By Caleb Taylor
Legislators on the Arkansas Tax Reform and Relief Task Force yesterday discussed possible changes to Arkansas’s individual income and corporate income taxes. You can view the PowerPoint presentations to the task force yesterday here and here.
Individual Income Taxes
Arkansas has the highest top income tax rate compared to our surrounding states at 6.9 percent, according to the Tax Foundation. Also, our income tax system consists of a complicated three rate system which is a legacy of tax cut legislation passed in 2015 and 2017 for low-income and middle class taxpayers.
Randy Bauer, a PFM consultant assisting the task force in its tax reform efforts, said during his presentation on income taxes yesterday:
“At the high-end you have the highest effective tax rate among your surrounding states. That certainly could be seen as a detriment to the state. If I was just looking at this, I’d probably say that would probably be where you would want to be focusing your attention.”
After Bauer’s presentation on the income tax, task force members moved on to studying Arkansas’s corporate income tax.
Corporate Income Taxes
Arkansas’s corporate income tax rate is 6.5 percent. It has six tax brackets. Arkansas offers a variety of corporate income tax exemptions, deductions and credits. According to PFM, Arkansas offered 18 corporate income tax exemptions in 2016 with 7 of those exceeding $1 million. Senate President Pro Tempore Jonathan Dismang suggested examining the benefits the states receives for these exemptions.
Dismang said:
“One of the things I’d like to see on these expenditures and credits is to know what the return is on the availability of these. Inside the corporate tax we’ve got all these expenditures and brackets that make for a pretty complicated system. Inside of the corporate income tax collections, is there a way to streamline that and utilize some of the exemptions that may not have as big of an impact to make a broader base, lower the threshold or just simplify the corporate income tax?
I think the goal should be to streamline that corporate income tax and make it more predictable. I think one way you can do that is eliminating some of these opportunities for exemptions to be realized with the hope you get to a simpler code.”
For a comprehensive look at the effects of tax breaks and subsidies on Arkansas’s economy, read ACRE Policy Analyst Jacob Bundrick’s policy review entitled “Tax Breaks & Subsides: Challenging the Arkansas Status Quo.”
Consultant Contract Terminated
After task force members adjourned for lunch, they returned briefly to terminate the state’s contract with PFM. PFM was the consulting group under contract with the state to assist legislators in their tax reform efforts. Senator Jim Hendren, the task force chairman, said they would proceed by relying on the help of the Bureau of Legislative Research, Department of Finance and Administration and outside groups from across the ideological spectrum.
Hendren said:
“PFM has done a great job of laying the groundwork with regard to educating us on tax policy, where our revenue stream goes, getting us through the interim report. I think right now there is a feeling among some on the task force that it’s time to go in a different direction. It’s really primarily because we think we have the resources in house to do much of what lays ahead of us which is take a lot of this data we’ve been given and formulate a path forward. We’ll be relying on BLR, DF&A and upon some other groups that we’ll ask to share their perspective. The chair will strive to make these balanced presentations. We’ll hear from some on the right and some on the left. It will be up to us in the end to make the final recommendations.”
To Learn More
For more of ACRE’s work on tax reform, read “Arkansas: The Road Map To Tax Reform” authored by ACRE Scholar and UCA Assistant Professor of Economics Jeremy Horpedahl and Tax Foundation experts. Chapter 3 focuses on the Individual Income Tax (pages 33-45) and Chapter 4 examines the Corporate Income Tax (pages 48-59).