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

How has the pandemic affected the local economy?

ACRE Scholar and BT����Associate Professor of Economics Dr. Jeremy Horpedahl will discuss the latest economic data on Conway and Faulkner County as an invited guest speaker of the Conway Noon Lions Club at the Hole In the Wall Cafe at noon on Tuesday, July 6th.��

In other news, the Mercatus Center at George Mason University awarded Horpedahl an Emergent Ventures grant on .

According to the , the mission of Emergent Ventures is to “jumpstart high-risk, high-reward ideas that advance prosperity, opportunity, and wellbeing.”

In a , Faculty Director of the Mercatus Center and Emergent Ventures Founder Tyler Cowen said Horpedahl received the grant for his “work on social media to combat misinformation, including (but not only) Covid misinformation.”

According to a , he was also a co-recipient of another award from the Mercatus Center for the blog , where he is a weekly contributor.

Horpedahl also outlines how Arkansas can gradually reduce its income tax rate to zero percent in “” in the Arkansas Democrat-Gazette published on June 28th.��Horpedahl writes that gradually reducing the rate over three decades would be a “prudent and realistic” way to eliminate the income tax.

Three ACRE experts recently appeared in “Believe in Arkansas” segments hosted by Americans for Prosperity.

BT����Assistant Professor of Economics and ACRE Scholar Dr. Jeremy Horpedahl discussed on March 25th.

For more on Horpedahl’s recent research and testimony on sales taxes in Arkansas, check out this ACRE Review post on February 2nd.

ACRE Economic Policy Analyst Alex Kanode to help remove barriers to opportunity for Arkansans on March 11th.

For more on Kanode’s recent research and testimony on occupational licensing, check out this ACRE Review post on March 17th.

BT����Associate Professor of Economics and ACRE Scholar Dr. David Mitchell on February 25th.

For more on Mitchell’s recent research and testimony on scope of practice issues, check out this ACRE Review post on March 17th.

Arkansas legislators will make another attempt to rein in local special elections that have contributed to Arkansas having the at 9.51%.

by State Rep. David Ray R-District 40 would limit special elections to primary and general election dates in even-numbered years; or during odd-numbered years, when no primaries and general elections are held, on the third Tuesday in May or the first Tuesday in November. Some flexibility is allowed within the legislation including for natural disasters and health and safety concerns, or to fill vacancies in office.

The bill is scheduled to be considered by the at 9:30 a.m. Wednesday. You can livestream the meeting . (HB 1368 passed the State Agencies and Governmental Affairs Committee by voice vote. The bill failed on Thursday, February 4 in the House by a vote margin of 40-49, but will possibly come up for a vote again this week.)

Currently, cities and counties have a great deal of discretion when deciding when to hold special elections.

Based on research by BT����Assistant Professor of Economics and ACRE Scholar Dr. Jeremy Horpedahl, ACRE recently released an updated infographic containing turnout data in these elections and an illustration of where Arkansas’s average sales tax burden ranks compared to the rest of the nation.

Dr. Horpedahl found that voter turnout in special elections is less than half of the turnout in general elections. Sales tax increases are much more likely to pass in special elections than in general elections, which is likely due to the lower turnout. Even within election types (for example, looking only at general elections), higher turnout is also associated with fewer tax increases passing.

When sales tax votes are held at the same time as a general election, voter turnout is higher — about 44 percent on average. When elections are held at “special” times, voter turnout averages about 19 percent.

The pass rate for sales tax increases is 76 percent in special elections but only 44 percent in general elections and 57 percent in primary elections. All numbers are based on city and county sales tax elections in Arkansas from 1981-2020.

Update: You can watch Horpedahl’s testimony  (starts at 10:50:00).

By Caleb Taylor

Should Arkansas approve a permanent 0.5 percent sales tax for road funding in November?

BT����Assistant Professor of Economics and ACRE Scholar Dr. Jeremy Horpedahl gave voters a few important points to consider in “,” in the Arkansas Democrat-Gazette on September 25.

The 0.5 percent sales tax on the ballot is currently scheduled to expire soon, once it raises enough revenue to retire the $1.3 billion on bonds issued (probably in 2023) if a permanent extension isn’t passed by voters. Horpedahl notes that Arkansas already has the in the nation behind Tennessee (which has no state income tax on wages and salaries).��

Horpedahl also notes that Arkansas already spends more than most states on road funding.

Horpedahl writes:

Do we spend enough on roads? Arkansas has the 15th highest spending on roads per capita, or the 11th highest spending as a percentage of personal income in the state, according to the most recent data from the .��Even if we look at 2012 data, before the temporary sales tax to fund roads was put in place, Arkansas had the 22nd highest spending on roads as a percentage of personal income, and was above the national average.”

