The include lowering the top marginal personal income tax rate from the current 5.9% down to 5.3%, consolidating the lower- and middle-income tax brackets, and providing a small personal tax credit for low-income taxpayers. Horpedahl explained that all of these changes will benefit Arkansas taxpayers, especially those in the middle part of the income distribution who will benefit from both the rate cut and the bracket consolidation.

The table below shows how the proposed changes would impact five sample taxpayers throughout the income distribution in Arkansas.

The estimated budgetary cost of these changes would be about a $300 million decrease in the state’s general revenue budget. Dr. Horpedahl said that this is a large tax cut, about equal in size to all the tax cuts passed in the 2015, 2017, and 2019 legislative sessions. But Horpedahl also said this tax revenue reduction will not cause any major cuts in government services in Arkansas, since it is about the size of the normal annual increase in the general revenue budget in Arkansas. The tax changes are possible to enact by slowing the increase in the size of state government, but would not require major reductions in the roughly $6 billion general fund.

For more of ACRE’s work on taxes, transparency, and state finance, please see the following:

Shine More Light – Policy Analyst Mavuto Kalulu advocates for more state fiscal transparency in administering COVID-19 relief funds.

Reducing Arkansas’s Income Tax Rate To Zero – Dr. Jeremy Horpedahl discusses the steps necessary to completely repeal the Arkansas individual income tax.

The Road Map To Tax Reform in Arkansas – Dr. Jeremy Horpedahl outlines a series of reforms state lawmakers could enact to improve Arkansas tax policy.

Arkansans Could See Big Savings from Special Session – ACRE Policy Analyst Joseph Johns and Dr. Jeremy Horpedahl discuss how Arkansans could benefit from potential income tax cuts in the upcoming special legislative session.

Dr. Jeremy Horpedahl and I spoke with Ryan Norris, State Director of the Arkansas Chapter of Americans for Prosperity, on his . Our conversation focused on the and more broadly about both tax and spending issues in Arkansas over the past few years.

The first half focusd on the during a planned upcoming special session. The two competing plans have potential benefits for different taxpayers. For example, a household earning around the median income of $43,000 stands to save at least $200 per year. This is a modest savings on a yearly basis. However, the proposed reforms set the stage for further reductions in the individual income tax in future legislative sessions.

Dr. Horpedahl explained the need to consider other tax reform pathways. These include eliminating the tax cliffs that happen when Arkansans earn slightly higher incomes. These slightly higher incomes and are taxed at higher rates on substantially similar income levels. He also recommended indexing the standard deduction, or the amount exempt from state income taxes to inflation. Without inflation indexing, the standard deduction becomes less valuable to taxpayers over time. This is critical since  by an annualized average of 5.3% relative to 2020. Indexing the standard deduction makes Arkansas’s tax code more consistent since “all other elements of Arkansas’ tax code are already indexed to inflation.”

The second half of the discussion centered on state spending trends and finding ways to restrict spending while maintaining essential government services. The RSA came out of the depression-era economic situation when Arkansas defaulted on its state debt. After two to address taxes and debt, legislators adopted the RSA in the 1940s to consolidate around 100 different funds and prioritize state spending into categories (for example, the 2022 budget has four categories, A through D).

Dr. Horpedahl spoke about the importance of the RSA to state spending by reminding listeners that the RSA mandates spending cuts when the state collects less revenue than anticipated. This prevents the state from spending beyond its means and prioritizes essential spending necessary for the state government to carry out its constitutional responsibilities. It is also important to remember that the legislature must fully fund Category A to ensure continued support for essential government services. The RSA does not prevent increased spending if the tax revenues come in high.

Norris then transitioned to the state’s Long-Term Reserve Fund. Dr. Horpedahl suggested that while this fund has grown significantly in the past several years, there are still loose rules governing withdrawal from the fund. The state should consider ways to limit the Long-Term Reserve Fund from being misused for imprudent purposes. I also spoke about a that requires any excess state revenue to be returned to taxpayers.

