Let’s kick this off with explaining what a capital gain even is in the world of taxation. It was brought to my attention the other day that many people don't have a clue what the term means. It does have one of those foggy, generalized sounds that conjures not a single image.
A capital gain is simply what the tax law calls the profit you receive when you sell a capital asset, which is property such as stocks, bonds, mutual fund shares and a business that constitutes real estate. This doesn’t include your primary residence by the way.
There already is a federal capital gains tax, which means that even without an additional state version, you will pay at least 10% (and as much as 36%) on a short-term capital gain (less than a year) regardless of your home state.
But if you’re a business owner or someone who owns real estate, or has invested his money and lives in the state of Arkansas , you’ll also be forking over another average of 4.9 percent on the sale.
I should point out again at this point that Arkansas is one of the nation's least business friendly states, coming it at 39th. We are the 14th highest in state and local tax burden at 9.8% and Arkansans make $13,000 less than the national average median income.
Our neighbor states (see map above) are kicking our Razorback hindquarters , and Texas, our arch sports rival is growing in business because they have figured out how to attract, rather than repel new businesses that spell additional new jobs. Those Longhorn folks, along with other neighboring Southern states, realize that eliminating their capital gains taxes is just good for business growth.
According to the Tax Foundation's Background Paper: 2011 State Business Tax Climate Index
A far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state's competitiveness. When assessing which changes to make, lawmakers need to remember these two rules:
- Taxes matter to business. Business taxes affect business decisions, job creation and retention, plant location, competitiveness, the transparency of the tax system, and the long-term health of a state's economy. Most importantly, taxes diminish profits. If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices), workers (through lower wages or fewer jobs), or shareholders (through lower dividends or share value). Thus a state with lower tax costs will be more attractive to business investment, and more likely to experience economic growth.
- States do not enact tax changes (increases or cuts) in a vacuum. Every tax law will in some way change a state's competitive position relative to its immediate neighbors, its geographic region, and even globally. Ultimately it will affect the state's national standing as a place to live and to do business. Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high-tax states.
Columnist Mike Masterson, (full disclosure) my husband, described in his column yesterday this very scenario:
[A] reader told me that in 1991 an Arkansas banker he knew prepared to sell his bank holding company to another in-state, start-up bank holding business. Before the transaction occurred, the seller moved to a neighboring state that had no a capital gains tax on a business sale. This meant that he legally avoided paying capital gains and income taxes.
Six years later, the same holding company was bought out by another in-state bank that was, in turn, was bought by another, all in fairly short order.
“Those were stock exchange and tax-free gains until a shareholder sold his shares in the open market,” the reader wrote. “As a director and shareholder of the original purchasing bank, I bought as much stock in the bank as I could.”
When the time came for him to sell and pay capital gains, he’d already left Arkansas and saved a hefty chunk by avoiding capital gains taxes on the sale. He still holds a fair amount of stock in another bank after selling half of it while living in his new home state. Once again, he paid nocapital gains taxes because he didn’t have to.
Another of his friends in Arkansas owned a professional firm that he wound up selling. He also bought a home and moved to another state without any capital gains tax before the sale was complete. Cha-ching!
“Arkansas has lost quite a bit in sales and ordinary income taxes from just from us,” the reader. “Arkansas definitely needs to have this bill passed.”
Any questions so far? I hope the need for HB 1002 is becoming much clearer for our oddly resistant governor and any legislators who, inexplicably, oppose the measure, which could help attract businesses and jobs to our state.
Successful politicians find it best to vote for improving Arkansas and its people rather than engaging in or knuckling under to self-serving oleboy politics.
“I’m confident that the other Arkansas businessman and I made our moves to preserve those moneys forour heirs and our select charities,” said this reader, who’s approaching his 70th birthday. “No one did it for personal lavishness. We didn’t want or need to do that. There are a great many like us whose other taxes and contributions Arkansas has missed out on because of its current tax structure.
“I want to be sure to leave my family enough to live on and enough to cover almost any adverse health events,” he continued. “My state now has no income, capital gains tax, estate or death taxes. Were Arkansas close to that, I’d live in the River Valley until I die. As is, I live here.” Ole-boy politics.
This is an important bill for Arkansas families and attracting Arkansas businesses. Get the facts and contact the Senate Revenue and Tax committee members, ask them to grow jobs NOT government~
Senators Lamoureux, Files, Sample and Williams have already committed to a YES vote.