The capital gains tax cut myth | Arkansas Blog

Wednesday, March 27, 2013

The capital gains tax cut myth

Posted By on Wed, Mar 27, 2013 at 7:11 AM

Any notion that House Speaker Davy Carter was a Democratic thinking man's Republican went out the window yesterday with his surreptitiously handled cramdown of legislation that only Ed Garner could love.

Carter rammed a capital gains tax cut out of a rump session of a House committee to get in ahead of far better and fairer Democratic tax cut proposals. (Not that a state that has frozen employee pay for years should be rushing to cut any taxes in the first place.) Nobody had seen the bill until the meeting. Financial analysis was sketchy and similarly unavailable in advance. By design, no doubt.

The procedure was slimy, but the fundamentals are worse.

The problem here is the blind and wholly unsupported faith that cutting the tax on profits from sale of property is a job creator, a Carter talking point instantly repeated mindlessly by one of the mindless GOP caucus members, that propane truck driver.

Bear with me.

Carter's tax cut — ONLY for the richest people in the first year, applying only to gains of greater than $5 million, if you can believe it — will eventually cut the tax rate on profits of sale of Arkansas property (a constitutional problem exists in covering only Arkansas property) from a top state income tax rate of 4.9 percent to 2.1 percent.

Is an investor REALLY going to make a decision to liquidate an investment on a 2.8 percentage point increase in net profit? And is he or she REALLY going to reinvest it in Arkansas simply because, some day, it might produce him a 2.8 percentage point swing in net profit?

I don't buy it. I particularly don't buy it because most capital gains are recorded on the sale of stock. Investors look for the best return. Few are saying, "This looks like a good buy because, in a year I can sell it and add a 2.8 percent return on investment because it's an Arkansas stock." I'm going to sell Tyson and buy Walmart because, if that's a good bet, some day my profit will be 2.8 percent greater? I doubt it. And, even so, what jobs did that decision create?

Heck, look at Carter's own position as a banker (on leave) from a very successful Arkansas bank holding company. Should Johnny Allison and Co. decide to sell that banking venture and score a $100 million profit, this tax cut could mean a savings of up to $2.8 million for them. Nice chump change. But is the availability of that tax break really an inducement to sell the company? ANd, if they did, is it really a meaningful incentive for them to then reinvest the money in Arkansas because of a 2.8 percent advantage somewhere down the line? Capital goes to the highest possible return. Marginal tax rates have little impact on those decisions, study after study has shown.

Here's the great irony of Carter's bill. It actually could kill some jobs. Think of the LaFrance family that recently scored a huge profit by selling their Arkansas-based retail USA Drug company to Walgreen. What was the first thing Walgreen did after buying the company? They began closing stores, including several in Arkansas, so they could increase profits and begin to recapture their investment. See Mitt Romney if you don't think this doesn't happen all the time.

Now maybe the LaFrances will buy an Arkansas bank or something else in the Land of Opportunity with their profits. Maybe they'll grow that bank, rather than close some branches or take other "efficiency" steps to maximize ROI. And maybe they'll choose an Arkansas bank over a MIssissippi bank for that investment. But I'd bet that decision would have a whole lot more to do with where they live and potential overall profit prospects than a 2.8 percent POTENTIAL marginal advantage years down the line should they decide to liquidate that new investment.

"Tax cuts good" is the prevailing dogma at the Arkansas legislature. So they're going to happen. But if they must, a fairer way is the Democratic bill to reshape tax brackets and give a bigger standard deduction to nearly ALL taxpayers, not just lavish breaks on the rich. If Gov. Mike Beebe can use his diminished power to craft a grand bargain of Medicaid expansion that pays for FAIR tax cuts, move over Govs. Donaghey and Bumpers.

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