Despite claims to the contrary, personal income tax cuts don’t help small businesses grow. Business owners hire when there is increased demand, regardless of what the tax rates are. In Arkansas, the majority of firms are small businesses (96.6 percent) who don’t have enough income to justify major hiring decisions based on small marginal tax rate changes.
Even eliminating the state personal income tax entirely (our top bracket is 6.9 percent) would mean only a few thousand dollars in annual tax savings for these businesses – hardly enough to hire an additional employee or “create a job.”
Tax cuts don’t entice people or businesses to move between states, either. Less than 2 percent of residents in the U.S. relocate across state lines each year, and most of the time if one person leaves a state, they are replaced by another person moving in, making the net change from migration close to zero. People are just as likely, if not more likely, to move to a state with higher income taxes. For example, just as many people moved to Arizona as Texas between 1993 and 2011, even though Texas doesn’t have an income tax and nearby Arizona does. Over half of the people who choose to change states do so because of job opportunities or to be closer to family; climate is also a major indicator. The bottom line? People are more likely to move to states with better jobs, not states with lower taxes.
If we want to attract and keep our best employees, our brightest graduates and our most promising entrepreneurs, we need to have quality schools, affordable housing, and a healthy job market. Arkansas is required to have a balanced budget; this means that any tax cuts must be paid for by cutting state services. Businesses need the products of state services like a well-educated workforce, an up-to-date infrastructure and police and fire protection. Good schools, national economic trends, and natural resources are true drivers of state economic growth. Minor personal income tax changes between states are not.
In the second in a four-part series, learn more about how substantial personal income tax cuts don’t do any favors for Arkansas businesses.
Read part 1 of this series, how personal income tax cuts have failed in other states, here.