Arkansas Governor Asa Hutchinson signed a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. cut into effect at the beginning of February, known formally as the “Middle Class Tax Relief Act of 2015” (Senate Bill 6). While the bill grants savings to taxpayers (an estimated $22.9 million in FY 2016 and $90.3 million in FY 2017), it does so in a rather complicated matter.
Arkansas’ individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
is graduated and has six brackets. For reference, we’ve displayed the pre-SB 6 individual income tax rate schedule in Table 1 below (to download Tabel 1, scroll to the bottom of this post). Rates ranged from a low of 0.9 percent to a high of 6.9 percent. These rates were the result of a tax cut package enacted during 2014 that reduced each bracket’s tax rate by one-tenth of a percentage point. (Note that Arkansas publishes a tax rate table that reduces the tax payments of eligible low-income taxpayers and this is not included here.)
SB 6 contained three changes: first, a taxpayer’s tax rate schedule is now dependent on income level; two, it created a tax liability adjustment for certain taxpayers so that the new tax rate schedules wouldn’t create a “tax cliff;” and three, it changed an existing capital gains exemption. We’ll briefly discuss each of these.
(1) New Tax Rate Schedules Dependent on Income Level
For tax years 2015 and after, an Arkansas taxpayer’s individual income tax rate schedule now depends on the taxpayer’s income level, as shown in Table 2 below (to download Tabel 2, scroll to the bottom of this post). (Note that even though Senate Bill 6 was passed after the start of 2015 and updated tax rates for 2015, 2016, and years thereafter, rate changes were retroactive to January 1, 2015.)
In effect, SB 6 did the following:
- Retained the one-tenth of a percentage point tax cuts for taxpayers with annual incomes lower than $21,000.
- Suspended most of the one-tenth of a percentage point tax cuts for taxpayers earning between $21,000 and $75,000 for the 2015 tax year. Except for the bottom bracket (which remained at 0.9 percent), rates reverted to their former levels. For tax years 2016 and thereafter, rates were reduced for the two top tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s (from 7.0 to 6.0 percent and from 6.0 to 5.0 percent, respectively).
- Suspended most of the one-tenth of a percentage point tax cuts for taxpayers earning over $75,000 for the 2015 tax year (again, except for the bottom bracket). For tax years 2016 and after, rates were reduced only for the top tax bracket (a reduction from 7.0 to 6.9 percent).
(2) Tax Liability Adjustment for Certain Taxpayers
Senate Bill 6 also created a tax liability adjustment for taxpayers that fall in the “above $75,000” income level. This was meant to phase the highest tax rates in to eliminate a “tax cliff” where suddenly income is subject to a much higher tax rate when one additional dollar is earned. The adjustment is available to taxpayers earning between $75,000 and $80,000 and ranges from $440 to $40. The adjustment amount decreases as income increases.
(3) Change in Capital Gains Exemption
Finally, SB 6 also changed the amount of realized capital gains that can be exempted from state income tax. Formerly, gains in excess of $10 million in tax years 2014 and after were exempted from Arkansas state income tax; an exclusion of 30 percent of gains realized in tax years 2015 and after also existed. Now, the exemption for capital gains greater than $10 million realized in tax year 2014 and after has been repealed. Further, the 30 percent exclusion (for tax years 2015) was altered as follows: now 50 percent of capital gains realized during January 2015 are excluded and 40 percent of capital gains realized on February 1, 2015 and after are excluded.
For more information SB 6, here are some additional resources:Share