Article: “Taxing Times for Arkansas”

Taxing Times for Arkansas  (Grapevine, June 22, 1983)

by Peter Tooker

As former state Representative Bill Stancil of Fort Smith recalls, the Boys Club of America had received an exemption from the state sales tax on their purchases in the 1977 legislative session. And before that it was the Boy Scouts and Girl Scouts in 1975. “I guess it was an oversight that the Girls Club was not exempted,” he says.

So, in the 1979 legislative session, Bill Stancil went to work constructing a bill to give the Girls Club the same advantage which was enjoyed by so many other special interests, large and small. After all, “Everybody and his dog practically has an exemption. You know, we have more exemptions than taxes.”

Was it hard getting the measure through?

“It’s never easy to pass any bill,” the former legislator remarks, but “it was only a matter of an oversight, and since it was an oversight, it wasn’t that hard to pass.” After all, the Girls Club was not a major source of revenue for the state, and “at that time Fort Smith had the only Girls Club in the state.”

At the same time that Rep. Stancil was composing an exemption bill for the Girls Club in his home town, Representative Ray S. Smith, Jr., of Hot Springs received a letter from the Poets’ Roundtable of Arkansas, a constituent of his. It complained of the burden the organization faced in paying sales taxes for its purchases, a burden they felt “was more trouble than it was worth,” according to Ray Smith. “And hell, everybody else had (an exemption).” So Ray Smith went about his business of writing the proposal to exempt the Poets’ Roundtable from the state’s sales tax.

Copies of the letter he had received from his constituent were given to each representative and senator to develop sympathy for the poets’ cause. The argument was made that the loss to the state’s treasury (the Roundtable president estimated) would be less than $100. And besides, “It was literary.”

And then Ray Smith heard of Rep. Stancil’s efforts to include the Girls Club in the myriad exemptions for youth organizations already in the law. So he approached Bill Stancil…

“…And I said, ‘Listen, let’s amend it (Stancil’s bill) and take care of it one time.”

And so it was done. And not only were the Roundtable and Girls Club joined, but in a massive common-law marriage of other youth organizations still not blessed with sales tax exemption the names of 4-H Clubs, FFA Clubs, the Arkansas 4-H Foundation, the Arkansas Future Farmers of America Foundation, and the Arkansas Future Farmers of America Association were also appended to the bill.

And the legislators saw that it was good, and their cause was needful. And they saw that it was of benefit to the people of the state. And so it passed, and an Emergency declared to put it into effect immediately. And the word was spread throughout the land. And from that day onward neither the Girls Club, Poets’ Roundtable, 4-H Clubs, FFA Clubs, Arkansas 4-H Foundation, Arkansas Future Farmers of America Foundation, nor Arkansas Future Farmers of America Association has been burdened with the obligation of paying a sales tax to the state on their purchases.

These are only a small number of the charitable social organizations which are legally avoiding the state’s sales tax. The list goes on, however: exemptions are placed on motor fuel, cotton and its byproducts, seed, livestock, fertilizer, feedstuffs for livestock and poultry, manufacturing machinery, farm equipment, electricity used in the manufacturing of aluminum, and more… many, many more.

Including the four passed in the latest legislative session, there are a grand total of 69 sales tax exemptions gracing the laws of Arkansas. Losses to the state’s treasury from many of these are unknown, but of those which can be estimated the total is somewhere around $220 million, give or take $10 million.

Most of these have been written into law at the behest of some legislator’s constituent to provide that party with relief in troubled economic times. The wealthier the constituent, the greater relief he or she may extract from the state’s lawmakers. The example of the exemption of electricity sales to Reynolds Metals Company is a case in point.

For the metal manufacturing industry in the United States, 1975 was a difficult year. From the boomtimes of the early ’70s the market for metals had soured until, in 1975, sales for the industry fell by 15.6 percent from the previous year, while industrial profits fell 44.8 percent, according to Fortune magazine.

Reynolds suffered the same misfortune as the rest of the industry, with earnings per share in 1975 shrinking to 53 percent of the 1974 total. In its corporate castles management was in a frenzy: budgets had to be trimmed; austerity was the order of the day. And here in Arkansas that meant laying off 1,405 of Reynolds’ 3,320 workers, a savings in salaries of $19.6 million.

Reynolds’ savings was Arkansas’ loss, however; $19.6 million buys a lot of bread in a state with the second lowest per-capita income in the union. State Senator Virgil T. Fletcher of Benton, in whose districts Reynolds was the biggest employer, set about the task of easing the troubled corporate ship through the shoals of economic depression. He introduced a bill to exempt the company from paying sales tax on the electricity it used; an expense which amounted to 37 percent of the costs of Arkansas operations. (Two years before this same measure had won the Legislature’s favor, only to be vetoed by then-Governor Dale Bumpers.)

