When it comes to Representative Ed Garner’s proposal to remove the capital gains tax, the numbers are what they are, and we’ve covered them thoroughly. Thing is, most people are not going to oppose this bill simply because the numbers tell them to; people understand the words “tax cut” much better than they grasp percentages of economic growth. So let’s look at a much more relevant reason that Arkansans and their elected lawmakers should oppose HB1002 (2011).
Repealing the tax would benefit only a handful of people and would do so at the expense of the rest of us.
Allow me to explain. Unlike income taxes (including capital gains taxes), which have graduated rates and include levels under which you pay no tax, everyone pays the same sales and excises taxes on an item. That is, income tax applies to all income, whether it is spent or saved; sales and excises taxes apply only to the portion that is spent. For people living paycheck-to-paycheck, who have to spend all of their income just to survive, this means that all of their income is subject to a sales tax as well as an income tax.1
You can certainly see this effect in Arkansas — Arkansans making $42,000 or less (60% of the population) pay roughly six times more of their income in sales taxes than do Arkansans earning over $145,000 (5% of the population). Even more troubling, Arkansas imposes the 7th highest tax burden in the nation on the poorest one-fifth of the population (less than $15,000 income) and the 2nd highest burden on people making between $15,001 and $26,000.
Why does this matter in the context of repealing a capital gains tax? Because, generally speaking, a state’s income tax is going to be the most progressive tax it levies on citizens. However, thanks in part to the tax break that capital gains already receive, Arkansas receives roughly half of its tax revenue in the form of sales and excise taxes and under 30% in income taxes. This means that Arkansas’s revenue stream is already overly reliant upon a tax that disproportionately impacts poorer residents. By exempting all of the capital gains revenue from income taxation, Rep. Ed Garner is effectively attempting to subsidize those who can live off investments at the expense of those who must earn an actual wage.
As if that’s not bad enough, Garner is literally proposing removing $110 million over the next two years from the state’s coffers and giving $99 million of that money to people with an average income of $326,000 per year. Arkansas will have to make that loss up elsewhere, either through raising the more regressive property or sales taxes or by cutting money from certain government programs (guess who bears most of that burden!).
We know that capital gains cuts do not stimulate the economy. We know that they do not create jobs. We know that they do nothing but pad the pockets of the wealthy, and I hope Mr. Garner’s constituents will ask him why he finds it necessary for them to subsidize the Waltons and Stephenses of this state.
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1 It is perhaps more accurate to say “nearly all” of their income is subject to sales tax, as there are some exceptions, but the point is the same.