Testimony: Arkansas Continues to Debate Tax Reform

September 26, 2018

Today, the Arkansas Tax Reform and Relief Legislative Task Force continued to debate how to implement much-needed tax reform in 2019.

The newly released 2019 State Business Tax Climate Index illustrates just how important reform is to Arkansas. Arkansas fell again this year, largely as other states jump ahead of the Natural State. Arkansas is now ranked 46th, among the bottom five states.

The task force asked me to present on two separate topics today. First, they wanted to understand the impact of proposed individual income tax changes on various Arkansans. With the assistance of Professor Jeremy Horpedahl at the Arkansas Center for Research in Economics, we created eight sample taxpayers and estimated their associated tax cuts. An individual with adjusted gross income of $50,000 would see a net tax cut of $166 under one plan and $80 under the second.

  Net Tax   Change in Tax
AGI Current Option A DFA   Option A DFA
$22,000 $426.75 $426.75 $421.96   $0.00 -$4.79
$25,000 $723.64 $557.52 $545.70   -$166.12 -$177.94
$50,000 $2,100.59 $1,934.47 $2,020.70   -$166.12 -$79.89
$75,000 $3,600.59 $3,434.47 $3,495.70   -$166.12 -$104.89
$85,000 $4,777.33 $3,866.47 $4,085.70   -$910.86 -$691.62
$100,000 $5,812.33 $5,023.40 $4,970.70   -$788.93 -$841.63
$200,000 $12,712.33 $11,523.40 $10,870.70   -$1,188.93 -$1,841.63
$250,000 $16,162.33 $14,773.40 $13,820.70   -$1,388.93 -$2,341.63

I also calculated these changes based on changes in income and in tax liabilities, which illustrate that the cuts are actually being constructed in a semi-progressive fashion.

  Change as % of Income   Change as % of Taxes
AGI Option A DFA   Option A DFA
$22,000 0.0% 0.0%   0.0% -1.1%
$25,000 -0.7% -0.7%   -23.0% -31.9%
$50,000 -0.3% -0.2%   -7.9% -4.1%
$75,000 -0.2% -0.1%   -4.6% -3.1%
$85,000 -1.1% -0.8%   -19.1% -17.9%
$100,000 -0.8% -0.8%   -13.6% -16.8%
$200,000 -0.6% -0.9%   -9.4% -16.0%
$250,000 -0.6% -0.9%   -8.6% -15.9%

Additionally, the task force asked me to construct four distinct tax cut packages with varying costs to help them prioritize their reforms. The task force has identified approximately $300 million in net tax cuts with only $30 million in revenue increases. Implementing all of these changes next year would strain the Arkansas budget. I identified my preferred package, along with how I would phase in the reforms over the next several budgets.

The task force will meet again tomorrow to continue its debate with greater conversation focused on prioritizing reform in a responsible way.

My full slide decks are available below.

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