There are specific steps that Arkansas could take to provide meaningful tax relief. The state should build on currently proposed income tax reforms, consider ways to guard LTRF balances, and keep Arkansas competitive with its neighboring states. Adopting these reforms puts the Natural State in an even stronger fiscal position.

See more of ACREs work on taxes, transparency, and occupational licensing reform below:

– Dr. Jeremy Horpedahl provides a non-partisan summary of Governor Hutchinson’s 2019 tax reduction plan on Capitol View.

– Dr. Horpedahl explains the necessary steps for Arkansas to eliminate its individual income tax.

– Dr. Jeremy Horpedahl proposes alternatives to increasing the sales tax to fund road construction. He cites equity and tax competitive concerns since Arkansas has a relatively high sales tax, relative to its neighboring states.

Occupational Licensing Review Committee Kicks Off Second Session – ACRE Policy Analyst Zach Burt summarizes his testimony on Seed Dealer Licenses before the Occupational Licensing Review Subcommittee.

– ACRE Policy Analyst Joyce Ajayi explains the need for increased transparency of school district budgets to discourage opportunistic behavior of financially burdened teachers.

ACRE Director David “Mitch” Mitchell and I spoke on the on Monday, October 4^th, 2021, about the upcoming Arkansas special legislative session. We discussed two main tax cut bills currently under consideration by the legislature. The first plan, by Joint Budget Committee Co-Chair Senator Jonathan Dismang [R-Searcy] would reduce the top marginal rate from its high of 5.9 percent to 4.9 percent and consolidate the low-and-middle income tax brackets. The second plan requested by Governor Hutchinson and created by the Department of Finance and Administration (DF&A), would keep the three-bracket structure, lower the top rate to 5.5 percent and lower the 5 percent rate to 4.5 percent by 2023. Arkansas taxpayers will benefit the most under the Dismang plan due to the steeper cut in the top marginal rate.

I also spoke about the effects of the “tax cliff “and how Arkansans who earn as much as one more dollar could be taxed by as much as $180 more “for the privilege of earning that extra dollar.” We both reminded listeners that Arkansas is competing against other southern and midwestern states with lower individual income tax rates. Staying competitive is key to enhancing Arkansans well-being and economic vitality.

Tax triggers are tax reductions applied when the state meets pre-established revenue targets. Tax triggers have been used in several states. Our LTRF is currently around $1 billion and could be used to help enhance the effects of the proposed income tax cut plans as state revenue recovers.

the need for the legislature to place rules around how the Governor could use the state’s Long-Term Reserve Fund (LTRF). Without rules we don’t know how the next governor or legislature will spend that money.

Mitchell also discussed the advantages of lowering individual income tax rates now because of Amendment 19 to the Arkansas State Constitution. Amendment 19 requires that three quarters of the Arkansas legislature or a majority of voters approve an increase in the individual income tax. Mitchell said that Amendment 19 would “make it almost impossible for legislators to raise the income tax” after lowering it.

Elswick also discussed the need to cut the state sales tax to pursue even bigger tax savings during the session. Mitchell suggested the legislature spend its time focusing on the income tax since Amendment 19 doesn’t create that higher three-quarters bar for raising the sales tax. Amendment 19 was adopted in 1934 and preceded the state sales tax which was adopted the following year in 1935. Therefore, it only acts as a constraint when the legislature considers increasing the individual income tax.  The next legislature could just raise the sales tax and saddle taxpayers with that extra burden.

Elswick also discussed the need for state-level , the main focus of ACRE Policy Analysts Mavuto Kalulu and Joyce Ajayi, to help keep Arkansas state lawmakers accountable to their voters and encourage legislators to spend the massive COVID-19 relief spending wisely.