Horpedahl mentions raising the gas tax, toll roads, and reducing state government spending as alternatives to raising the sales tax.

Horpedahl writes:

This November, voters must decide whether they want to make the sales tax increase permanent or not. These other funding methods aren’t on the ballot right now, but they are real options the Legislature could take up in the next session.��The current sales tax for roads doesn’t expire for a few more years. There’s plenty of time for our elected representatives to go back and find better ways to keep Arkansas moving.”

For a different perspective from a fellow BT����College of Business professor, check out “,” by BT����Professor of Logistics and Supply Chain Management Dr. Doug Voss published in the Arkansas Democrat-Gazette on September 26.

You can find more of our research on taxes and spending here.

Between November 5, 2019 and January 21, 2020, natural gas prices   This dramatic price decline occurred even before March, when the coronavirus began to have a large impact on U.S. economic activity.�� This price volatility causes fluctuations in the revenue the state receives from its taxes on natural gas sales, making it difficult for Arkansas to plan long-term road construction projects.��     

Arkansas generates revenue from its severance taxes.�� A severance tax is a tax on the extraction of non-renewable resources, such as oil and natural gas. Since January 2009, the state of Arkansas has taxed natural gas according to its market value.�� The severance tax collected $80 million in 2015, but as the price of natural gas dropped, so did the state’s revenues. By 2019, the tax only generated $40 million.��

Arkansas has specific guidelines regarding the allocation of the revenues created from the natural gas severance tax. are allocated to the Arkansas Highway Commission, while the remaining 5% is allocated to the general fund.�� As a result of this arrangement, when the price of natural gas is high, the Arkansas Highway Commission receives more tax revenue.�� In contrast, when prices are low, which they have been for the last few years, the Arkansas Highway Commission obtains less revenue.�� For example, in 2014, when natural gas prices were near $4 per million BTU, the Arkansas Highway Commission received nearly . In 2017, when prices were just $3 per million BTU, the Commission received only .�� Over just a three-year span, this volatility in natural gas prices caused a 50% drop in the Highway Commission’s severance tax revenue.��

  Between 2014 and 2016, the Arkansas Highway Commission’s total expenditures remained consistently but increased to $1.5 billion in 2017. The three main sources of revenue for the commission include registration and fuel fees, diesel taxes, and natural gas severance taxes. During 2014 to 2017, the severance tax revenues contributed, on average, 4.15% to the commission’s budget, although this percentage varied between 2.3% and 6%.�� Over the same time span, revenue from registration and fuel fees as well as the diesel tax remained fairly constant comprising 37% of the budget in 2017.

The Arkansas Highway Commission has full authority over the planning, construction and maintenance of Arkansas roads, and it funds many long-term projects.�� In 2012, the Arkansas Highway Commission undertook one of the largest highway connection programs in its history. The Connecting Arkansas Program is a ten-year program comprised of 35 different projects. Additionally, the Arkansas Highway Commission is also actively working on the Interstate Rehabilitation Program, which entails more than $1 billion in improvements to Arkansas’s Interstate highways over the multi-year life of the program.��

If a state can contribute 20% of the funding for interstate highway construction, the federal government will pay the remaining 80% of the cost of the project.�� However, the federal funds are “use it or lose it,” meaning that if Arkansas does not produce the , it will not receive any of these federal funds.�� According to Scott Bennett, the former Director of Highways and Transportation in Arkansas, decreases in the revenue from natural gas sales for the state to consistently provide its 20% contribution.  

(Act 416) raised taxes on gasoline, diesel fuel, and car registration to help finance the highway commission.�� Importantly, the act also diverted a minimum of $35 million a year in casino tax revenue to the State Highway and Transportation Department Fund.�� While the tax hikes with many Arkansans, the diversion of casino money provided a stable revenue source to the Department of Transportation.�� Even though the money generated by Act 416 must be used to repair existing roads and bridges, the additional revenue directed to the Department of Transportation gave the agency flexibility, making the department more willing to transfer money obtained from other sources away from repairs.�� This flexibility makes it easier for the state to finance new construction highway projects in the years when the revenues from the natural gas severance taxes are low.

Macy Scheck is an ACRE Undergraduate Research Fellow at the University of Central Arkansas. His views do not represent those of UCA.

By Aaron Newell

Comprehensive reforms – not special tax incentives – are key to making Arkansas a  more economically competitive state says Jeremy Horpedahl, ACRE Scholar and BT����Assistant Professor of Economics, who recently discussed with Paul Williams at Law360.