An important industry in distress quickly became an important political issue for Governor David Pryor’s consideration. And so, on January 8, 1976, he traveled to Reynolds’ corporate headquarters in Richmond, Virginia, to discuss the company’s plight with the highest levels of management. Leaving the meeting, the governor was quoted by the Arkansas Gazette as saying he “was optimistic that Reynolds would return to full production in Arkansas and possibly even expand.”

Yet, while admitting that Reynolds had made no promises in exchange for removing the state’s sales tax on their electricity, he nonetheless included such a measure in his legislative program for the extended session which began just five days after his meeting with the heads of the corporation.

Was such an exemption necessary for Reynolds to continue its operations in the state, or was it simply a subsidy for an inefficient, non-competitive operation? Dr. Charles E. Venus, an economist for Worthen Bank and Trust (Little Rock), speaking to the Public Relations Society of America in early 1975, had called the state’s Reynolds plants “old and costly to operate.” Moreover, it was his opinion that sooner or later the company would decide to abandon the outmoded Arkansas operations altogether.

According to Representative Ray Smith of Hot Springs, though, the exemption did have a positive effect on Reynolds’ outlook in the state. Because of the concern of the Legislature for the company’s well-being, Reynolds’ management was impressed with the “atmosphere” in Arkansas, and since that time has placed a new plant in the state.

The cost of creating a favorable corporate “atmosphere” is substantial, though. The Legislative Council report of 1982 set the state’s revenue loss at $2 million annually because of the Reynolds exemption. And once it’s on the books removing such an exemption is nearly impossible, even if the financial picture which was the reason for first granting it brightens. Since 1975 Reynolds has ridden the peaks and troughs of the economic tide—in 1981 the company had net profits of over $180 million, for the highest earnings-per-share ratio in its history—but not once has en effort been made in the Legislature to reimpose the sales tax on its electric bills.

In the competition for sales tax exemptions the state’s major economic interests have a decided advantage. Even in the dark days of Arkansas government’s current depression the major interest groups can still find many sympathetic ears in the Legislature and governor’s office. Last March, while the Legislature was calling for restraint in education and other basic services, it was granting yet another sales tax exemption, this time to the large manufacturers of Arkansas; one costing between $1.9 million by its supporters’ reckoning, and $6 million by opponents’.

It was House Bill (HB) 756, authored by Rogers Representative Richard Barclay, exempting replacement machinery. “The Associated Industries of Arkansas (AIA) had a manufacturing committee working for several years, “ he told me, “working on the sales tax regulations that were published about January of 1981. They were actively concerned about the exemptions, about the court cases gradually narrowing the definition of the machinery exemption.”

That exemption, first passed in 1967, removed the tax from repair, replacement or expanded machinery. There were two issues they were concerned with:

First, the state’s Department of Finance and Administration had ruled that “the machine that was exempt actually had to touch the product,” and,

Second, “they were ruling that only new plants were eligible for the exemption and the only way an existing company could get the exemption was to replace the entire plant.”

HB 756 dealt with this second issue.

Representative Barclay is the first to admit, “Frankly, of course, I am in an area with some industries that have been around for quite some time, and so I had some interest in this. I got interested in it and decided to sponsor it because Daisy (the B-B gun manufacturer located in Rogers) has had some problems with Finance and Administration about this. I think all of the industries have had a lot of problems with this. That’s why the governor supported it.”

In fact, he had Governor Bill Clinton’s support before the bill was even in the legislative hopper. “We had the bill drawn and waiting for some time for him to get his office organized,” Barclay told me, “and we had an agreement with the governor before we introduced the bill.”

To hear Richard Barclay speak, the success of his exemption of replacement machinery from sales tax was a victory of virtue and reason. To Senator Ben Allen, the main opponent of the measure in the state senate, Bill Clinton’s agreement to back the bill “was just a submission to a lobbying effort that was unreal. The administration, in an effort to appease this lobbying effort, responded to it by supporting the exemption.”

“That’s far too simple an explanation,” says Joan Roberts, press secretary to the governor. In the long run the money saved by the corporations in their replacement machinery will be reinvested, eventually resulting in more economic activity, wages paid, sales, and ultimately, state revenues than would have been received with the sales tax. In the long run, she insists, “All of those things are going to put people back to work.”

And this is typical of the argument used to explain the exemption of important economic sectors from the state’s sales tax: keep money in the hands of the corporate supply side and it will multiply itself until soon more persons will have benefited than if it had been paid in sales taxes. Ronald Reagan knows the argument well.

In addition to this line of reasoning, if any neighboring states exempt any items from their sales taxes, exemption supporters will argue that Arkansas should follow their lead. As Representative Barclay declares, “The fact is that Arkansas is trying to develop industry, and the fact is that almost all the states that are developing industry are giving advantages to industries. We have to be competitive.”

A competitive position, in this case, is bought at the expense of fairness. For with the addition of each special-interest exemption that state’s sales tax—an inequitable levy by its very nature—becomes even more regressive. Because everyone has the same basic demands for food, shelter, clothing and transportation, and since income rises faster than spending, basic costs (and sales taxes) remain fairly static for everyone, while wealth varies greatly.