Our three main points are:

• Cutting the income tax rate allows Arkansans to receive more gains from their own work and helps keep Arkansas competitive when looking to attract jobs and talent to the state.
• Cutting income taxes can be done in such a way as to preserve government spending on commonly agreed upon public priorities such as infrastructure and K-12 education.
• Making these changes now can also sustain lower income taxes for many years to come due to the higher standard imposed by Amendment 19 to raise income tax rates.

ACRE Scholar Dr. Jeremy Horpedahl and I also co-authored an op-ed in the that discusses on Arkansas taxpayers. A more thorough analysis of the impact of these two plans can be found on the ACRE Review blog.

For more of ACRE’s work on taxes, transparency, and state finance, please see the following:

Shine More Light – Policy Analyst Mavuto Kalulu advocates for more state fiscal transparency in administering COVID-19 relief funds.

Reducing Arkansas’s Income Tax Rate To Zero – Dr. Jeremy Horpedahl discusses the steps necessary to completely repeal the Arkansas individual income tax.

The Road Map To Tax Reform in Arkansas – Dr. Jeremy Horpedahl outlines a series of reforms state lawmakers could enact to improve Arkansas tax policy.

Arkansans Could See Big Savings from Special Session – ACRE Policy Analyst Joseph Johns and Dr. Jeremy Horpedahl discuss how Arkansans could benefit from potential income tax cuts in the upcoming special legislative session.

Access Arkansas: County-Level Web Transparency – ACRE Policy Analysts Mavuto Kalulu and Joyce Ajayi created the Arkansas Transparency Index to help keep Arkansas government accountable to the public.

The Arkansas legislature may be meeting in the near future to consider changes to the income tax that individuals, families, and small businesses pay. So far we are aware of , and more could be proposed at a special session this fall. The plans proposed are one by State Senator Jonathan Dismang and another by the Department of Finance and Administration (requested by Governor Hutchinson).

We wrote about this plans and other possibilities for Arkansas in our recent op-ed, “” published in the Arkansas Democrat-Gazette.

While the plans differ in specific details, both provide tax relief for both middle- and high-income earners. The table below shows how these proposals would lower taxes for different households in Arkansas, as well as a third plan which combines elements of both plans.

As we explain in a recent op-ed for the Arkansas Democrat-Gazette, any tax relief is great news for Arkansas taxpayers, as it allows them to control more of their own earned income. The median household in Arkansas could expect around $300 in tax savings each year if the most aggressive parts of both plans are enacted, and many other families could receive tax cuts even larger than those shown in the table above.

Creating an environment conducive to household and personal economic growth is a good goal for the legislature to consider during the upcoming special legislative session. These tax cuts come after three previous sessions where legislators reduced Arkansas taxpayer burdens. Households could be poised to receive even more relief in the coming weeks.

Details of the Plans

The first plan is proposed by Senator Jonathan Dismang [R-Searcy] and would consolidate the low- and middle-income tax brackets, and lower the top marginal income tax rate from 5.9 percent to 4.9 percent by 2026. The Dismang Plan would eliminate the tax cliff between the low- and middle-income tax bracket by merging them together. This would help those who choose to work more and who could be on the hook to pay more in taxes for earning just slightly more money this year.

The second plan from Governor Hutchinson and Department of Finance and Administration (DF&A), would keep the three-bracket structure, and lower the top marginal income tax rate from 5.9 percent to 5.5 percent by 2023. This Plan would also lower the 5 percent tax rate on income between $22,900 and $38,499 to 4.5 percent by 2023. This plan has a few more details that would include some modifications to rates in the lower-income bracket, as well fixing the income tax cliffs between the low- and middle-income sets of tax brackets.

Lowering the individual income tax and consolidating the overly complex three bracket structure will make Arkansas more competitive with its neighboring states as well as other southern states. For instance, tax to a flat tax of 5.25 percent, and several of Arkansas’s neighboring states . Arkansas is in a very competitive tax environment. As we stated in our op-ed:

our neighbors aren’t standing still either: Mississippi has seriously considered eliminating their income tax. Oklahoma recently lowered their top rate to 4.75 percent, and Missouri will lower their top rate to 4.8 percent over the next several years (using revenue triggers, something discussed in the Arkansas plans too). Voters in Louisiana will soon decide whether to lower their top rate down to 4.25 percent, which would once again make Arkansas the highest in the region if we make no changes. Even Tennessee, where they have never had an income tax on wages, finished phasing out their tax on investment income this year.

