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Recommendations for the Arkansas Tax Reform and Relief Task Force

2 min readBy: Nicole Kaeding

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 continues its study of overhauling the Arkansas tax code. Over the course of the last several months, the Tax Foundation has provided the task force with advice on reforming the state’s sales, income, property, and excise tax structure. And today, I provided the task force with recommendations on a comprehensive $200 million tax cut package.

My presentation, included below, hit on several key themes. First, Arkansas’s tax code is in need of reform. The state has the 39th best tax climate, according to our State Business Tax Climate Index. Second, the state is falling behind by standing still. A number of Arkansas’s neighbors and competitor states, such as Georgia, Iowa, Missouri, and Kentucky, have done tax reform this year. Finally, I congratulated the task force for making it this far into the process and thanked them for their hard work.

My recommendations focused on current reform options before the task force. While my tax cut package would have differed if I were designing a package from scratch, the task force has a number of strong options before it.

I suggested that the task force make the following reforms:

  • Lower the 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. top marginal rate to below 6 percent
  • Lower 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. top marginal rate to below 6 percent
  • Repeal the state’s throwback rule
  • Expand the state’s net operating loss rules to match the new federal rules
  • Move to a single sales factor apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. structure
  • Repeal a number of 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
  • Repeal the state’s franchise tax
  • Repeal the state’s inventory tax

These provisions, in combination, will exceed the task force’s goal of $200 million in net tax relief, so I also provided the task force with advice on how to implement the reforms, while balancing revenue needs. Phasing in reforms and using a tax trigger will allow Arkansas to make the needed improvements to its structure.

If the task force implements the reforms that I’ve outlined, the state would jump from 39th on the State Business Tax Climate Index to 31st.

My entire slide deck is below:

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