For Capital Gains Tax Cuts, Opinions Abound

The most controversial of the multitude of tax cut proposals working their way through the state legislature is HB 1002, a proposal by Rep. Ed Garner (R-Maumelle) that eliminates the tax outright.

Groups opposing the measure include Arkansas Advocates for Children and Families, who have conducted their own research here and have promoted a recent study from Iowa that contends that business tax breaks are "an expensive and inefficient way to attempt to stimulate a state economy."

The Arkansas Department of Finance and Administration has looked at the measure on two different occasions since 2009. Both times DF&A officials have highlighted major hits to state finances over the long-run if the tax was eliminated.

All four analyses suggest catastrophic effects or immeasurable results from eliminating the capital gains tax or providng major business tax breaks.

Supporters of the tax elimination have used a study conducted by UALR economist Dr. Michael Pakko, a former Federal Reserve Bank economist, whose blog we link to on our web site.

Pakko’s analysis of HB 1002, which he revised today, bases estimates of the effects of a capital gains tax elimination on "alternative calculations based on evidence from additional data sources."  It portrays a much less dire outcome from a tax cut than the other sources.

Pakko is careful to note that his report is merely an alternative view and he says he is neutral on the bill.

"There is a great deal of uncertainty associated with forecasting the impact of hypothetical policy changes.  The estimates provided in my report should be viewed as an alternative that helps establish a plausible range of likely outcomes. I neither endorse nor oppose HB1002, but provide this analysis in the public interest," writes Pakko on his blog.

In his paper’s conclusion, Pakko adds a few more comments to wrap up the debate from his perspective:

A key lesson from this analysis is that the revenue impact of HB1002 is particularly uncertain.  Capital gains are an inherently variable source of income for businesses and individuals, there is little direct evidence about the magnitude of gains from “Arkansas property” that would be realized under the act, and it is difficult to quantitatively identify the dynamic impact of the proposal.

Nevertheless, the analysis presented here suggests that the impact of HB1002 on state revenue is likely to be smaller than estimated by DFA, particularly during the early years of its implementation.

We’d throw another perspective in the mix as well. Matt Campbell with our content partner, Blue Hog Report, has written extensively from his progressive/liberal point-of-view that the capital gains tax cut would not benefit a large number of Arkansans, just a wealthy, smaller percentage.  Campbell has pretty mercilessly derided Garner’s arguments for passing the tax cut.

Most interesting is Campbell’s assertion that a lower capital gains tax doesn’t necessarily translate to more jobs or lower unemployment. This has been a key argument for supporters of the bill who have stated that the elimination of the tax will create more jobs. They’ve consistently highlighted that Arkansas needs to eliminate capital gains taxes to remain competitive with surrounding states.

Campbell points out that the only two states contiguous to Arkansas that have no capital gains tax – Tennessee and Texas – have significantly higher unemployment rates than Arkansas. Arkansas’ unemployment rate was 7.7% in 2010 compared to Tennessee’s 9.4% and Texas’ 8.1%.

Click here to read more.