In ACRE’s 2016 book, Arkansas: The Road Map to Tax Reform, published jointly with the Tax Foundation, we suggested that Arkansas could lower its top income tax rate to 5 percent from the then 6.9 percent level to be more competitive in our region. At the time, our neighbors with income taxes had rates of either 5 or 6 percent. Given the recent changes in other states, our previous recommendations have even more importance today.

Of the two plans, Senator Dismang’s is more comprehensive and would provide larger tax cuts for middle- and upper-income taxpayers. This larger tax cut also means a larger reduction in state revenue, about $400 million in the long run versus about $200 million under the DF&A. Low-income Arkansans, those who earn less than $22,900 per year, would have the same tax burden under Senator Dismang’s plan, though they may see some relief under the DF&A/Hutchinson Plan.

Governor Hutchinson said he is willing to reduce top marginal rate as low as 4.9 percent as long as spending on education and healthcare are protected with special fiscal rules known as revenue triggers. require specific revenue targets to be met before tax cuts would come into effect to allow rates to fall further. The triggers would smooth state spending and avoid revenue shortfall perils that come with automatic, mandatory reductions in income tax rates.

Other Ideas for Tax Relief

Aside from revenue triggers, the Arkansas General Assembly could also consider taking up ideas from the last legislative session to provide further income tax relief. One such idea is to double the standard deduction for single and married filers. during the 2021 regular session that would have made this change. If this were the only change legislators decided to resurrect, a married couple earning $50,000 with one child would save around $260 a year just from this change.

If legislators decided to both adopt Senator Dismang’s tax plan and double the standard deduction, a married couple with $45,000 of income (Nathan and Sarah in our sample table) could expect to save around $432 per year under the combined Dismang-Doubled Standard Deduction plan (about $200 of that comes from the standard deduction change). A married couple filing separately with three children who earns $220,000 (Luke and Hannah in our sample table) could expect to pay around $2,200 less in income taxes under a hypothetical Dismang-Doubled Standard Deduction tax change (again, about $200 is from the standard deduction change).

The state of Arkansas is also more fiscally prepared than it ever has been to implement more income tax reforms due to the robust $1.2 billion balance of the Long-Term Reserve Fund (LTRF), a fund which didn’t even exist prior to 2016 when Governor Hutchinson began championing the idea of a budge stabilization fund. ACRE Director that ensure this fund is only used for true fiscal emergencies. Tax cuts should be made in a way that does not jeopardize the soundness of Arkansas’s balanced budget, but the LTRF’s robust balance could be used as a backstop for any unexpected revenue declines due to future economic downturns.

Finally, Arkansas needs to be able to compete with its neighbors for talent and jobs. Two of our neighboring states, Tennessee and Texas, have no state income tax and balance their budgets without it. In the long run, if it pursues responsible state spending patterns and prudent tax reforms now. A recent shows strong support for the general idea of eliminating the personal income tax in Arkansas.

For more of ACRE’s work on taxes, check out the below links:

Tax book: The Road Map to Tax Reform in Arkansas

Research paper: Lessons From Other States Tax Reform Attempts

More on State Taxes and Spending

By Caleb Taylor

What’s the latest news on taxes and spending policies in Arkansas?

ACRE Director and BT����Associate Professor of Economics Dr. David Mitchell and ACRE Legislative Research Associate Dr. Nathan Smith joined the Dave Elswick Show on 101.1 FM in Little Rock to answer this and more on Monday, April 26th.

Smith recommended legislators consider eliminating the “tax cliffs” in the state income tax code when they meet again in the fall.

