The Arkansas Tax Task Force Concludes its Work

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 legislative task force concluded its work today after 18 months of study, research, and analysis of the state’s tax code. The task force was charged with modernizing the state’s tax code, improving its competitiveness, and reducing tax burdens.

In August, it released its report with 22 recommendations in it. And today, it sent its final recommendations to the General Assembly. If adopted, these reforms would improve Arkansas’s competitiveness.

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 Arkansas individual income tax is a complex mess with three rate schedules, for a total of 16 brackets.

Individual Income Tax Rates (2019)

Note: the exact brackets will change slightly due to Arkansas’s policy of inflation-adjusting its brackets annually.
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%

Today, the task force voted to dramatically simplify this structure. Under the adopted provision, the three rate schedules would be consolidated into one rate schedule, while lowering the top rate. Initially, the drop rate would fall to 6.5 percent, then 6.2 percent, and eventually end at 5.9 percent. This would happen over a three-year period.

Individual Income Tax Rates (Proposed)

Note: the exact brackets will change slightly due to Arkansas’s policy of inflation-adjusting its brackets annually.
Phase One			Phase Two			Phase Three
$0-$8,000	2.0%			$0-$8,000		2.0%		$0-$8,000	2.0%
$8,001-$18,000	4.0%	$8,001-$18,000		4.0%	$8,001-$18,000	4.0%
$18,001-$65,000	5.9%	$18,001-$65,000		5.9%	$18,001	5.9%
$65,001+	6.5%	$65,001+		6.2%

To help ensure that no individual has an increased tax liability under this structure, the plan would also expand the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. from $2,200 to $6,800 for individuals and $4,400 to $13,600 for married filers.

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.

The biggest change to the sales tax in Arkansas by the task force is codifying the necessary changes to adhere to the Wayfair decision by the U.S. Supreme Court. The bill would require remote sellers to collect and remit sales tax revenue if they meet a threshold of $100,000 in sales or 200 transactions.

It would also eliminate 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.

Business Taxation

The recommended legislation would make several changes to 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. in Arkansas but make those contingent on the individual reforms being adopted first. The corporate income tax rate would fall from 6.5 percent to 5.9 percent. It would move the state from a double-weighted sales formula 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. formula, while repealing the state’s throwback rule. It would also create an inventory tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. .

The task force also recommends expanding the state’s net operating loss provision from its current five years to 20 years. This would be done over a number of years. The task force voted to move this provision from the business tax bill to the individual tax bill to allow that phase-in to start earlier.

Other Recommendations

The task force also included language requiring the state to begin an ongoing process of studying its tax exemptions. Previously, reviews were done on an ad-hoc basis. The legislative language calls for biennial review, but the chairs suggested that might change due to concerns over the cost.

The task force’s August report included several other recommendations, which are not part of the final revenue package. These include an optional pass-through entity tax provision, eliminating the state’s exemption for large capital gains, lowering the health insurance premium tax credit, modifying several other sales tax exemptions, indexing the 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. , and creating a new fee for electric and hybrid vehicles. These proposals, however, likely will still receive consideration during the legislative session.

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