On income taxes

What were we thinking?

It’s that time of year again when the income tax bubbles up as a hot topic of conversation in households all across America. For many, it’s not quite as bad as a root canal, but it may come close. At least with a root canal, when it’s over, it’s over. To comply, the search will be on for receipts, statements, proof of deductions, expenses, transactions, W2s, W9s, 1040s, and on and on.

Prior to 1913, life was a lot simpler: there was no federal income tax. None. Zero. Everything changed when political leaders passed the 16th Amendment to the Constitution, created the federal income tax, and began tapping into a vast reservoir of national personal income. The amendment reads: “The Congress shall have the power to levy and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.”

What were they thinking? Talk about giving a blank check to the federal government without any requirement to share with the states! The federal government does share some of the revenue, but it almost always comes with strict rules, regulations, and mandates.

In 1913, citizens bought in to the idea as they were told the income tax would only affect the wealthy. It started out that way, but as most of you reading this article know all too well, it did not last. It began with a maximum rate of 5 percent on income over $500,000 (only affecting the wealthiest of the wealthy). Political leaders kept increasing the rates, and by the 1960s the top income-tax rate was up to a shocking 91 percent. This was too much, and the economy suffered.

President John F. Kennedy led the charge to cut the top tax rate to 70 percent, which was accomplished in 1964 after his death. President Reagan continued this effort, achieving a top rate of 28 percent by 1986. Predictably, that tax cut did not last, and the current top rate has snuck back to 37 percent.

It didn’t take long for the incometax idea to spread to the states. Why not get in on the gravy train along with the feds? A few states deferred, and now it seems they were the ones with the best economic foresight. Today, that total is nine, with many others in the process of cutting rates. Florida and Texas get the most attention, but others include Alaska, Nevada, New Hampshire, South Dakota, Tennessee, Washington and Wyoming.

For Arkansas, it began with Act 118 in 1929 and only affected the wealthy with a top rate of 5 percent on taxable income over $25,000. Adjusted for inflation, $25,000 in 1929 is equivalent to $449,000 today. In 1971, the top rate increased to 7 percent.

Regrettably, from 1929 until 1996 the brackets were never indexed to inflation. Over the years, inflation ate into the purchasing power of $25,000, and “them” became “us.” In 1996, Gov. Mike Huckabee indexed the state taxes to inflation, which thankfully halted the process. Gov. Asa Hutchinson led efforts in 2015 to reduce the top rate, and this has been continued by Gov. Sarah Sanders with two rate cuts in her first year.

The current top income-tax rate in Arkansas is now down from 7 percent to 4.4 percent, with further reductions on the horizon. Bear in mind the top rate begins with a taxable income of $24,300, so over 1 million Arkansans benefit from a lower top rate. With Texas and Tennessee on our borders and Florida not too far down the road, having a state income tax is not attractive to current and potential residents. However, states are finding out that once a state income tax is instituted, it is difficult to get rid of. The state income tax provides a significant percentage of revenue for the states that have it.

For Arkansas, our best bet is to continue trimming the income-tax rates and see how far in that direction we can go. Ultimately, the elimination of the state income tax is an exciting and worthy pro-economic-growth goal.

Dr. David F. Rankin is president emeritus at Southern Arkansas University where he’s been a longtime professor of finance and economics. For the past 26 years, he has been chairman of the Governor’s Council of Economic Advisors and is the author of “The Economics of Freedom” and “What Every American Needs to Know about Economics.” He may be reached through his website, com.