Arkansas Chips Away at Tax Reform

The tax reform conversation continues in the Arkansas General Assembly. In the last several weeks, the state has cut the individual income tax and passed a highway funding plan.

With Governor Hutchinson’s signature, the state has implemented the third phase of its individual income tax cut package. The plan lowers the top marginal income tax rate from 6.9 percent to 5.9 percent, starting in 2021. The plan would also consolidate the top rate schedule from six brackets to three. The brackets for those with income below $79,300 in income would be unchanged (except a small decrease in the top rate from 6 percent to 5.9 percent where needed).

Additionally, the General Assembly sent a highway package to the Governor yesterday. Senate Bill 336 would help fund infrastructure in the state.

First, the plan would create a new wholesale fuel tax on gasoline and diesel. Every year, the Department of Finance and Administration will calculate the new tax by multiplying the average wholesale price of gasoline (and diesel) by the new wholesale tax rate of 1.6 percent for gasoline and 2.9 percent for diesel. It will then be converted into a cent-per-gallon amount. For the current year, this is expected to be equivalent to a 3 cent-per-gallon increase on gasoline and 6 cent-per-gallon increase on diesel. The tax is technically separate from the state’s existing gas tax to avoid triggering Amendment 19 of the Arkansas Constitution, which would require a supermajority vote for adoption.

Senate Bill 336 would also impose an annual fee on hybrid and electric vehicles of $100 and $200, respectively. It would also dedicate new revenue from casino gambling (approximately $35 million) to highways.

All told, the Department of Finance and Administration estimates that these changes would raise $121 million in fiscal year 2021.

But that revenue is still well short of the estimated $400 million needed to fund infrastructure in the state. To complement the highway bill, the General Assembly also plans to send a constitutional amendment to Arkansas voters. This amendment would create a one-half cent sales tax to fund “the state’s four-lane highway system, county roads, and city streets.” This tax would raise $294 million in annual revenue, if adopted in 2020. Following the state’s general practice, 70 percent of that, $206 million, would go to the state, with the remainder split among counties and cities.

In 2012, voters in Arkansas approved a temporary sales tax for highways, at the same amount, but it expires in 2023. This amendment would make that tax permanent and embed it within the state’s constitution.

These two policies—the individual income tax cuts and highway package—are direct results of the work of the Arkansas Tax Reform and Relief Task Force. The General Assembly is still expected to debate corporate income tax reform this session, along with changes to conform the state to the U.S. Supreme Court’s Wayfair decision.