Why do people move to other states to avoid Arkansas’ high state income tax? (If you love Milton Friedman then you will love this post)

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Milton Friedman served as economic advisor for two American Presidents – Richard Nixon and Ronald Reagan. Although Friedman was inevitably drawn into the national political spotlight, he never held public office.

Milton Friedman’s Free to Choose (1980), episode 1 – Power of the Market. part 1

Mike Huckabee recently moved to Florida? Why? The answer is easy. Huckabee wants to avoid Arkansas’ high state income tax. Max Brantley of the Arkansas Times wants to call Huckabee a tax fugative, but who can blame him.

Liberals like Brantley and Ernie Dumas want to praise former Arkansas governor Dale Bumpers for raising the state income tax to 7%, but that is the reason our state has the highest state income tax in the area (all bordering states have either lower state income taxes or no state income tax).

Is it any suprise that during the last census that the seven states that do not have an income tax grew in population? Arkansas has suffered from bracket creep and in 1929 you had to make 5 times the average wage to pay any state income tax at all, but now over 66% of tax payers in Arkansas pay at least some of their income at the 7% level.

Take a look at all the Milton Friedman clips that I have posted today. These liberals I mentioned above have truly forgotten how powerful the market is if not interferred with by the government.

Milton Friedman’s Free to Choose (1980), episode 1 – Power of the Market. part 2

Ernie Dumas in his article “Arkansas” A tax myth-maker too,” Arkansas Times, April 13, 2011 asserts:

Until Gov. Dale Bumpers raised income-tax rates and other taxes in 1971, Arkansas had by far the lowest per-capita state and local taxes in the United States. Afterward, we were still 50th but within shouting distance of 49th.

Here are the real facts  according to Greg Kaza of the Arkansas Policy Foundation:

(June 2006) Democratic Gov. Dale Bumpers and the General Assembly raised Arkansas’ top income tax rate to “broaden the tax base” in 1971(1). Yet Arkansas’ per capita income, expressed as a percentage of the U.S. total, has barely improved, moving from 71 (1971) to 77.7 percent (2005) over the 34-year period, according to data from the U.S. Bureau of Economic Analysis. The 1971 income tax increase reversed a decades-long strong growth trend and left Arkansas with the highest income tax rate among bordering states (Mississippi, Missouri, Louisiana, Oklahoma, Tennessee and Texas).

Income Stagnation: The 1930s

One has to turn to the 1930s-the decade of the Great Depression-to find weaker income growth than in recent years.

Arkansas per capita personal income was 44 percent of the U.S. in 1929, the first year data was compiled in the BEA time series. The Great Depression started that year, and by the time it ended in 1933 Arkansas per capita income had fallen to 41 percent of the U.S. By decade’s end (1939) it had returned to 44 percent.

Growth Decades: The 1940s, 1950s & 1960s
Arkansas per capita income increased as a percentage of the U.S. in the next three decades.
In 1941, at the onset of World War II, Arkansas per capita income was 47 percent of the U.S. It was 59 percent at war’s end in 1945 and again in 1949. It was 56 percent in 1950, 62 percent a decade later in 1960, and 68 percent in 1969. If this growth rate had continued Arkansas would have exceeded 100 percent of the U.S. average in the current decade (2000-2009).

To summarize, Arkansas per capita income increased from 44 to 71 percent of the U.S. total between 1939 and 1971.

Anemic Income Growth (1971-2005)

The trend in recent decades is anemic growth in Arkansas per capita personal income. Fiscal policy changes effect economic behavior with a time lag. Arkansas per capita income was 71 percent of the U.S. in 1971 and 76 percent in 1973. Income growth stagnated for the rest of the decade, reaching 77 percent of the U.S. in 1979. It fell to 75 percent in 1989, and was 76 percent in 1999. Today, Arkansas per capita income, at 77.7 percent of the U.S., is barely above its high point of the 1970s.

Milton Friedman’s Free to Choose (1980), episode 1 – Power of the Market. part 3

Recently I read the report “A short history and recent trends in the Arkansas income tax,” by Richard Sims, Arkansas Business and Economic Review, December 22, 1993 and here is a portion of it:

Introduction

Since its introduction in 1929, Arkansas‘ statutory income tax structure has changed very little. However, due to changes in the economy and in inflation, the real effects of that tax structure have changed substantially. This report looks at the effects that rising incomes and inflation have had on the Arkansas income tax structure. In addition, the report looks at the changing profile of Arkansas taxpayers in recent years, and provides a brief comparison of Arkansas taxes in relation to other states and the federal tax system.

ArkansasIncome Tax Structure: Original and Revised

In 1929 Arkansas became 12th among the states to adopt an individual income tax. The structure contained five rates and net income brackets with a top rate of five percent applying to net income over $25,000. That original structure remained in place until 1971 when a new middle income bracket was added and the rate on net income over $25,000 was increased to 7.0 percent. The rates and brackets revised in 1971 remain in place today. The 1929 original and the revised current tax structure are shown in Table 1.

