Arkansas Legislators’ Tax Plan for 2019: Cut Income Tax to 5.9%

By Caleb Taylor

Arkansas Legislative Tax Reform and Relief Task Force members voted Wednesday, December 12th to prioritize a plan that includes a cut to the top individual income tax rate from 6.9 to 5.9 percent. The Task Force approved a number of other changes at previous meetings (such as to the corporate income and sales taxes), but the question of which individual income tax plan they preferred was unanswered until this most recent meeting.

Task force members approved a plan released by the Department of Finance and Administration (DF&A) in August known as the “2/4/5.9% Plan.” This plan would reduce the top individual rate to 5.9 percent for taxpayers making over $18,000. Those with taxable income between $8,001 and $18,000 would pay a 4 percent rate. Those with taxable income less than $8,000 would pay a 2 percent rate. The plan also more than triples the standard deduction for taxpayers, and consolidates Arkansas’s current three sets of tax brackets into a single set of brackets.

Implementing this plan over three years received the most support from task force members.

The task force also considered the so-called “Option A” plan to reduce the top individual income tax rate from 6.9 to 6.5 percent and consolidate its rate schedules (as the 2/4/5.9% plan does).  That plan would cut taxes for individuals by about $260 million with $100 million of that total going to middle income earners. While Option A was recommended by the task force in August, the “2/4/5.9%” plan received greater support from members last week.

Nicole Kaeding, Director of Special Projects at the Tax Foundation, told the task force in October that both plans would improve Arkansas’s overall tax competitiveness. Kaeding cautioned members at the October meeting that Arkansas was falling behind due to standing still in tax competitiveness due to other states already moving on reform.

Kaeding and ACRE Scholar and UCA Assistant Professor of Economics Jeremy Horpedahl discuss some of the reforms other states have made to their tax code in Learning from Other States’ Successes and Failures in Tax Reform. Their op-ed on the same topic, “Reform Taxes Now,” in the Arkansas Democrat-Gazette on May 21st can be read here.

Kaeding told members on December 12th that the “2/4/5.9%” plan was the better plan despite significant political challenges.

Kaeding said:

I think the Governor’s plan is the superior plan. I understand the questions about Amendment 19 and the higher vote threshold, but I think that plan gets you closer to where you want to go and it does it in a more fiscally responsible way.”

Amendment 19 requires a vote of three-fourths of support in both the House and Senate for legislation that increases taxes. The Governor’s “2/4/5.9%” plan would require a three-fourths majority because some tax rates are being increased, though with the large increase in the standard deduction very few taxpayers will actually see their tax bill increase. The “Option A” plan would only require a simple majority in both the House and Senate for passage since no rates are increased.

Curious about this Arkansas tax reform proposal affects you? Find out in a blog post by Kaeding and Horpedahl.

More of ACRE’s research on taxation can be found here. This was the final task force meeting before the legislative session, but be sure to check the ACRE Review soon for what’s happening with tax reform in Arkansas.