Rep. Ed Garner’s HB 1002, his effort to remove Arkansas’s already preferential capital gains rate, is due to be discussed in the House Revenue & Tax Committee today. I’ve written extensively about this measure, both in the abstract and in regard to this specific bill. Without hyperbole, I can honestly say that this is one of the worst ideas being advanced in this year’s legislative session, right up there with anything David Meeks or Denny Altes has proposed.
Anyway, in advance of today’s discussions, Garner made a brief video for Arkansans For Progress, in which he “explains” his bill.
The video started well enough — Garner did manage to get his name and district correct — but it quickly spiraled out of control. It was kind of impressive, to tell you the truth; as videos full of incorrect statements about the impact of your proposed bill go, this was Citizen Kane. Of course, if you’ve followed Garner’s capital-gains crusade, this is not surprising.
All the same, with HB 1002 getting its moment in the sun today (where, hopefully, it shrivels up and dies), let’s tackle his claims from the video.
0:18. “I wanted to spur job growth and, to do that, new investments have to come into Arkansas, capital needs to be reinvested in Arkansas, because that’s how you start businesses.
If Garner’s theory about capital gains and job growth is correct, one would expect to see some sort of correlation between capital gains rates and unemployment. Looking at the immediate area, however, we see:
State Cap Gain% Unemp% AR 4.9 7.7 LA 6.0/0.0* 7.8 MS 5.0/0.0* 9.8 MO 6.0 9.3 OK 5.5 6.9 TN 0.0 9.4 TX 0.0 8.1 *As of 2010, Louisiana exempts some capital gains from tax, subjects others to 6% top rate. *MS has an exception for some investments that is far more narrow than what Garner proposes. (All numbers from 4Q 2010)
If there’s a correlation there, I sure don’t see it. This makes sense, really; the math certainly doesn’t add up to suggest that jobs would be created internally, so one would have to assume that cutting the rate to zero would bring in lots of new capital that otherwise would not come to Arkansas. Except, you know, Arkansas’s economy grew in 2009, while Texas’s and Tennessee’s did not, despite those states’ lack of capital gains taxes.
Additionally, there is historical evidence that cutting capital gains taxes does nothing to create jobs and spur employment. The federal capital gains rate was raised twice and lowered twice between 1976 and 1987. The unemployment rate rose after both the 1978 and 1981 capital gains tax cuts, yet it fell significantly after the 1976 and 1986 capital gains tax increases were passed. Conversely, there is evidence that capital gains increases have a positive effect on the economy. The tax was was raised in 1976, and economic growth jumped up from 3.6% in the previous two years to 5.2% in the next two years. Capital gains were also raised in 1986, undoing the August 1981 cuts and restoring the level from 20% to 28%, and economic growth rose from 2.2% in the previous twelve months to 3.8% over the next twenty-four months.
Back to the video…
0:56. The states surrounding us have an advantage over us; either they don’t have an income tax or don’t have a capital gains tax, or they’ve exempted the capital gains investments or the capital investments in their states from taxes.
Uh…what? No, seriously, what is he talking about? Exactly two (or four, depending on Louisiana and Mississippi and the type of gain you’re talking about) of the states touching Arkansas have lower capital gains rates than does this state (TX and TN, both with zero). Our economy is already faring better than TX and TN states in terms of growth over recent years. Not to mention, it’s not exactly an apples-to-apples comparison to say that Texas’s advantage, whatever it might be, comes from the capital gains rate. It probably has more to do with Texas’s economy being one of the 20 largest economies in the entire world.
In numerical terms, Arkansas’s share of the national GDP grew by .6% from 2008 to 2009 (the national percentage was -2%). Surrounding states had various levels of success or failure, with Louisiana growing by 2.5%, Mississippi declining by -.9%, Tennessee down -3.1%, Missouri falling by -2.2%, Oklahoma up 6.6%, and Texas down -1.5%. Arkansas, Louisiana, and Oklahoma (a group of which Arkansas has the lowest capital gains rate, recall) were in the top quintile nationally in GDP growth from 2008 to 2009. Conversely, Texas was in the third quintile and Tennessee was in the bottom quintile, despite both states’ having no capital gains tax or state income tax at all.
I fail to see a competitive disadvantage, especially one that can be traced to capital gains taxes.
1:10. [Removing our capital gains tax] makes us more competitive, makes us more attractive to locate business here over a broad base of investors, not just those companies that come to the capitol and cut a deal to be able to locate here.
Guh. OK, we’ve just tackled competitiveness. As for the “more attractive” nonsense, there’s just so much wrong with that statement that it’s a little difficult to unpack. First, there is no evidence — literally NONE — to suggest that Arkansas has missed out on investment by companies located in other states due to the capital gains rate, nor is there any evidence to suggest that cutting the rate will bring in companies. I’m still waiting on someone to provide some; show me a company that would have come to AR but for the capital gains rate. Just one. Go on…I’ll wait.
Second, you’ve got the idea tax independence (i.e. that as long as the capital gains tax isn’t 100%, businesses are going to make the same decisions regarding hiring and expanding regardless of the capital gains tax because some percentage is better than $0).
