Reforming Arkansas’s Income Taxes

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

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 tax. 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 tax exemptions to lower these taxes.