Sunday, July 09, 2006

Give it Back Where it's Out of Whack

Personal Exemption Amounts in Arkansas Lag Far Behind Other States

Our $400 million state tax overcharge (called a "budget surplus" in the papers) has been the subject of a lot of debate recently. Some have argued for using the surplus to fund an elimination of the state sales tax on groceries. Others have argued that the money should be kept by the government for a "rainy day fund". Some have argued for both.

Put Arkansas Watch on the side of those who want the overcharge returned to the people who earned it. Will there be a shortage of funds later if we do this? Yes. And there will also be a shortage of funds if we let the government keep all $400 million. That is just the way government is once a people and their leaders have lost sight of the fact that their are limits to what government can and should do. The new view of government as the "ultimate solver of all problems" will never have enough money. Until we can vote out those with this view, the more money we can keep out of their hands the better it will be for the honest, productive citizens of this state.

An elimination of the grocery tax would be better than nothing, but this would be a burden for businesses to administer. Whatever rules made to determine what items count as "groceries" for the purposes of the tax will have to be applied to every item in the store to see if it fits. Is the stuff behind the deli counter "groceries" or is that prepared foods? What about breads baked in the bakery? What about a gas station that sells many non-food items? Ringing the charges up and keeping the books straight would be a nightmare for smaller businesses.

There is a better way. And a comparison of the state tax codes presented here shows that Arkansas is way out of line with the other states in the area I am about to discuss.

(for rest of article click "Sunday" below and scroll down, or if sent straight here just scroll down.)

5 Comments:

Blogger Mark Moore (Moderator) said...

Even a brief glance at that link will show that our Personal Exemptions are absurdly low.

Granted that ours are in the form of a Tax Credit rather than a deduction, so $20 per person credit at a .05% tax rate equals a $400 deduction. There are only two states that have worse. The norm is for other states to have exemptions that are two, five, or even ten times as great as the paltry $20 credit (or $400 deduction) that Arkansans get.

California give a child credit 13 times the size of Arkansas, Delaware 5.5 times as great. Only Colorado and Pennsylvania have lower personal exemptions than Arkansas. (Six states have no state income tax on earned income at all).

Among our neighbors, Missouri gives a couple a deduction of $4,200 with an additional $1,200 tacked on for each child. Mississippi gives a couple a $12,000 deduction with $1,500 tacked on for each child. Oklahoma is the piker among our neighbors. They only give exemptions two and one half times a great as those available in "The Natural State" at $2,000 a couple and $1,000 for each child. Louisiana also give $1,000 for each child, but offers a $9,000 tax exemption for couples. Once again, our $20 per person tax credit is roughly worth about $400 as a deduction.

What about our other two neighbors? You can't score them. Texas has no income tax at all, and Tennessee only taxes dividends and interest.

The examples cited are by no means far outside of what the rest of the states are doing. WE IN ARKANSAS are the ones that are far outside the rest of the states. A common figure is a $3,300 per person exemption.

A raise in the tax credit amount or granting of a generous personal exemption, call it a "grocery tax rebate credit" would be far easier to administer than forcing the businesses to administer the grocery tax. Governor Huckabee suggested something like this when he first took over 10 years ago, but the establishment was not open to it then. Maybe now they are ready.

To be a true rebate of grocery tax, the rebate would have to be payable even if one payed in less income tax than the amount of the rebate. It is not a "negative tax" like the so-called "earned income tax credit", but rather an acknowledgement that some taxes were paid on food, and that an amount roughly equal to what they spent on that is being returned to families.

The current tax code of Arkansas punishes families and the neediest among us, because it's personal exemption amounts are miniscule compared to the nation. This causes our income tax to be more regressive and shifts more of the tax burden onto people with children relative to other states.

In conclusion, the surplus represents an historic opportunity to make our tax code more competitive with other states, and more family friendly. We can eliminate the grocery tax in a way that simplifies tax code administration and enforcement while keeping better control of our costs- the cost of the increased personal exemption is a lot easier to estimate than the "cost" of a grocery tax exemption.

Tax cuts anyone?

9:16 PM, July 09, 2006  
Anonymous Anonymous said...

AMEN Mark! To also see how we rank with other states on our total state tax burden as a percentage of our per capita income check out:
http://www.taxadmin.org/fta/rate/05taxbur.html
It shows that Arkansas is ranked 4th in the nation in the tax bite taken out of our citizens' pockets.
I'm so tired of hearing that Arkansas is a low tax state.

9:16 PM, July 09, 2006  
Blogger Mark Moore (Moderator) said...

Relative to income, Arkansas is probably one of the ten highest taxed states. #1 reason is that our sales tax is so high. The number two reason is that the personal exemptions on our income taxes are so low.

We are tied for the third worst in the nation for having puny personal exemptions. Our income tax rates are about middle of the pack, but if you combine them with a paltry personal exemption then our total income taxes are high. Add that to a very high sales tax and you have an over-taxed state. The only place we look better than average is property taxes.

6:50 PM, July 11, 2006  
Anonymous Anonymous said...

this is something that needs to be fixed even if the grocery tax is repealed.

6:53 PM, July 11, 2006  
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8:03 PM, August 08, 2006  

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