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Mitchell, Smith Discuss Taxes and LTRF on Dave Elswick Show

By Caleb Taylor

What’s the latest news on taxes and spending policies in Arkansas?

ACRE Director and UCA Associate Professor of Economics Dr. David Mitchell and ACRE Legislative Research Associate Dr. Nathan Smith joined the Dave Elswick Show on 101.1 FM in Little Rock to answer this and more on Monday, April 26th.

Smith recommended legislators consider eliminating the “tax cliffs” in the state income tax code when they meet again in the fall.

Smith said:

The way a well-designed income tax code would work is that as you make more money, you pay more tax and for each dollar you earn, you’d pay a little bit more tax. You do that by setting a marginal tax rate that rises. Arkansas has something weird where when you hit certain thresholds…suddenly your tax bill jumps so if you make $1 more you’re taxed $167 more. That doesn’t really make much sense.

Smith also acknowledged that “it’s kind of expensive” to eliminate Arkansas’s tax cliffs. 

Smith said:

You lose a lot of (tax) revenue because you have to cut taxes not just for people just across the tax cliff but also on everybody above that level. That would be a smart thing to do, but they’d have to have some room in the budget to fund that.”

For more on this topic, check out Smith’s recent op-ed “Iron it out” in the Arkansas Democrat-Gazette on February 12th.

Mitchell said a recent decision by Gov. Asa Hutchinson and legislative leaders to increase the state’s Long Term Reserve Fund, a kind of state savings account, from $209.9 million to $711.1 million in the next fiscal year’s budget was both “laudable” and a “serious chunk of money.”

Mitchell said:

It’s the money the state puts aside for the future in case of recessions. I’m glad they’re putting money aside. It’ll end up being about $700 million. It would take us from near the bottom of the list to very high on the list as the percentage of general funds we have set aside.” 

According to the Tax Foundation, Arkansas’s Long Term Reserve Fund had a balance of $153 million, or 2.7 percent of general fund expenditures, at the beginning of fiscal year 2020. This left Arkansas with the sixth lowest so-called “rainy day fund” balance in the nation at the time.

Mitchell recommended Arkansas consider passing a Constitutional amendment that would have stricter rules for withdrawals from and deposits for the Long Term Reserve Fund.

You can listen to the entire interview here.

For more of our research on taxes and spending, go here.