Smith said:

The way a well-designed income tax code would work is that as you make more money, you pay more tax and for each dollar you earn, you’d pay a little bit more tax. You do that by setting a marginal tax rate that rises. Arkansas has something weird where when you hit certain thresholds…suddenly your tax bill jumps so if you make $1 more you’re taxed $167 more. That doesn’t really make much sense.

Smith also acknowledged that “it’s kind of expensive” to eliminate Arkansas’s tax cliffs. 

Smith said:

You lose a lot of (tax) revenue because you have to cut taxes not just for people just across the tax cliff but also on everybody above that level. That would be a smart thing to do, but they’d have to have some room in the budget to fund that.”

For more on this topic, check out Smith’s recent op-ed “” in the Arkansas Democrat-Gazette on February 12th.

Mitchell said a recent decision by Gov. Asa Hutchinson and legislative leaders to increase the state’s Long Term Reserve Fund, a kind of state savings account, was both “laudable” and a “serious chunk of money.”

Mitchell said:

It’s the money the state puts aside for the future in case of recessions. I’m glad they’re putting money aside. It’ll end up being about $700 million. It would take us from near the bottom of the list to very high on the list as the percentage of general funds we have set aside.” 

According to the , Arkansas’s Long Term Reserve Fund had a balance of $153 million, or 2.7 percent of general fund expenditures, at the beginning of fiscal year 2020. This left Arkansas with the sixth lowest so-called “rainy day fund” balance in the nation at the time.

Mitchell recommended Arkansas consider passing a Constitutional amendment that would have stricter rules for withdrawals from and deposits for the Long Term Reserve Fund.

You can listen to the entire interview .

For more of our research on taxes and spending, go here.

In an op-ed published in the Arkansas Democrat-Gazette on February 15 entitled “,” ACRE Scholar and BT����Assistant Professor of Economics Dr. Jeremy Horpedahl and National Taxpayer Union Foundation Economist  Nicole Kaeding say Arkansas’s sales taxes have generally increased, income taxes have decreased, and property taxes have generally stayed the same over the past decade.

Arkansas Sales Taxes

Horpedahl and Kaeding on sales taxes:

The statewide sales tax stood at 6 percent in 2010, but it is now 6.5 percent after voters approved a temporary increase dedicated to highway funding in 2012. Cities and counties in Arkansas can also add their own sales taxes on top of the statewide rate. A decade ago these local sales taxes averaged about 2 percent across the state, while today they are closer to 3 percent. That means the combined rate that Arkansans paid, on average, has increased from to , just slightly behind Tennessee and Louisiana. Arkansas voters are being asked again to approve a permanent extension of that sales tax this fall. If voters approve the 0.5 percent tax for highways, and more local sales taxes increase (such as the proposed 1 percent tax in Little Rock), Arkansas could fight for the dishonor of the highest sales tax in the nation.”

One exception to this sales tax trend is the state sales tax rate on groceries which decreased from 2 percent a decade ago to ⅛ percent today, according to Horpedahl and Kaeding.

Arkansas Income Taxes

Horpedahl and Kaeding on income taxes:

Most visibly, the state’s top personal income-tax rate was 7 percent in 2010. This year it is being cut to 6.6 percent, and it will drop again next year to 5.9 percent. That’s a big improvement, along with the reduction in the corporate income-tax rate, which is being cut from 6.5 to 5.9 percent. But it’s not just high-income earners that have had their income taxes cut, as the top rate cut was the third step in Gov. Asa Hutchinson’s plan to reduce income-tax rates across the board. Two previous tax cuts directly benefited middle- and low-income taxpayers. While Arkansas’ three sets of tax brackets are complex, all taxpayers are now paying less in taxes, boosting their after-tax income. We estimate that low-income taxpayers are saving between $100 and $200 per year, while the middle class is saving between $300 and $400 per year. That’s a few meals out, a car repair more easily covered, or a surprise for the kids.”

