The Arkansas Tax Task Force Concludes its Work

December 12, 2018

The Arkansas Tax Reform and Relief legislative task force concluded its work today after 18 months of study, research, and analysis of the state’s tax code. The task force was charged with modernizing the state’s tax code, improving its competitiveness, and reducing tax burdens.

In August, it released its report with 22 recommendations in it. And today, it sent its final recommendations to the General Assembly. If adopted, these reforms would improve Arkansas’s competitiveness.

Individual Income Tax

The Arkansas individual income tax is a complex mess with three rate schedules, for a total of 16 brackets.

Note: the exact brackets will change slightly due to Arkansas’s policy of inflation-adjusting its brackets annually.

Total Income Under $21,000   Total Income Between $21,000 and $75,000   Total Income Above $75,000
Income Bracket Tax Rate Income Bracket Tax Rate Income Bracket Tax Rate
Individual Income Tax Rates (2019)
$0-$4,299 0.0%   $0-$4,299 0.75%   $0-$4,299 0.9%
$4,300-$8,399 2.0% $4,300-$8,399 2.5% $4,300-$8,399 2.5%
$8,400-$12,599 3.0% $8,400-$12,599 3.5% $8,400-$12,599 3.5%
$12,600-$20,999 3.4% $12,600-$20,999 4.5% $12,600-$20,999 4.5%
  $21,000-$35,099 5.0% $21,000-$35,099 6.0%
$35,100-$75,000 6.0% $35,100+ 6.9%

Today, the task force voted to dramatically simplify this structure. Under the adopted provision, the three rate schedules would be consolidated into one rate schedule, while lowering the top rate. Initially, the drop rate would fall to 6.5 percent, then 6.2 percent, and eventually end at 5.9 percent. This would happen over a three-year period.

Individual Income Tax Rates (Proposed)

Note: the exact brackets will change slightly due to Arkansas’s policy of inflation-adjusting its brackets annually.

Phase One   Phase Two   Phase Three
$0-$8,000 2.0%   $0-$8,000 2.0%   $0-$8,000 2.0%
$8,001-$18,000 4.0% $8,001-$18,000 4.0% $8,001-$18,000 4.0%
$18,001-$65,000 5.9% $18,001-$65,000 5.9% $18,001 5.9%
$65,001+ 6.5% $65,001+ 6.2%    

To help ensure that no individual has an increased tax liability under this structure, the plan would also expand the standard deduction from $2,200 to $6,800 for individuals and $4,400 to $13,600 for married filers.

Sales Tax

The biggest change to the sales tax in Arkansas by the task force is codifying the necessary changes to adhere to the Wayfair decision by the U.S. Supreme Court. The bill would require remote sellers to collect and remit sales tax revenue if they meet a threshold of $100,000 in sales or 200 transactions.

It would also eliminate the sales tax exemption for magazine subscriptions.

Business Taxation

The recommended legislation would make several changes to the corporate income tax in Arkansas but make those contingent on the individual reforms being adopted first. The corporate income tax rate would fall from 6.5 percent to 5.9 percent. It would move the state from a double-weighted sales formula to a single sales factor apportionment formula, while repealing the state’s throwback rule. It would also create an inventory tax credit.

The task force also recommends expanding the state’s net operating loss provision from its current five years to 20 years. This would be done over a number of years. The task force voted to move this provision from the business tax bill to the individual tax bill to allow that phase-in to start earlier.

Other Recommendations

The task force also included language requiring the state to begin an ongoing process of studying its tax exemptions. Previously, reviews were done on an ad-hoc basis. The legislative language calls for biennial review, but the chairs suggested that might change due to concerns over the cost.

The task force’s August report included several other recommendations, which are not part of the final revenue package. These include an optional pass-through entity tax provision, eliminating the state’s exemption for large capital gains, lowering the health insurance premium tax credit, modifying several other sales tax exemptions, indexing the gas tax, and creating a new fee for electric and hybrid vehicles. These proposals, however, likely will still receive consideration during the legislative session.

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