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Arkansas Enacts Fourth Tax Cut in Less than Two Years

4 min readBy: Joseph Johns

Arkansas Governor Sarah Huckabee Sanders (R) recently called a brief special legislative session to enact the fourth round of reductions to the Natural State’s individual and corporate income taxes. Legislators also passed a modest property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. reform proposal.

The individual and corporate 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 package in question, HB 1001, reduced the top marginal 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. rate from 4.4 percent to 3.9 percent, effective tax year 2024. Arkansas also reduced its top corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate from 4.8 percent to 4.3 percent. The most recent round of tax rate reductions is estimated to save Arkansas taxpayers over half a billion dollars this year alone. HB 1002 benefits Arkansas homeowners by increasing the Homestead Property Tax CreditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. from $425 to $500. This small change is expected to save a collective $46 million in calendar year 2025 and beyond. A breakdown of the impact of the individual income tax cuts can be found in the table below. It shows the estimated tax savings for a wide range of households across the Natural State.

Table 1. Impact of HB 1001 Tax Reforms on Arkansas Households

Household NameJamesJasonAmberChad and SophieSeth and LauraJoe and Sarah
Household Gross Income$30,000$52,000$75,000$165,000$2,000,000$48,000
Household AGI$27,510$49,481$72,481$162,331$1,997,481$45,302
Marital-Filing StatusSingle, FSSingle, FSSingle, FSMarried, MFJMarried, MFSMarried, MFJ
Individual Tax Credit$150$150$150$300$150$300
Children:No kids2 kidsNo kids2 kids2 kids1 kid
Child Tax Credit:$0$29$29$29$29$58
Standard Deduction$2,340$2,340$2,340$2,340$2,340$2,340
ItemizationStd. DeductionStd. DeductionStd. DeductionItemizingItemizingStd. Deduction
Current Law$704$1,670$2,682$7,018$87,226$1,486
Tax Liability Change$29$138$253$773$9,594$117
% Tax Liability Change-4.12%-8.26%-9.43%-11.01%-11.00%-7.87%
% Change in After Tax Earnings0.11%0.28%0.35%0.48%0.48%0.26%
Source: Tax Foundation calculations.

As shown in the table, all taxpayers, regardless of their level of income, benefit from the most recent round of tax reductions. But because the focus is on rate reductions, benefits are somewhat larger for higher earners. This makes sense from a competitiveness standpoint. These taxpayers face higher initial effective rates, so they will benefit more from rate reductions, but even more than that, economic decision-making takes place on the margin, so a reduction in top marginal rates has a larger impact on economic growth. This is particularly true since pass-through businesses are taxed under the individual income tax.

These changes come as Arkansas seeks to remain competitive with other neighboring states. Thirteen other states reduced their individual income tax rates in 2024 alone, and 27 states have cut income tax rates since 2021 (several more than once). Two of these states, Mississippi and Missouri are neighboring states to Arkansas, which enhances the importance of fostering a competitive, pro-growth tax environment in Arkansas. The passage of its most recent tax reform package brings the Natural State’s top marginal individual income tax rate to the second lowest of all its bordering states. The lowest, of course, are Texas and Tennessee, since they do not assess an individual income tax. The other four states bordering Arkansas have top marginal rates under the 3.9 percent adopted by HB 1001. This enhances Arkansas’s competitiveness, especially among entrepreneurs and other highly mobile income earners.

These reforms focus on rates without changing the overall structure of the tax code, but they still improve the state’s performance on the Tax Foundation’s State Business Tax Climate Index, a measure of tax competitiveness. The Index compares the state and local tax policy preferences of all 50 states and the District of Columbia using five distinct tax types and over 126 unique variables. The two most relevant portions for this purpose include the individual income tax and the corporate income tax subindices. Arkansas currently ranks 38th in the overall rankings, while placing 37th and 28th in its individual and corporate subindex rankings, respectively.

After the passage of HB 1001, Arkansas will improve its overall ranking one place to 37th nationwide. Arkansas will also gain two places in the individual income tax subindex and rank 35th, while improving four places in the corporate income tax subindex, entering the top half of all states at 24th place. These are notable gains and reflect policymakers’ efforts to enhance tax competitiveness—efforts that could, in the future, be complemented by reducing reliance on several outdated and non-neutral taxes and tax provisions.

Since 2015, Arkansas has made great strides in reducing the burden on families and businesses. That year, Arkansas’ top marginal individual income tax rate was 6.9 percent. The rate is now 3 percentage points lower. Likewise, Arkansas’ top corporate income tax rate was 6.5 percent in tax year 2015 but now stands at the second lowest among its neighboring states at 4.3 percent.

There is no evidence yet of shrinking tax revenue due to these rate reductions. According to the Arkansas Bureau of Legislative Research, individual and corporate income tax revenues have grown at a healthy pace since the passage of the first of now seven separate reductions to the individual and corporate income taxes across the past nine years. As we noted earlier this year, tax-cutting states grew revenue faster with lower rates in recent years. This is not an argument that tax cuts have paid for themselves, but it does demonstrate that lower-tax states are prospering and that many states have been able to afford substantial tax rate reductions out of existing revenue growth.

Reducing individual and corporate income tax rates will increase the returns to the Arkansas labor force and promote greater levels of investment. It will also help keep Arkansas competitive with its neighboring states, which are hard at work on their own efforts to reduce tax burdens. Likewise, property tax relief efforts are also a welcome reduction in tax burdens for Arkansas homeowners.

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