Arkansas ranks poorly on the Index despite multiple rounds of income tax rate reductions since 2015 and a resulting low top marginal individual income tax rate, due to a range of structural shortcomings in the state’s tax code. For instance, Arkansas only allows corporations’ net operating losses (NOLs) to be carried forward for 10 years, while most states either allow 20-year or uncapped carryforward periods. Arkansas also imposes a throwback rule, exposing some out-of-state activity of Arkansas-based corporations to the state’s corporate taxes, which increases their tax liability. Throwback rules penalize firms’ investments and instead incentivize them to relocate to states without these rules.
The state stands alone in having two different income tax rate schedules depending on taxpayer income.
Arkansas has the third-highest combined state and local sales tax rate in the nation at 9.48 percent. The state also imposes a tax on capital stock, at 0.3 percent of the apportioned net worth of corporations. Such taxes are increasingly rare, and Arkansas’s tax rate is the highest in the nation. The state also assesses property tax on businesses’ inventory, making the state even more of an outlier. Both taxes are assessed whether the firm makes a profit or loss in a particular tax year, which is harmful to small businesses seeking to scale up their operations, capital-intensive firms, and all firms during an economic decline. Finally, Arkansas offers no de minimis exemption for its tax on tangible personal property, making this tax exceptionally burdensome to small businesses.
| Category | Rank | Rank Change | Score |
|---|---|---|---|
| Overall | 34 | 1 | 4.92 |
| Corporate Taxes | 15 | -1 | 5.51 |
| Individual Income Taxes | 40 | -1 | 4.69 |
| Sales Taxes | 43 | 1 | 3.97 |
| Property Taxes | 16 | 0 | 5.38 |
| Unemployment Insurance Taxes | 10 | 1 | 5.70 |
Get facts about taxes in your state and around the US
Corporations in the United States pay federal corporate income taxes levied at a 21 percent rate. Forty-four states and D.C. also levy taxes on corporate income, with top marginal rates ranging from 2.5 percent in North Carolina to 11.5 percent in New Jersey.
2 min read
High property taxes levied not only on land but also on buildings and structures can discourage investment in infrastructure, which businesses would have to pay additional tax on.
3 min read
Applying the sales tax, a traditional broad-based consumption tax, is perfectly appropriate, but excessive targeted taxation of wireless services lacks the traditional justifications—a user-pays system or the internalization of social costs—for excise taxation, raising consumer costs and discouraging investment.
5 min read