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Many pay state capital gains tax.

Arkansas policymakers, in this year's legislative session, maintained a 50 percent state capital gains tax exemption enacted in 2013. The move was opposed by some who argue the idea benefits only a small number of wealthy Arkansans and is partisan policy.

Public records obtained from the state Department of Finance & Administration paint a different picture. There were 126,654 Arkansas resident and 27,720 nonresident fliers in 2013. The DFA records, which date to 2005, show there were five other years when more than 100,000 Arkansans paid state capital gains taxes: (2005) 141,825; (2006) 145,220; (2007) 162,751; (2008) 104,368; and (2012) 107,131. That's a country mile from the small group of entrepreneurs singled out by critics.

In fact, the annual average since 2005 is nearly 115,000 Arkansans.

The revelation should not surprise observers. The Internal Revenue Service notes: "Almost everything you own and use for personal or investment purposes is a capital asset. Examples include a home, personal-use items like household furnishings, and stocks or bonds held as investments. When you sell a capital asset, the difference between the basis in the asset and the amount you sell it for is a capital gain or a capital loss. ... You have a capital gain if you sell the asset for more than your basis."

Upper-income households aren't the only Arkansas households to own "a home, personaluse items like household furnishings, and stocks and bonds held as investments." The three great bull markets of the last quarter-century have created capital gains for Arkansans of various income classes.

Exemption opponents also describe it as a Republican policy, but the policy's history is more complex. A Democrat, state Sen. Jim Hill of Nashville, successfully sponsored a 30 percent exemption in 1999. Democrats controlled the Arkansas Legislature, and Mike Huckabee, the Republican governor, signed Act 1005 into law.

A decade later, in 2009, Republican state Rep. Ed Garner of Maumelle sponsored a capital gains tax reduction (HB 1947) that passed the House with 29 Republican and 27 Democratic votes. It died in the state Senate. Act 1488, the 2013 measure creating the 50 percent exemption, was sponsored by Republican Speaker Davy Carter and signed into law by Mike Beebe, the Democratic governor. In sum, the policy of reducing the capital gains tax has been supported by policymakers of both parties.

Where does that leave exemption opponents? The tax generates revenues, which totaled $86.4 million (2013). These, however, tend to be more unstable in contractions like the Great Recession, which occurred from December 2007 to June 2009. DFA records show only 67,308 resident filers claimed capital gains in 2009 when the tax raised $47.6 million. By contrast, 88,874 residents claimed losses that year.

The Fluor GLS study, commissioned by the Legislature early this century, noted Arkansas' capital gains rate is higher than that of other states in the region. One reason for phasing out the capital gains tax, over a multiyear period, is that some states do not tax income and have higher job creation rates. The latest evidence: Texas (14.3 percent) and Florida (11.1 percent) payroll employment has increased more than the U.S. (7.8 percent) and Arkansas (3.6 percent) in the current expansion.

Greg Kaza is executive director of the Arkansas Policy Foundation, a Little Rock think tank founded in 1995. Email him at Kaza@ArkansasPolicyFoundation.org.

Kaza@ArkansasPolicyFoundation.org
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Title Annotation:Commentary
Author:Kaza, Greg
Publication:Arkansas Business
Geographic Code:1U7AR
Date:May 11, 2015
Words:571
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