Last month we discovered that Gov. Asa Hutchinson and President Obama shared a determination, from opposite ends of the political spectrum, to see that some 250,000 low-income Arkansans enjoy medical coverage and that Arkansas small businesses have a chance to get low-cost insurance for their employees through the Patient Protection and Affordable Care Act, a.k.a. Obamacare.
But what else do Obama and Hutchinson have in common? Well, last week both discovered what they should have already known: It's hard to get legislators from either party to go along with the popular idea of "tax reform" if it involves raising taxes on the class that funds election campaigns. Hutchinson proved slightly better at it than the president, or luckier. Maybe it is just the honeymoon with the legislative wing of his own party.
In his State of the Union speech, which outlined tax reforms that would lower burdens on the middle class while closing loopholes for people with high incomes, Obama proposed repealing the tax exemption for college savings accounts, a little preference that mainly advantages people who make more than $200,000 a year. The tax-free college accounts are always on the chopping block when Congress talks reform because it is one of the least-defensible shelters, since nearly all the benefits go to those who need it least, if at all.
Obama expected Republicans to cavil but he was taken aback when Democratic congressmen openly rebelled. On an Asian diplomatic flight, House Minority Leader Nancy Pelosi told him the rebellion was so strong that it was pointless to continue the battle. One week out, he caved. One imagines that Pelosi reminded him that Democratic campaigns were funded not by the same people, but by the same class that funds Republicans, people making upward of $200,000 a year. Democratic claims on the relatively well to do were tenuous enough already.
The president's whole plan for elevating the economic status of the middle class and lower incomes had plenty of populist appeal: free community college, a giant highway-building work program, a series of tax breaks for middle-class families, a tax on accumulated overseas corporate profits and higher taxes on capital gains for the very rich and those inheriting estates with big capital gains. But ending tax preferences for college savings accounts would hit too many of the well-heeled professionals that Democrats count on in election years.
Let's briefly recapitulate tax policy in the United States and Arkansas the past 50 years. Federal taxes have fallen dramatically for the richest 5 percent of Americans through income-tax and estate-tax reductions but risen slightly for those on the low end of the ladder owing to higher payroll taxes in the Reagan years and periodic excise-tax increases. The Arkansas tax burden has flattened or fallen for the wealthy. Estate taxes, which were levied only on those inheriting estates valued at more than a million dollars, were lifted entirely in the past decade. Taxes on the poor and middle class have risen with successive hikes in sales and excise taxes, which far more than offset the occasional tax break, like former Gov. Mike Beebe's groceries exemption.
Like all modern governors, Hutchinson wanted to begin his administration with a tax cut and, laudably, it was targeted at the middle class rather than the rich. (It would have been even more laudable if he had included a little help for low-wage working families, those earning below $21,000 a year, but who's perfect these days?) Hutchinson asked the legislature to alter the brackets and rates to give some relief to people earning from $21,000 to $71,000.
Here's the astonishing part: The same bill repealed the big capital gains tax cut his party passed in 2013, one of the most egregious tax bills of the modern era. The 2013 act eliminated taxes altogether on the capital gains of Arkansans as long as their net incomes exceeded $10 million. If you were not that wealthy you didn't get the tax break. But you still would get a substantial tax cut: Half of your profits would be off limits to the tax collector. Salaried and wage people would still be taxed on every dime of their income.
Hutchinson — a Republican! — set out to repeal that law, and he justified it to wary Republicans by saying if his tax cut was loaded on top of the 2013 cut, the state budget would be in such dire shape that big cuts in important services or future tax increases would be necessary. Before Hutchinson, appeals like that went unheeded.
The governor actually got the Senate to pass the bill, although several, most notably Sen. Linda Collins-Smith (R-Pocahontas), had to be told by some rich constituents back home what they had done and tried to get the bill back to change their votes. The Republican leader in the Senate told Collins-Smith to start reading important bills before she voted.
But, like the president's congressional party, Republicans in the state House of Representatives revolted. They insisted on keeping at least some of the rich folks' capital-gains tax cut. Hutchinson folded. Investors will have only 40 percent of their net capital gain shielded from taxes rather than 50 percent. But more important, the super-rich — those with net capital gains of more than $10 million a year — will have to pay some taxes on 60 percent of their profits rather than none at all.
The idea that some people are too rich to be bothered by taxes apparently was too much for at least one Republican. But stay tuned. It isn't over.
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