Horpedahl and Kaeding say further income tax rate decreases to Gov. Asa Hutchinson’s eventual goal of 5 percent is “feasible” and would be a “welcome improvement.”

Arkansas Property Taxes

Horpedahl and Kaeding on property taxes:

Not too much has changed here. While some tax rates may have increased, on average these have been in line with increases in home value: Average tax rates for owner-occupied homes were about 0.6 percent in both 2010 and in the latest available data, but the homestead tax credit was increased by $25, which will lower property-tax bills slightly in future years.”

You can read the entire op-ed .

For more of ACRE’s work on taxes, check out the below links:

The Road Map to Tax Reform in Arkansas

Lessons From Other States Tax Reform Attempts

More on State Taxes and Spending

Arkansans would all benefit from shifting the state’s tax burden away from income taxes, ACRE Scholar and BT����Assistant Professor of Economics Dr. Jeremy Horpedahl said in a speech at a “Tax Freedom Day” event at the State Capitol on Friday, April 13th. It’s good for taxpayers, consumers, businesses, and even state government employees and officials!

According to the Tax Foundation, Tax Freedom Day in Arkansas is the date Arkansans have to work until to pay their federal, state and local taxes for the calendar year.

In his speech, Horpedahl discussed his research on Arkansas taxes and options for reform explained in “.”

Arkansas policymakers studying tax reform should eliminate economically harmful exemptions in sales and income taxes and use the increase in revenue to offset income tax reductions, according to Horpedahl.

Horpedahl said such changes  aren’t just “shifting taxes around” but rather are an opportunity to increase individual liberty, improve economic growth, and improve government budgeting.

1. Tax Reform Can Increase Individual Liberty

“This increases the choices you have and your individual liberty. If you think about an income tax….that money is taken away from you before you get your paycheck. That money is withheld and you never get to see that money. Whereas with the sales tax, you at least have some choice with how your income is going to be spent. If you lower income tax rates, you have more money going into your bank account and more money going into your pocket. That means you can then choose to spend it and you’d pay the sales tax. Or, you could do other things with it…save it, invest in your business or donate to your church or favorite charity. By lowering income tax rates, we’re going to give you more choices.”

2. Tax Reform Can Increase Prosperity

“The more you lower those income taxes and shift them to sales taxes…the higher economic growth will be. For example, for every four percentage points of your tax revenue that you shift over to sales or property taxes and away from income taxes, you can increase your economic growth rate by one percent. Some of you may say, ‘One percent? What’s the big deal about that?’ In many years the total economic growth rate is just one percent so you can essentially double the rate of economic growth by shifting say about four percent of your taxes over towards sales and property taxes. Most years we only get two or three percent max so a one percent increase in growth is huge especially if you add it up over decades or generations.”

3. Income Tax Cuts Can Make Government Budgets More Responsible

“Income taxes are the most volatile. When the economy is doing well, that revenue goes way up for the government. When the economy isn’t doing well, that revenue goes way down. Property taxes are much more stable and sales taxes are still pretty stable compared to income taxes. The more of your total tax revenue you shift away from income taxes, the more stable the government’s budget is overall which makes it easier to plan. It also reduces that temptation when times are good to start new programs. You’ve got new revenue so let’s start something new. When tax revenue goes down you either have to eliminate something or search for new revenue somewhere else. That’s not something we want to encourage. Having that revenue be more stable I think is a good strategy for government budgeting overall.”

Upcoming Tax Reform Tour Dates

Horpedahl has two more upcoming “town hall” speaking engagements as part of Americans for Prosperity- Arkansas’s Tax Reform Tour. He’ll be speaking at 6:30 p.m. Thursday, April 19th at the Embassy Suites in Little Rock and 6:30 p.m. Monday, May 17th at a location to be determined in Rogers. A third date in Jonesboro this summer will be announced soon.

More of ACRE’s work on tax policy can be found here. You can read a one-page summary of Horpedahl’s research on income taxes here.