Arkansas’s Property Tax is Low, But What Does That Mean For Income and Sales Tax Rates?

By Caleb Taylor

Arkansas has the third highest combined state-local sales tax rate in the nation and the highest personal income tax rate of its surrounding states.

But there is one area of taxation where Arkansans enjoy a relatively low burden: property taxes.

According to the Tax Foundation, Arkansas has the third-lowest state and local property tax collections per capita . Arkansas pay an average of just $699 per capita in property taxes.

Task Force Testimony

ACRE Scholar and UCA Assistant Professor of Economics Jeremy Horpedahl and Tax Foundation Senior Policy Analyst Jared Walczak discussed Arkansas’s property tax structure and areas for reform at a meeting of the Arkansas Tax Reform and Relief Legislative Task Force on May 24th. You can find slides of their presentation here.

Horpedahl and Walczak are co-authors of Arkansas: The Road Map To Tax Reform with Scott Drenkard, Joseph Bishop-Henchman and Nicole Kaeding of the Tax Foundation.

Horpedahl said economists tend to view property taxes as some of the least harmful to economic growth. However, national surveys find that property taxes consistently rank as among the least popular type of tax among the general public. Horpedahl speculated this might be due to the “visibility” of property taxes compared to income and sales taxes. Arkansas property owners pay the property tax once a year in a lump sum while sales taxes are paid little by little, and income taxes are withheld from every paycheck (most taxpayers withhold too much, and therefore get a refund at the end of the year).

While property taxes in Arkansas are primarily a local matter, Horpedahl said it was “worth thinking about” how Arkansas’s overall tax structure is a result of Arkansas’s low property taxes. Statewide property taxes are not allowed under Arkansas’s Constitution (from Amendment 47, ratified in 1958). But the state legislature does have control over several aspects of how the local property taxes are implemented, and further changes could be made by amending the Constitution. Arkansans have modified how the Constitution treats property taxes numerous times, most recently in 2000 with Amendment 79.

As a very rough estimate, Arkansas would be able to completely eliminate personal and corporate income taxes and reduce sales taxes by 20 percent if Arkansas taxed property at the same rate as Texas. If Arkansas taxed property at a rate similar to states like Florida or Missouri with rates around the national median, Arkansas could cut total income tax collections in half, according to Horpedahl.

Horpedahl said:

We tax property very low and that may be a constraint on what we can do with income and sales taxes.

Property Tax Proposals

Task force members also submitted property tax proposals for further study on May 24th. You can read the official list of those proposals here.

The proposals for consideration include:

  • Repeal business personal property inventory tax (Rep. Johnson)
  • Repeal business personal property inventory tax or create income tax credit/deduction (Rep. Cavenaugh, Rep. Dotson)  
  • Repeal franchise tax (Rep. Dotson, Rep. Johnson)  
  • Repeal franchise tax or restructure franchise tax and implement an offset (Sen. Irvin)
  • Reduce franchise tax to 0.1% (Rep. Cavenaugh)
  • Create guidelines for property assessment and exemptions that are uniform and transparent across all counties (Sen. Elliott, Sen. Hendren, Sen. Hester, Sen Irvin)
  • Place Assessment Coordination Department into Department of Finance and Administration (Sen. Irvin)  
  • Allow 100% abatement for property taxes for new business recruitment to the state by the Arkansas Economic Development Commission (Rep. Dotson)  
  • Review property reassessment 5 year cycle requirement (Sen. Hendren)  
  • Use excess sales tax for tax relief in other areas (homestead credit) (Sen. Hendren)

Two recommendations from, Arkansas: The Road Map To Tax Reform, eliminating the business inventory personal property tax and the franchise tax were among the proposals submitted for consideration.

Walczak recommended ending Arkansas’s franchise and inventory taxes during his testimony. Arkansas is one of only nine states to fully tax inventory as personal property. Horpedahl and Kaeding have previously said both taxes “hurt the state’s economic prospects.”

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.

For further reading, you can read Learning from Other States’ Successes and Failures in Tax Reform by Horpedahl and Kaeding. Their op-ed on the same topic “Reform Taxes Now” in the Arkansas Democrat-Gazette on May 21st can be read here. More of ACRE’s research on taxation can be found here.