Testimony: Arkansas Continues to Debate Tax Reform

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 46^th, 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 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. 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 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. cuts. An individual with adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” 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.