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Prioritizing Tax Reform in Arkansas

By: Nicole Kaeding

Yesterday, the Arkansas 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. Reform and Relief task force took a big step forward: It approved its recommendations on how to restructure the state’s tax code.

The full report includes 22 specific recommendations, with the overwhelming majority coming from the various Tax Foundation resources provided to the task force over the last year.

Among the recommendations, the task force suggested:

  • Consolidating and lowering 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. rates
  • Lowering the 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
  • Repeal the state’s throwback rule and moving to single sales factor
  • Expanding net operating losses
  • Repealing several 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 IRS, preventing them from having to pay income tax. s
  • Clarifying the taxation of remote sellers
  • Establishing a regular review process for tax expenditureTax expenditures are a departure from the “normal” tax code that lower the tax burden of individuals or businesses, through an exemption, deduction, credit, or preferential rate. Expenditures can result in significant revenue losses to the government and include provisions such as the earned income tax credit, child tax credit, deduction for employer health-care contributions, and tax-advantaged savings plans. s

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In total, the Department of Finance and Administration estimates that these reforms will cost approximately $400 million in tax cuts, with approximately $50 million in identified revenue increases. The task force has previously stated its goal was a net cut of $200 million, so now, the task force will spend the next several months trying to prioritize its recommendations and prepare the necessary legislative text for the upcoming legislative session.

The task force once again asked me to present my thoughts on the best paths forward. In my testimony, I outlined three options for prioritizing the various recommendations. My full presentation is available below.

While the work continues in Arkansas, yesterday’s vote was a large leap forward in creating a pro-growth tax system for Arkansas.