Third, to suggest that any businesses that chose not to invest in Arkansas did so because of our capital gains rate rather than, among other things, the woeful lack of a highly educated populace, the lack of quality technological infrastructure, and the lack of a major seaport or airport borders on the absurd.1
1:27. This would invigorate smaller investment, the small-cap industries and businesses that are responsible for the majority of job creation in Arkansas.
Not to be flippant, but prove it. Show us something to support this claim, because all available evidence points to Garner being exactly incorrect on this. As I’ve mentioned before, even if you buy the incredibly unlikely claim that every dollar saved by removing the capital gains tax would be reinvested in labor, you would create one full-time minimum-wage job for every million dollars in tax savings. (I say “incredibly unlikely” because corporate profits are already at an all-time high, yet there is minimal hiring occurring, so I have doubts that 100% of an additional small revenue stream would suddenly go into job creation.)
1:38. It has no impact on the current budget.
Because this bill would apply only to new investments made after the effective date of the law, I understand Garner’s argument here vis-a-vis budgetary impact on the revenue side. However, what he ignores (or fails to understand) is that budgets are based on a set of assumptions about the revenue streams the state will face. If you change one of those assumptions — say by making it more attractive for me to hold off hiring or investment until a later date — then you necessarily impact the budget.
So, in the context of this tax cut, you would see a drop-off in the total amount of investment, as it would behoove investors to wait until after the effective date of the law. Lack of investment means a lack of new jobs in the short term (i.e. a change in the underpinnings of the budget), which, in turn, means that there will be a strain on the expense side of the budget for the state as a higher number of people than previously expected will rely on government assistance to eat. Stupid people and their need for food and shelter and whatnot.
Basically, Garner’s plan calls for a negative impact on the immediate future due to a delay in investment (at a time when companies are already flush with cash for the most part but are refusing to hire) in exchange for what he perceives to be some future windfall. However, despite his contentions, the math just does not work out: the net gain will be a handful of jobs created by in-state companies, and Arkansas’s other, larger flaws (infrastructure, education) will dissuade out-of-state companies from moving here no matter what the tax rate is. This isn’t even a case of robbing Peter to pay Paul; this is a case of robbing Peter and then defaulting on your debt to Paul.
1:51. By definition, you must sell an investment at a profit over a year from now, so this has absolutely no impact on the current budget, except for the fact that, if we create jobs, we’ll see additional income tax revenue that will more than pay for the cost of the capital gains cut’s lost revenue.
Remember that scene in Back to the Future2 where 1955 Doc Brown is watching the video Marty shot in the mall parking lot, and Doc becomes all incredulous once he hears himself say “one point twenty-one gigawatts”? My reaction when I heard Garner say this about income taxes was pretty similar to that scene.
Let’s do some quick math. The Department of Finance & Administration estimated that this bill would cost Arkansas roughly $45M in year 1 and roughly $110M over the first two years. Arkansas’s top income tax rate is 7%.3 Meaning that, to offset the $45M lost in year 1, Garner expects his bill to generate $642,857,143 in new job earnings. To cover both years of the, Garner wants you to believe that Arkansans will earn and pay taxes on $1.571 BILLION over that timeframe.
But take it a step further. All of this growth in income tax revenue is supposed to come from the windfall that companies receive when the capital gains tax is cut. To cover the $1.571B in payroll costs (and to say nothing of benefits and other costs), companies would have to have capital gains of $32.06B over the same time period! ONE-POINT-TWENTY-ONE GIGAWATTS?!?! GREAT SCOTT!!
Then there’s also that pesky little fact that capital gains cuts do not pay for themselves. Ever. To again quote N. Gregory Mankiw, the former chairman of President Bush’s Council of Economic Advisers, “a broad-based income tax cut (applying to both capital and labor income) would recoup only about a quarter of the lost revenue through supply-side growth effects. For a cut in capital income taxes, the feedback is larger–-about 50 percent-–but still well under 100 percent.”
50% recouped, of course, means 50% lost.
At this point, I feel like I am rehashing the majority of this post for the umpteenth time and doing so to minimal avail. The facts are what they are, and the only logical conclusion to draw from those facts is that Ed Garner is incorrect about pretty much everything regarding this bill. Either he’s ignorant of reality or he’s being purposefully obtuse, but neither answer changes the mountain of data against him. The fact of the matter is that removing the capital gains tax has been his goal for two sessions now, and he’s willing to damn the torpedoes and go full-speed ahead with this.
I can only hope that the rest of the legislature has the basic common sense and economic knowledge to stop him.
***
1Putting everything in numerical terms yet again (something that Garner has failed to do at every turn, I might add), among the top-20 in Forbes’ recent ranking of best states for business, 14 states have higher capital gains rates than Arkansas. Comparing these rankings to previous Forbes rankings, we see an average upward movement of 2.71 places among the 14 states with higher rates. Conversely, of the 6 states with rates lower than Arkansas’s, we see an average downward movement of .82 places, meaning a net gain of 3.53 of states in the top 20 with rates higher than Arkansas’s.
2 Yes, I am assuming you’ve seen Back to the Future. If you haven’t, we can’t be friends.
3 I should note that Denny Altes is trying to lower this rate, which would further undermine Garner’s point here, but that’s really not important because the absurdity is the same regardless of whether it’s 7% or 3%.