This act, sponsored by Sen Bart Hester (R-Cave Springs) and , includes many of the provisions suggested by the Arkansas Tax Relief and Reform Task Force last year. In the (gated) article “,” published on April 8, 2019, Horpedahl explains how broad based reforms like the ones included in SB576 are good policy.

Horpedahl states:

Research has shown that targeted incentives have not had any effect on convincing companies to locate here. . . This is more of a broad-based package that makes the tax code more attractive as a whole.”

This broad-based package Horpedahl references includes:

• Requiring out-of-state sellers and marketplace providers to collect sales tax, which will generate about $35 million a year in extra revenue
• Lowering the corporate income tax rate from 6.5% to 5.9% by 2022, which will cut taxes by about $30 million a year
• Extend the state’s five-year net operating loss carryforward period to 10 years by 2021
• Collect a tax on water that car washes use and tax online travel companies that book hotel stays through their web platforms
• In 2021, the state will move to a single-sales-factor apportionment from its three-factor formula that counts a business’s property and payroll and double-weights its sales

Concerning this last change, Horpedahl told Law360:

Single-sales-factor apportionment is a simpler method for computing your tax liability, and it favors in-state businesses by generally lowering their corporate income tax obligations.”

Many of these changes come straight from recommendations from the Arkansas Tax Relief and Reform Task Force. Dr. Horpedahl, along with Nicole Kaeding of the Tax Foundation, both testified before the Task Force and further helped inform the discussion by through their research and writings, such as “Arkansas: The Road Map To Tax Reform” and “Learning from Other States’ Successes and Failures in Tax Reform.”

If you want to see more of Horpedahl’s work on tax issues, you can view his author page here.

If you want to see more of ACRE’s work on these and related issues, go here.

By Caleb Taylor

What were the major tax reforms passed by Arkansas legislators during the 2019 session?

ACRE Scholar and BT����Assistant Professor of Economics Jeremy Horpedahl and the Tax Foundation’s Vice President of Federal and Special Projects Nicole Kaeding outlined the recent “series of tax reforms to improve the competitiveness of the state’s tax code” in the Natural State in an article published on April 11th for the Tax Foundation.

The reforms encompass various parts of Arkansas’s tax code including the individual income tax, the corporate income tax and sales tax.

Reforms mentioned by Horpedahl and Kaeding include:

• Dropping the corporate income tax rate from 6.5 percent to 6.2 percent in 2021, followed by another decrease to 5.9 percent in 2022.
• Changing the apportionment factor from a double-weighted sales approach to a single-sales factor, which will favor businesses with a physical location in Arkansas compared with the current formula.
• Extending the net operating loss carryforward period from five years to 10 years.
• Requiring remote collection by sellers with more than $100,000 in sales or 200 transactions.
• Cutting the top income tax rate from 6.9 percent to 5.9 percent in 2021 and consolidating the six brackets into three (although the three sets of brackets based on income level will remain).

Other reforms include administrative changes to the franchise tax, a gas tax increase to fund infrastructure, and a tax expenditure review that requires the Department of Finance and Administration to prepare biennial reports about the cost, distribution and impact of each tax expenditure.

Horpedahl and Kaeding said:

Many of these recommendations come directly from our as well as our frequent testimony to . Both authors presented on multiple occasions to guide the thinking of the task force as it considered tax reform proposals in Arkansas. Arkansas’s diligent study of the issue has paid off with comprehensive tax reform in the Natural State.”

You can read their full post over at the Tax Foundation .

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

Arkansas Legislative Tax Reform and Relief Task Force members voted Wednesday, December 12th to prioritize a plan that includes a cut to the top individual income tax rate from 6.9 to 5.9 percent. The Task Force approved a number of other changes at previous meetings (such as to the corporate income and sales taxes), but the question of which individual income tax plan they preferred was unanswered until this most recent meeting.

Task force members approved a plan released by the Department of Finance and Administration (DF&A) in August known as the “2/4/5.9% Plan.” This plan would reduce the top individual rate to 5.9 percent for taxpayers making over $18,000. Those with taxable income between $8,001 and $18,000 would pay a 4 percent rate. Those with taxable income less than $8,000 would pay a 2 percent rate. The plan also more than triples the standard deduction for taxpayers, and consolidates Arkansas’s current three sets of tax brackets into a single set of brackets.

Implementing this plan over three years received the most support from task force members.