Table 1 Arkansas Individual Income Tax Structure

 1929 Original Net Income Rate first $3,000 1.0% 
next$3,001 to $6,000  2.0% 
next$6,001 to $11,000 3.0% 
next $11,001 to $25,000  4.0% 
over $25,000 5.0% 
1971 Revision (Current) 
Net Income Rate first $2,999 1.0%
 next$3,000 to $5,999 2.5% 
next$6,000 to $8,999 3.5% 
next$9,000 to $14,999 4.5% 
next $15,000 to $24,999 6.0%
 over $25,000 7.0% 

Source: Arkansas Legislative Tax Handbook, 1992, Bureau of Legislative Research.

In 1975, the earliest year for which records on income tax collections by income group is available, only the top 4.0 percent of Arkansas taxpayers would have had any of their income subjected to the top 7.0 percent rate. By 1991, around 66.0 percent of the state’s taxpayers would have had some of their income subjected to this top rate–a rate once reserved for only the highest income earners.

The 1929 tax structure provided for exemptions of $1,500 for a single person and $2,500 for married individuals. In 1947 the state raised the exemption to $2,500 for singles and $3,500 for married persons. In 1957 the personal exemption was converted to a credit of $17.50 for singles and $35.00 for married persons. In 1987 the credits were increased to $20 per person. Finally, in 1991, low income Arkansans were exempted from paying income tax if their gross income did not exceed $5,500 for an individual or $10,000 for a married couple. For most taxpayers, the $20.00 credit remains in effect today.

The Value of Exemptions as a Share of Per Capita Income

Table 2 shows how the value of the personal tax exemption or credit has diminished over time. The figures shown represent the personal exemption or credit for a single individual as a ratio of the per capita personal income in the year in which the credit was first enacted. In 1929, for instance, an individual would have been exempted from any tax until their income reached a level which was equal to 490 percent of the Arkansas per capita income for that year. In 1947 with the first statutory change in the exemption, that individual would have still been exempted up to an amount equal to 340 percent of the per capita income level. By 1957 the value of the exemption (which was changed to a tax credit that year) had declined substantially, falling to 130 percent of per capita income. At the time of the next change in the personal credit (1987), the value of that credit was only 17 percent of the per capita income level. For most taxpayers (all those not officially classified as low income) in 1992, the value of the personal credit was only 13 percent of per capita income.

Table 2 Personal Exemptions and Credits As a Percent of Per Capita Income

 Arkansas Year of Value of Per Capita Enactment ExemptionIncome Ratio 1929 $1,500 $ 308 490% 19472,500 737 340% 19571,6001,247 130% 19872,000 11,980 17% 19922,000 15,439 13% 

Source: Arkansas Legislative Tax Handbook, 1992, Bureau of Legislative Research; Per capita personal income data is from the Bureau of Economic Analysis, unpublished data, April, 1993.

In other words, whereas in the first year of enactment of the income tax, the personal exemption would have allowed an Arkansan to earn almost five times the average per capita income before paying any tax.

Milton Friedman’s Free to Choose (1980), episode 1 – Power of the Market. part 4

____________________________________

In his article “Census: Fast growth in states with no income tax,” Washington Examiner, Dec 21, 2011, Michael Barone noted:
 
For those of us who are demographic buffs, Christmas came four days early when Census Bureau director Robert Groves announced on Tuesday the first results of the 2010 census and the reapportionment of House seats (and therefore electoral votes) among the states.

The resident population of the United States, he told us in a webcast, was 308,745,538. That’s an increase of 9.7 percent from the 281,421,906 in the 2000 census — the smallest proportional increase than in any decade other than the Depression 1930s but a pretty robust increase for an advanced nation. It’s hard to get a grasp on such large numbers. So let me share a few observations on what they mean.

First, the great engine of growth in America is not the Northeast Megalopolis, which was growing faster than average in the mid-20th century, or California, which grew lustily in the succeeding half-century. It is Texas.

Its population grew 21 percent in the past decade, from nearly 21 million to more than 25 million. That was more rapid growth than in any states except for four much smaller ones (Nevada, Arizona, Utah and Idaho).

Texas’ diversified economy, business-friendly regulations and low taxes have attracted not only immigrants but substantial inflow from the other 49 states. As a result, the 2010 reapportionment gives Texas four additional House seats. In contrast, California gets no new House seats, for the first time since it was admitted to the Union in 1850.

There’s a similar lesson in the fact that Florida gains two seats in the reapportionment and New York loses two.

This leads to a second point, which is that growth tends to be stronger where taxes are lower. Seven of the nine states that do not levy an income tax grew faster than the national average. The other two, South Dakota and New Hampshire, had the fastest growth in their regions, the Midwest and New England.

Altogether, 35 percent of the nation’s total population growth occurred in these nine non-taxing states, which accounted for just 19 percent of total population at the beginning of the decade.

Milton Friedman’s Free to Choose (1980), episode 1 – Power of the Market. part 5

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