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 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. 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 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.
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 | ||
| $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% | ||||
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Subscribe| $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 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.
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 taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. exemptions are still being considered for repeal. These include the sales tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. 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 taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. 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 taxA gas tax is commonly used to describe the variety of taxes levied on gasoline at both the federal and state levels, to provide funds for highway repair and maintenance, as well as for other government infrastructure projects. These taxes are levied in a few ways, including per-gallon excise taxes, excise taxes imposed on wholesalers, and general sales taxes that apply to the purchase of gasoline. based on the inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. rate of “construction costs.” A separate proposal would create a user feeA user fee is a charge imposed by the government for the primary purpose of covering the cost of providing a service, directly raising funds from the people who benefit from the particular public good or service being provided. A user fee is not a tax, though some taxes may be labeled as user fees or closely resemble them. 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.
| 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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