The task force also considered the so-called “Option A” plan to reduce the top individual income tax rate from 6.9 to 6.5 percent and consolidate its rate schedules (as the 2/4/5.9% plan does).  That plan would cut taxes for individuals by about . While Option A was recommended by the task force in August, the “2/4/5.9%” plan received greater support from members last week.

Nicole Kaeding, Director of Special Projects at the Tax Foundation, told the task force in October that both plans would improve Arkansas’s overall tax competitiveness. Kaeding cautioned members at the October meeting that Arkansas was falling behind due to standing still in tax competitiveness due to other states already moving on reform.

Kaeding and ACRE Scholar and BT����Assistant Professor of Economics Jeremy Horpedahl discuss some of the reforms other states have made to their tax code in Learning from Other States’ Successes and Failures in Tax Reform. Their op-ed on the same topic, “Reform Taxes Now,” in the Arkansas Democrat-Gazette on May 21st can be read .

Kaeding told members on December 12th that the “2/4/5.9%” plan was the better plan despite significant political challenges.

Kaeding said:

I think the Governor’s plan is the superior plan. I understand the questions about Amendment 19 and the higher vote threshold, but I think that plan gets you closer to where you want to go and it does it in a more fiscally responsible way.”

Amendment 19 requires a vote of three-fourths of support in both the House and Senate for legislation that increases taxes. The Governor’s “2/4/5.9%” plan would require a three-fourths majority because some tax rates are being increased, though with the large increase in the standard deduction very few taxpayers will actually see their tax bill increase. The “Option A” plan would only require a simple majority in both the House and Senate for passage since no rates are increased.

Curious about this Arkansas tax reform proposal affects you? Find out in a by Kaeding and Horpedahl.

More of ACRE’s research on taxation can be found here. This was the final task force meeting before the legislative session, but be sure to check the ACRE Review soon for what’s happening with tax reform in Arkansas.

Where do Arkansas’s finances rank nationally?

Olivia Gonzalez, a research associate for the State and Local Policy Project at the Mercatus Center at George Mason University, spoke Thursday, November 29th about Arkansas’s fiscal health and ranking in the COB Auditorium.

According to the , Arkansas ranks 25th for fiscal health. Neighboring states that rank in the top five in fiscal health are Tennessee and Oklahoma.

The study analyzes state finances on five dimensions, then combines them to produce an overall ranking.

• Cash solvency: Does a state have enough cash on hand to cover its short-term bills?
• Budget solvency:  Can a state cover its fiscal year spending with revenues, or does it have a budget shortfall?
• Long-run solvency:  Can a state meet its long-term spending commitments? Will there be enough money to cushion it from economic shocks or other long-term fiscal risks?
• Service-level solvency:  How large a percentage of personal income are taxes, revenue, and spending? How much “fiscal slack” does a state have to increase spending if citizens demand more services?
• Trust fund solvency:  How much debt does a state have? How large are its unfunded pension and healthcare liabilities?

Gonzalez’s main suggestions were to improve Arkansas’s fiscal health by  increasing Arkansas’s rainy day fund and making sure that Arkansas is planning for longer-term financial commitments like pensions and implementing tax reform correctly.

Gonzalez said:

You can’t really talk about the fiscal health of a state without talking about tax reform. When North Carolina  implemented their tax reform they mostly lowered the rates, broadened the base and kept an eye on their expense side. Kansas on the other hand lowered tax rates, but they also narrowed the tax base even more and didn’t really keep an eye on the spending side of the equation. When you implement tax reform without taking into consideration your spending issues, you have more revenue-neutral or revenue-negative results.”

BT����Assistant Professor of Economics and ACRE Scholar Jeremy Horpedahl and Nicole Kaeding, Director of Special Projects at the Tax Foundation, expand on this idea and more in a research paper Learning from Other States’ Successes and Failures in Tax Reform released in May, 2018.

Horpedahl and Kaeding show that there are important lessons for Arkansas legislators to learn from other states and principalities when considering how to proceed on tax reform. Utah, Indiana, North Carolina and the District of Columbia implemented “smart, sensible” tax reform measures that can “dramatically improve competitiveness.” While the authors list multiple examples Arkansas should emulate, they also tell a cautionary tale about the “haphazard” tax reform efforts in Kansas mentioned by Gonzalez.

Gonzalez recommended states treat their finances like like a budget-savvy individual would treat their personal finances.

Gonzalez said:

State finance should be pretty straightforward. Things that matter for your personal finances like having enough cash on hand to pay short term bills, having more money coming in than you have going out and not paying for previous debt with new debt. These kind of common sense things matter for your state finances just as much as they do for personal finances.”

You can watch her full talk below: 

For more on this topic, visit our taxes and spending research page.