Learning From Other States On Tax Reform

By Caleb Taylor

What can Arkansas learn from other states’ work on tax reform?

UCA Assistant Professor of Economics and ACRE Scholar Jeremy Horpedahl and Nicole Kaeding, Director of Special Projects at the Tax Foundation, answer this question and more in a just-released research paper Learning from Other States’ Successes and Failures in Tax Reform. Horpedahl and Kaeding discuss changes that have happened with Arkansas’s tax code since publication of Arkansas: The Road Map To Tax Reform in November, 2016, such as the repeal of the InvestArk tax credit, the state’s largest business tax credit, and lowered income taxes for low-income taxpayers which happened during the 2017 legislative session

Horpedahl and Kaeding show that there are important lessons for Arkansas legislators to learn from other states and principalities when considering how to proceed on tax reform. Utah, Indiana, North Carolina and the District of Columbia implemented “smart, sensible” tax reform measures that can “dramatically improve competitiveness.” While the authors list multiple examples Arkansas should emulate, they also tell a cautionary tale about the “haphazard” tax reform efforts in Kansas.

Key Findings

  • State tax reform is a difficult process, but states like Utah, Indiana, and North Carolina, and the District of Columbia, illustrate that reform can be successful when it happens in a diligent and thoughtful way. Arkansas can learn much from these experiences.
  • All four of these jurisdictions lowered tax rates, broadened tax bases, and simplified their tax structures, improving their competitiveness.
  • Tax reform in Arkansas does not need to be a one-year effort. Indiana, for instance, instituted its reforms over a five-year time frame.
  • The use of tax triggers helped North Carolina and the District of Columbia ensure that they had sufficient revenues to pay for government services.
  • Kansas, however, illustrates an unsuccessful example of tax reform. Dramatically cutting a state’s revenue source, without offsetting spending or tax changes, puts the state’s fiscal health in jeopardy. These problems were exacerbated by Kansas’s special pass-through exemption, which narrowed the state’s tax base.

‘Road Map’ Revisited

Learning from Other States’ Successes and Failures in Tax Reform builds on the work of Horpedahl and Kaeding’s Arkansas: The Road Map To Tax Reform with co-authors Scott Drenkard, Joseph Bishop-Henchman and Jared Walczak of the Tax Foundation. In their latest paper, Horpedahl and Kaeding  update their previous recommendations for reform and restate the importance of lowering rates and broadening bases in any version of sensible tax reform. . You can read a one-page infographic of their work on income taxes here.
The paper will appear in ACRE’s forthcoming publication The Citizen’s Guide to Understanding Arkansas Economic Data, which will be released in Summer 2018. This section was released early due to the important, ongoing debate about how to reform Arkansas’s tax code to make it fairer and more competitive.

Tax Reform in Arkansas

The Arkansas Tax Reform and Relief Legislative Task Force was created during the 2017 legislative session to:

  • Modernize and simplify the Arkansas tax code
  • Make the Arkansas tax laws competitive with other states in order to attract businesses to the states
  • Create jobs for Arkansans
  • Ensure fairness to all individuals and entities impacted by the tax laws of the State of Arkansas

Members of the task force have a September 1st deadline to submit a report to the Governor, Speaker of the House and President Pro Tempore of the Senate that contains the task force’s recommendations for tax reform.

You can read Learning from Other States’ Successes and Failures in Tax Reform here. More of ACRE’s research on taxation can be found here. Horpedahl and Kaeding also wrote a slightly modified version of this paper to emphasize that the reforms they discuss are useful lessons for all states, not just Arkansas.