Arkansas Tax Task Force Hones its Recommendations

August 7, 2018

The Arkansas Tax Reform and Relief Task Force is quickly approaching its September deadline for recommendations. Today, the task force revisited a number of its previous proposals to begin to craft its final recommendations. The task force started with more than 20 distinct provisions, many of which were approved for final consideration later this month.

If fully implemented, these proposals would improve Arkansas’s tax code, making the state more competitive among its regional peers.

A full list of proposals is available on the Arkansas legislature’s website, but a summary of several key provisions is below.

Individual Income Tax

The task force considered several proposals on how to reshape Arkansas’s individual income tax. Arkansas is unique among states in that it uses three different rate schedules, each containing a progressive rate structure. The task force ranked “Option A,” as its preferred rate structure. It consolidates the three rate schedules and lowers the top marginal rate from 6.9 percent to 6.5 percent

Total Income Under $21,000   Total Income Between $21,000 and $75,000   Total Income Above $75,000
Income Bracket Tax Rate Income Bracket Tax Rate Income Bracket Tax Rate
Before Reform: Individual Income Tax Rates (2019)
$0-$4,299 0.0%   $0-$4,299 0.75%   $0-$4,299 0.9%
$4,300-$8,399 2.0% $4,300-$8,399 2.5% $4,300-$8,399 2.5%
$8,400-$12,599 3.0% $8,400-$12,599 3.5% $8,400-$12,599 3.5%
$12,600-$20,999 3.4% $12,600-$20,999 4.5% $12,600-$20,999 4.5%
  $21,000-$35,099 5.0% $21,000-$35,099 6.0%
$35,100-$75,000 6.0% $35,100+ 6.9%
Option A: Individual Income Tax Rates (2019)
$0-$4,299               0%    
$4,300-$8,399 2%
$8,400-$12,599 3%
$12,600-$20,999 3.4%
$21,000-$35,099 5%
$35,100-$80,000 6%
$80,000+ 6.5%

Corporate Income Tax

The task force voted to continue to explore lowering the corporate income tax rate from 6.5 percent to 5.9 percent, using tax triggers. The exact design of the triggers is being finalized. Net operating losses would be extending from five years to 20 years, matching most other states.  Additionally, the task force had previously voted to include a repeal of the state’s throwback rule and a move to single-sales factor in its final report.

Sales Taxes

A few minor sales tax exemptions are still being considered for repeal. These include the sales tax exemption for magazine subscriptions and small “named entities” in the state. But more importantly, the task force approved a proposal to amend the state’s taxation of remote sellers, following the Wayfair decision. According to the proposal, Arkansas would adopt a de minimis exemption of $100,000 in sales or 200 transactions, similar to South Dakota’s law, and would clarify that collection is not retroactive. Any new revenue would be dedicated to “reducing taxes.”

Excise Taxes

Here the task force decided to stop a number of potential excise tax increases, including creating a new tax on e-cigarettes, two separate cigarette tax proposals. Creating a broader excise tax of 2 percent on “cigarettes, tobacco products, e-cigarettes, and alcoholic beverages” was also withdrawn.

Fuel Taxes

The task force will continue to consider a proposal to index the state’s gas tax based on the inflation rate of “construction costs.” A separate proposal would create a user fee for drivers of electric and hybrid vehicles.

In aggregate, these recommendations mirror many of my recommendations to the task force. Ideally, repealing the franchise and inventory taxes would have been adopted as well, but the state is appropriately concerned about revenue constraints.

If all of these proposals are adopted (and fully phased in), Arkansas would see an improvement in its tax competitiveness. According to the State Business Tax Climate Index, Arkansas would increase from 39th overall to 36th overall. The corporate income tax variable, in particular, would improve.

Projected State Business Tax Climate Index Ranking
  Current Proposed
Overall 39 36
Individual Income 30 30
Corporate Income 39 26
Sales 44 44
Property 22 22
Unemployment Insurance 32 32

The task force will meet later this month to finalize its list of recommendations for the 2019 legislative session.

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