Legislators Miss Opportunity (Jacob Bundrick Commentary)

Jacob C. Bundrick

Arkansas legislators are fully aware of the state’s tax problem. In fact, they freely admit it.

In the emergency clause of Senate Bill 332, which is now Act 1107, legislators state that “Arkansas has been classified as the worst of the 12 states in the southeast region on the taxation of industrial materials.” Furthermore, they recognize that “Arkansas is not competitive with surrounding states” when it comes to taxing the partial replacement and repair of manufacturing machinery. Yet legislators continue to throw away opportunities to correct Arkansas’ onerous manufacturing taxes.

In its original form, Senate Bill 332 would have reduced the tax burden that firms face when partially replacing and repairing manufacturing equipment by lowering their effective tax rate through refunds and eliminating the qualifying permit. Research by the Federal Reserve Bank of San Francisco shows that states with more favorable tax environments have faster growing economies, so this would have been a positive step for Arkansas.

However, state lawmakers backtracked on the bill and passed legislation that not only introduces a second specialty permit, but omits the very tax relief the bill was intended to provide. This is a badly missed opportunity for Arkansas and raises the question of whether the legislators understand the consequences of their decision.

As can be seen in the chart, Arkansas’ manufacturing industry has grown more slowly than that of any other state in the region. This is in part because of the state’s tax environment. By failing to reduce the high tax burden faced by manufacturers, legislators failed to make Arkansas a more competitive state within the region. Until legislators begin taking steps to create a competitive tax environment, Arkansas’ manufacturing industry will remain the least productive, lowest paid and slowest growing of the region.

Jacob Bundrick is a research associate with the Arkansas Center for Research in Economics at the University of Central Arkansas in Conway, a research and education nonprofit focused on improving the lives of Arkansans by training students, evaluating the state’s policies and offering solutions in order to promote free markets and limited, transparent government. Email Bundrick at JBundrick@UCA.edu.