By Joseph Johns
ACRE Director David “Mitch” Mitchell and I spoke on the Dave Elswick Show on Monday, October 4th, 2021, about the upcoming Arkansas special legislative session. We discussed two main tax cut bills currently under consideration by the legislature. The first plan, by Joint Budget Committee Co-Chair Senator Jonathan Dismang [R-Searcy] would reduce the top marginal rate from its high of 5.9 percent to 4.9 percent and consolidate the low-and-middle income tax brackets. The second plan requested by Governor Hutchinson and created by the Department of Finance and Administration (DF&A), would keep the three-bracket structure, lower the top rate to 5.5 percent and lower the 5 percent rate to 4.5 percent by 2023. Arkansas taxpayers will benefit the most under the Dismang plan due to the steeper cut in the top marginal rate.
I also spoke about the effects of the “tax cliff “and how Arkansans who earn as much as one more dollar could be taxed by as much as $180 more “for the privilege of earning that extra dollar.” We both reminded listeners that Arkansas is competing against other southern and midwestern states with lower individual income tax rates. Staying competitive is key to enhancing Arkansans well-being and economic vitality.
Tax triggers are tax reductions applied when the state meets pre-established revenue targets. Tax triggers have been used in several states. Our LTRF is currently around $1 billion and could be used to help enhance the effects of the proposed income tax cut plans as state revenue recovers.
Dr. Mitchell also discussed the need for the legislature to place rules around how the Governor could use the state’s Long-Term Reserve Fund (LTRF). Without rules we don’t know how the next governor or legislature will spend that money.
Mitchell also discussed the advantages of lowering individual income tax rates now because of Amendment 19 to the Arkansas State Constitution. Amendment 19 requires that three quarters of the Arkansas legislature or a majority of voters approve an increase in the individual income tax. Mitchell said that Amendment 19 would “make it almost impossible for legislators to raise the income tax” after lowering it.
Elswick also discussed the need to cut the state sales tax to pursue even bigger tax savings during the session. Mitchell suggested the legislature spend its time focusing on the income tax since Amendment 19 doesn’t create that higher three-quarters bar for raising the sales tax. Amendment 19 was adopted in 1934 and preceded the state sales tax which was adopted the following year in 1935. Therefore, it only acts as a constraint when the legislature considers increasing the individual income tax. The next legislature could just raise the sales tax and saddle taxpayers with that extra burden.
Elswick also discussed the need for state-level fiscal transparency, the main focus of ACRE Policy Analysts Mavuto Kalulu and Joyce Ajayi, to help keep Arkansas state lawmakers accountable to their voters and encourage legislators to spend the massive COVID-19 relief spending wisely.
Our three main points are:
- Cutting the income tax rate allows Arkansans to receive more gains from their own work and helps keep Arkansas competitive when looking to attract jobs and talent to the state.
- Cutting income taxes can be done in such a way as to preserve government spending on commonly agreed upon public priorities such as infrastructure and K-12 education.
- Making these changes now can also sustain lower income taxes for many years to come due to the higher standard imposed by Amendment 19 to raise income tax rates.
ACRE Scholar Dr. Jeremy Horpedahl and I also co-authored an op-ed in the Arkansas Democrat-Gazette that discusses the effects of the two plans on Arkansas taxpayers. A more thorough analysis of the impact of these two plans can be found on the ACRE Review blog.
For more of ACRE’s work on taxes, transparency, and state finance, please see the following:
Shine More Light – Policy Analyst Mavuto Kalulu advocates for more state fiscal transparency in administering COVID-19 relief funds.
Reducing Arkansas’s Income Tax Rate To Zero – Dr. Jeremy Horpedahl discusses the steps necessary to completely repeal the Arkansas individual income tax.
The Road Map To Tax Reform in Arkansas – Dr. Jeremy Horpedahl outlines a series of reforms state lawmakers could enact to improve Arkansas tax policy.
Arkansans Could See Big Savings from Special Session – ACRE Policy Analyst Joseph Johns and Dr. Jeremy Horpedahl discuss how Arkansans could benefit from potential income tax cuts in the upcoming special legislative session.
Access Arkansas: County-Level Web Transparency – ACRE Policy Analysts Mavuto Kalulu and Joyce Ajayi created the Arkansas Transparency Index to help keep Arkansas government accountable to the public.