With a stroke of Governor Hutchinson’s pen yesterday, Arkansas has made a great leap forward in its 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. competitiveness. SB362, now Act 465, will eliminate Arkansas’s investment 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. , InvestArk, as of July 1, 2017.
As I noted a few weeks ago,
Created in 2003, InvestArk is the largest tax credit in Arkansas for businesses. It represents half, or $40 million, of all business credits in Arkansas, based on the most recent data from the Arkansas Department of Finance and Administration. We discussed InvestArk at length in our recent book on Arkansas tax policy, Arkansas: The Road Map to Reform:
InvestArk provides a credit against an established business’s 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. liability as the firm invests $5 million in a “project, including land, buildings, and equipment used in the construction, expansion, or modernization.” The credit equals 0.5 percent above the state’s current sales tax rate, and is used to offset a corporation’s direct sales tax liability. The credit cannot exceed 50 percent of a firm’s sales tax liability in one year, and it can be carried forward for up to five years.
The availability of InvestArk, however, covers Arkansas’s mistreatment of repair parts under its sales tax code. Currently, repair parts for machinery and manufacturing are partially taxable under the state’s sales tax. The state currently refunds taxes paid on repair parts in excess of 4.875 percent, compared to the full tax rate of 6.5 percent. We’ve written frequently about the harmful nature of taxing business inputs. The taxation of business inputs leads to “tax pyramiding,” or higher prices for consumers. Ideally, all business inputs would be exempt from sales taxation. Arkansas seemed to understand this, but the state decided to fix bad tax policy—taxing business inputs—with another bad tax policy—business tax credits.
In addition to these arguments, supporters of elimination pointed out the inherent inequity of the credit. Because InvestArk required a capital expenditure of $5 million, it was only available to very large, established businesses in the state. Smaller manufacturers were likely unable to claim the credit, due to the outlay requirement. Removing the credit, and fixing the underlying sales tax issues, leveled the playing field, allowing all Arkansas purchasers of repair parts for machinery to benefit.
It isn’t often that a state repeals one of its business tax credits, especially one that represents half of all its business tax credits. With this change, Arkansas’s 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. will increase from 40th to 34th best on the State Business Tax Climate Index.
Arkansas still has lots of work to do to improve its tax competitiveness, but this, and the creation of the upcoming tax task force, are great ways to start the process.
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