Arkansas Tax Reform: Lessons from Other Legislators

December 6, 2017

On Tuesday, Arkansas’s Tax Reform and Relief Task Force met to hear from legislators across the country on their experiences, both good and bad, on tax reform. The task force heard about the experiences of North Carolina, Indiana, Kansas, and Oklahoma. The discussion was wide-ranging, but several key themes emerged.

Tax Reform Is a Process

During his presentation, Representative John Szoka (R) of North Carolina described tax reform as an “evolution, not a revolution.” North Carolina, which passed comprehensive tax reform in 2013, still made additional changes in subsequent sessions in 2015 and 2017. Legislators from North Carolina and Indiana repeatedly warned of patience, making tax reform a thoughtful, methodical process.

Cutting Revenue Can’t Be the Goal Alone

In addition to hearing about the success stories of North Carolina and Indiana, the task force heard from Representative Steven Johnson (R) from Kansas about that state’s experiences. In addition to providing a blanket tax exemption for pass-through business income, the state cut its tax revenue by almost 10 percent, without identifying tax or spending changes to offset the cuts. Slashing the state’s budget by 10 percent was untenable, forcing Kansas to raid trust funds until it was able to override the governor’s veto this year.

Spending Controls Are Necessary

Making dramatic tax changes can’t be done without consideration for spending too. North Carolina Representative Bill Brawley (R) discussed that state’s new highway prioritization system, while Speaker Tim Moore (R) noted that North Carolina also reformed its education and unemployment insurance programs. Balanced budget requirements mean that states must consider spending changes as part of tax reform.

Tax Trigger Design Is Critical

Oklahoma and North Carolina’s experience with tax triggers were an important juxtaposition to emphasize the importance of designing a tax trigger. North Carolina’s trigger was well structured. The state wanted to reduce its corporate income tax, but was concerned about having adequate revenue. To achieve both goals, specific revenue targets were enumerated. If the state hit a revenue figure, a corporate income tax rate cut happened. If the revenue target was missed, the tax change didn’t happen. North Carolina did trigger the rate decrease, but importantly, only after meeting its revenue goals.

By contrast, Oklahoma Tax Commissioner Clark Jolly (R) spent a large part of his presentation discussing his state’s challenging tax trigger. The tax trigger lowered individual income tax rates if revenue grew year-over-year. Unfortunately, it did not tie this growth to an original amount of revenue. Oklahoma had a sharp decrease in revenue, followed by a modest increase the next year. The modest increase triggered a tax cut, even though the state was still below its original revenue level.

Tax Reform Is Worth the Effort

A common refrain among presenters was the political difficulties in tackling tax reform. Eliminating tax expenditures and handling trade-offs isn’t easy, but in the end, the presenters reiterated that tax reform was worth the effort. Senator Brandt Hershman (R) of Indiana outlined the various accolades Indiana continues to receive for reforming its tax code, and how those changes are translating into greater economic opportunity for Hoosiers.

The presentations from each state are available here.

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