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Testimony: Arkansas Options for Sales Tax Reform

1 min readBy: Nicole Kaeding

This morning, I had the honor of presenting to Arkansas’s Tax Reform and Relief task force. The task force asked me to present options for reforming the Natural State’s sales 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. .

As detailed in our 2016 book, Arkansas: The Road Map to Reform, Arkansas’s sales tax structure is in need of broad reforms. The state has the third highest combined state-local 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. rate in the country, but the real issues are with the state’s sales tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. . The state has a sales tax holidayA sales tax holiday is a period of time when selected goods are exempted from state (and sometimes local) sales taxes. Such holidays have become an annual event in many states, with exemptions for such targeted products as back-to-school supplies, clothing, computers, hurricane preparedness supplies, and more. , numerous blanket exemptions for goods, and limited taxation of services.

However, the state should proceed cautiously with the newfound revenue from sales tax base expansions. While the state’s sales tax rate is high, its high 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. rates are more problematic. The state should use any additional revenue from sales tax changes to help lower tax rates for these other taxes. Any excess revenue should be used to also repeal the state’s franchise and inventory taxes, along with a few other reforms detailed in our book.

My entire slide deck is below.