Leader Blues

Tuesday, January 19, 2010

EDITORIAL >> This isn’t a fair tax

Beware of propositions that sound too good to be true. They nearly always are. A business group headquartered at Fort Smith is circulating petitions for a constitutional amendment that merits far more skepticism than that. The attorney general cleared the popular name and ballot title a week ago.

It is presently called the AR One Tax, although the sponsors will surely find a catchier and more appealing name, like the Fair Tax, which is what a national group calls a similar proposition that it has been pushing for about a decade. The Arkansas sponsors advertise the amendment as a way to simplify the state tax system, treat taxpayers fairly, finance government bountifully and give the state a robust economy. Truthful advertising would proclaim exactly the opposite.

You’ll likely be asked to sign one of the petitions this spring, probably at the May primaries when you go to vote. Find out what it does first.

The popular name that would appear on the ballot is “A Constitutional Amendment to Repeal All State Taxes and Establish a Flat Rate Sales Tax.” If voters approved the amendment, the legislature would set a sales-tax rate high enough to make up for all the revenue that would be lost by the repeal of all the other taxes from businesses and individuals. The state sales tax now is 6.5 percent. It could go up to 20 percent, 25 percent or 30 percent — no one really has a clue. But this should give you a hint: The present sales-tax rate produces about $2.2 billion a year. To replace all existing taxes, the new tax would need to produce about $8 billion a year. You do the figures.

The text of the amendment, which would not appear on the ballot, is so vague and contradictory that it would take many state Supreme Court decisions to settle exactly what taxes would be repealed and what sales would be taxed under the new single tax on consumers.

We have identified a few problems with the amendment and its popular name and ballot title. Get a copy. You’ll find more.

First, the popular name seems to be a lie. It says “all state taxes” would be repealed. But when you read the amendment, all state taxes are defined, either by design or ineptness, as only some state taxes — those codified in Title 26 of the Arkansas Code and the Constitution. That covers most of the big taxes, but a hundred or so taxes are codified in other titles. The amendment says that it would specifically repeal “payroll taxes” but Arkansas voters cannot repeal the taxes that are commonly known as payroll taxes, Social Security and Medicare, because they are federal taxes. The courts might presume that it was trying to repeal employment security taxes, which constitute the Arkansas unemployment trust fund although it is not codified in Title 26.

But here is the nastiest little detail about the amendment. When the legislature fixed the new sales-tax rate, businesses would not pay any of it. Not only would they no longer pay income, franchise or any of the small imposts for certain business activities, they wouldn’t pay any of the taxes you would pay. The electricity, gas and water they bought wouldn’t be subject to the sales tax. Neither would the motor fuel for their vehicles or any other commodity or service they bought. Your cars, clothing and groceries (yes, groceries would be taxed at the full rate) would be taxed at a rate high enough to compensate for the lost tax revenues from business activity. ExxonMobil, Walmart and all the big multi-state corporations wouldn’t pay a penny of tax in Arkansas. You would pick up the slack.

The sponsors say the sales-tax rate would not have to be very high because everything that is now exempt from the sales tax would be taxed, including doctor and hospital bills. Fair enough, but the amendment says specifically that services of every kind would NOT be taxed.

So the amendment might at first glance be appealing to businessmen throughout Arkansas because it would shift part of their cost of doing business to consumers, including their employees.

But think about this: If the state requires consumers to pay a tax of 25 percent — or even 10 percent — on everything you sell them, how competitive will your business be? No car dealership would be left in the state. Businesses within 100 miles of the border in every direction would go out of business. Internet sales would skyrocket.

The amendment seems to prohibit collection of a compensating use tax for items bought outside the state for use in the state, which would restore some competitiveness if the state had a large enough tax agency to enforce it.

On the other hand, the amendment does not seem to prohibit the legislature from re-enacting any tax that it desires once all those taxes are repealed. Eventually you could have the giant sales tax and every other kind of tax, too.

The AR One Tax, the Fair Tax, or whatever they call it is a recipe for economic disaster. Don’t sign those petitions until you have a chance to read the full amendment.