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Reforming Arkansas’s Income Taxes

1 min readBy: Nicole Kaeding

Today, I presented to 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. Reform and Relief Task Force on reforms to the state’s individual and 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. structure.

Arkansas’s individual tax code is unique. The state uses a progressive income tax structure, like most states, but the rate schedules also vary by income. An individual with income between $21,000 and $75,000 uses a different rate schedule than those with incomes above or below those amounts. No other states adopt a similar structure.

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
Before Reform: Individual Income Tax Rates (2019)
$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%
Option A: Individual Income Tax Rates (2019)
$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%

Arkansas’s top rates both for individual and corporate income are also uncompetitive, both regionally and nationally. Two bordering states, Tennessee and Texas, have no 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. . Its top corporate income tax rate of 6.5 percent is also high.

Additionally, there are a number of issues with the base of each tax, especially the corporate income tax. The state has a throwback rule, which seeks to capture “nowhere income,” and restrictive net operating loss carryforwards.

As noted in the testimony and in our book Arkansas: The Road Map to Tax Reform, the state should use the revenue generated by repealing 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 to lower these taxes.