Leader Blues

Thursday, August 17, 2006

EDITORIALS>>Candidates pandering

Voters know by now not to invest much confidence in what a candidate for governor says about taxes during a heated campaign. The budget realities a year from now will determine what he does about taxes. Our hunch is that either of the major candidates will leave them alone except maybe for a gesture toward lowering sales tax rates on groceries if a recession does not intervene and take away the current slack in spendable state revenues.

Still, it pays to follow the candidates’ promises if only to understand who their real constituents are. An appearance in front of a bankers convention furnishes a good reading. Neither Mike Beebe nor Asa Hutchinson gave us much encouragement when they talked to the bankers last week.

Attorney General Beebe only confuses. He said he would leave the state income-tax rate on capital gains alone unless Congress altered the federal tax treatment. If Congress reduces taxes on capital gains, he might ask the Arkansas legislature to follow suit. Arkansas ordinarily follows Washington’s lead on technical changes in the tax code — deductions, income definitions and the like — but not tax rates. Arkansas now exempts the first 30 percent of a person’s capital gains from taxation altogether and treats and taxes the rest as simple income.

President Bush wants to eliminate taxes altogether on capital gains, stock dividends and many other income sources for high-income investors, including big inheritances. He is unlikely to succeed, but if he did, would Beebe go along with eliminating them in Arkansas? We hope and trust that he would not.

Hutchinson, on the other hand, told the bankers that he would not wait for Congress before further cutting taxes on investment income. Hutchinson said he would ask the legislature to do it anyway and while it was at it reduce income tax rates on entrepreneurs, who he said were leaving the state because Arkansas levies a 7 percent tax on the top income bracket.

Tax cuts always sound good and sometimes inject a small stimulus into the business cycle. But government needs revenue to run the schools, colleges and its many other functions, and it needs to collect it as fairly as possible. It is simply not fair to tax working people on every dime of their wages but give a free ride to the investment class, which now includes to some small extent a good 40 percent of us. If we are to have an income tax, it should be on income, not merely the earned income of workers.

Cutting or eliminating taxes on capital gains may indeed spur more investment, but so would cutting or eliminating income and payroll taxes on wages. Already, the effective Arkansas income tax rate on capital gains and on other high incomes is less than 5 percent. That is because of the 30 percent exclusion of capital gains and the deductibility of state income taxes from the federal tax payments of taxpayers who itemize.

If taxes are to be cut, they are not for those who need it.

Despite his fuzziness on investment taxes, Beebe offered one clear, sensible and doable tax cut, a $50 increase in the homestead tax credit, which would afford homeowners, particularly elderly ones, some needed relief from ad-valorem taxes on inflationary home values. We should be able to count on that one.