According to Internal Revenue Service figures for 1980, a 3-percent sales tax would take about 1.4 percent of the income of a family of four making $8,000 annually. That same tax would take about 0.7 percent of the income of the same size family making $50,000, and only about 0.5 percent of the $100,000 family’s income. In other words, the sales tax burden is twice as great for the moderate-income family as for those at the $50,000-a-year level, and 2.8 times as great as those making $100,000 per year.

Yet even this measure does not accurately reflect the regressive nature of the state’s sales tax, now shot full of special-interest exemptions like so much Swiss cheese. By the most conservative estimate the state government lost $217 million last year from sales tax loopholes.

The state does not lack for these funds, though, for eventually the rest of us who do pay taxes will have to make up the deficit. By subtracting the $217 million that had to be subsidized by other non-exempted sales-taxpayers from the total sales-tax income last year of $420 million, we see that our legitimate portion of the sales tax bill was only $203 million, or less than half of what we paid in sales taxes. If all exemptions were removed, the same income could be produced with a sales tax of one and one-half cents, rather than today’s charge of three cents on the dollar.

The fact that we’re paying twice as much as our fair share only doubles the inequity of an already inequitable sales tax. But indications are that this is part of a trend which, over the last ten years, has made the state’s system of taxation increasingly regressive. From 1969 to 1981, the growth rate of the individual income tax has been three times that of the corporate tax. What’s more, the share of total state revenues from the individual income tax has been growing while the percent of the corporate income tax in state revenues has been falling since 1969 (from 11.2 percent to 6.8 percent last year). In addition, the original sales tax law of 1941 included 20 exemptions, and out of the remaining 49 exemptions, 28 have been added since 1973.

Obviously, one way of dealing with the state’s financial crisis, exacerbated now with the recent Arkansas Supreme Court ruling striking down the traditional system of public school funding, is to remove the exemptions from the state’s sales tax. One who supports this idea is Senator Ben Allen. “I would like to see all the exemptions removed,” he told me, while adding, “Now pragmatically I know, judging from the past legislative session, I am not going to get any support there.” The pressures from wealthy interests, particularly farming and industry, are too great to allow their exemptions to be removed.

“One, I don’t think the administration would do it, and two, even if the administration did it, I don’t think the General Assembly would have the intestinal fortitude. It’s political reality…Our business and industrial leaders would not be supportive of (removing) the balance of (sales tax exemptions). It’s self-interest. This is the way life is, and this is the way government is.”

During the last legislative session there was a bill that addressed the problem of exemptions, that would have removed each exemption unless it could be justified. But the bill was watered down, amended to remove its sunset provision, and, when finally passed, simply required the Joint (House and Senate) Interim Committee on Revenue and Taxation to study the exemptions and prepare legislation “for abolishing the various sales and use tax exemptions which the Committee finds not to be justified…”

As Chairman of the Senate Committee on Revenue and Taxation, Ben Allen should be preparing hearings, as mandated by this law. Instead he says, “I don’t want to tilt with windmills…It’s merely lip service. It’s not coming out of a serious concern with tax equity.”

If this law was on the books only to make it appear that the Legislature is interested in tax equity, what other ways may the exemption problem be attacked? According to Richard Barclay, “There’ll have to be some group, some organization (working for sales tax reform), of the Governor’s office has got to stand up and demand that they be taken off. As it stands right now there’s not enough uproar, there’s not enough public outcry to remove them. But there’s more outcry from those that have the exemptions than those that don’t.”

And those who wait for Bill Clinton to take the lead in making the tax system more progressive may have to wait quite awhile. “He thinks,” says his press secretary, Joan Roberts, “it will probably be difficult at this point to repeal exemptions.”

This is not really surprising, given the fact that Bill Clinton holds the record, among all the governors of Arkansas, for passing sales tax exemptions. As the champion of special-interest exemptions, it’s hardly surprising that he would take little interest in seeing to their repeal.

Despite the lip service, the public proclamations of support for progressive taxation, neither the governor not the Legislature is sincere in seeking fundamental changes in the application of the state’s sales tax. In fact, indications are they’ll tilt the system even further toward citizens of wealth and influence, as they have done over the last ten years. Instead of making the tax system more progressive, they have been increasing its regressiveness; instead of greater fairness, they have promoted greater inequity.

But, as with Reynolds Metals when it was faced with falling income, the special interests that apply for exemptions are those that find themselves sinking with the nation’s economy. To keep themselves afloat they cast off their obligations of citizenship, leaving it to those without the political leverage and influence of wealth to bear their burdens for them.

Exemptions are thus a symptom, a response to hard times, in the present and future days of growing hunger. In this changing environment, when the fortunes of the world seem themselves to change their locus and fickle fortune smiles on neighbors far away across the oceans, citizens are turned against each other. And finally those with the least to give will be those who are asked to give the most.