections of a neighboring state by about 1%. Maryland provides one stark example of this phenomenon, where a recent tax hike has yielded significantly less than expected as a result of cross-border cigarette purchases and smuggling. The experience of New Hampshire, however, may suggest that this point has only limited applicability (see next story).
So what does all this mean? In a recent Wall Street Journal editorial,
The editorial states that
So what is the drawback to this plan? The percentage of smokers in the
Arkansas Governor Mike Beebe has called a special session starting Monday to consider a higher severance tax on natural gas. The Governor says that the tax hike will eventually raise as much as $100 million to help pay for state highways. The current level of tax was established in 1957 and is based on the volume of gas extracted. Beebe's proposal would change the tax base to market value, bringing Arkansas in line with what most states have been doing since the 1970s. Basing the tax on market value would ensure that inflation will no longer erode the value of revenues generated by the tax, which is currently providing natural gas companies with an effective tax cut each year. A 2003 ITEP study of the Arkansas natural gas tax found that if the state had imposed a 5 percent tax on the market value of natural gas in 1975 (rather than basing the tax on volume) the state would have raised $610 million between 1975 and 2001, instead of the $13 million it actually collected. For more on the state's severance tax and potential reforms read this report from Arkansas Advocates for Children and Families.
Higher severance taxes may soon be on the agenda as well in Colorado, where environmental groups and higher education advocates have banded together in support of a ballot initiative to generate $200 million in additional revenue from the oil and gas industries. The proposal would eliminate several severance tax deductions and exemptions, the most notable of which allows companies to write off 87.5 percent of their property tax bills. The revenue generated would go to fund college scholarships and renewable-energy programs, among other things.
Four states — Mississipi, Tennessee, Arkansas, and Idaho — are currently debating ways to reduce the sales taxes paid on food. But how (or whether) to pay for the cuts and who should benefit remain key sticking points.
On Thursday, the Mississippi House of Representatives passed (91-27) a "tax swap" bill that would cut the state's sales tax on groceries in half and raise the tax on cigarettes to $1 per pack. The bill still faces significant challenges before becoming law, however, since key members of the Senate oppose it and Governor Haley Barbour vetoed a similar bill last year. Although the plan's reliance on revenue from cigarette taxes is not a long-term solution, it does offer a temporary mechanism to make up the revenue that would be lost from a cut on the sales tax on food.
In Tennessee, a similar "tax swap" is under consideration. However Gov. Phil Bresden has expressed reluctance to link a cigarrette tax increase with a grocery tax reduction, and has instead proposed using revenue from a cigarette tax increase for education funding.
Arkansas Gov. Mike Beebe signed a grocery tax reduction into law on Thursday that will reduce the state's sales tax on groceries from 6% to 3% effective July 1st. However, no funding mechanism was enacted to make up for the decreased revenue, as lawmakers instead decided to rely on a projected surplus to pay for the proposal.
In Idaho, Gov. Butch Otter continues to struggle with the state legislature over how best to enact a grocery tax credit. Otter's proposal would target low-income Idahoans with a credit of up to $90, while the House's newly passed version would give a smaller grocery tax credit (up to $50) to a broader range of residents.
Arkansas Governor Mike Beebe and the state senate worked together this week to pass a series of measures aimed at helping low-income Arkansans. The keystone of the tax package was a cut in the state sales tax on groceries from six percent to three percent, one of Governor Beebe's leading campaign proposals. A study by the Arkansas Advocates for Children and Families (AACF) projected annual savings for a family of four ranging from $98 to $298, depending on income level. The Governor's Office estimated that the sales tax change would cut state revenues by $252 million this year. Everyone involved in the effort to pass this bill deserves high praise for bringing attention to this important issue. However, research by the AACF using ITEP data indicates that a refundable Earned Income Tax Credit might be an even more effective way to help low-income Arkansans. According to the data, a 24% refundable EITC would cost almost exactly the same as the grocery sales tax exemption, but would provide more assistance to families in need. Arkansas lawmakers should consider a refundable EITC to get the most bang for their tax bucks.
