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Horpedahl, Johns Discuss the Upcoming Special Tax Session on “Believe in Arkansas”

By Joseph Johns

Dr. Jeremy Horpedahl and I spoke with Ryan Norris, State Director of the Arkansas Chapter of Americans for Prosperity, on his Believe in Arkansas podcast. Our conversation focused on the proposed state tax changes and more broadly about both tax and spending issues in Arkansas over the past few years.

The first half focusd on the proposed income tax cuts during a planned upcoming special session. The two competing plans have potential benefits for different taxpayers. For example, a household earning around the median income of $43,000 stands to save at least $200 per year. This is a modest savings on a yearly basis. However, the proposed reforms set the stage for further reductions in the individual income tax in future legislative sessions.

Dr. Horpedahl explained the need to consider other tax reform pathways. These include eliminating the tax cliffs that happen when Arkansans earn slightly higher incomes. These slightly higher incomes and are taxed at higher rates on substantially similar income levels. He also recommended indexing the standard deduction, or the amount exempt from state income taxes to inflation. Without inflation indexing, the standard deduction becomes less valuable to taxpayers over time. This is critical since inflation increased  by an annualized average of 5.3% relative to 2020. Indexing the standard deduction makes Arkansas’s tax code more consistent since “all other elements of Arkansas’ tax code are already indexed to inflation.”

The second half of the discussion centered on state spending trends and finding ways to restrict spending while maintaining essential government services. The RSA came out of the depression-era economic situation when Arkansas defaulted on its state debt. After two constitutional amendments in the 1930s to address taxes and debt, legislators adopted the RSA in the 1940s to consolidate around 100 different funds and prioritize state spending into categories (for example, the 2022 budget has four categories, A through D).

Dr. Horpedahl spoke about the importance of the RSA to state spending by reminding listeners that the RSA mandates spending cuts when the state collects less revenue than anticipated. This prevents the state from spending beyond its means and prioritizes essential spending necessary for the state government to carry out its constitutional responsibilities. It is also important to remember that the legislature must fully fund Category A to ensure continued support for essential government services. The RSA does not prevent increased spending if the tax revenues come in high.

Norris then transitioned to the state’s Long-Term Reserve Fund. Dr. Horpedahl suggested that while this fund has grown significantly in the past several years, there are still loose rules governing withdrawal from the fund. The state should consider ways to limit the Long-Term Reserve Fund from being misused for imprudent purposes. I also spoke about a constitutional rule in Oregon that requires any excess state revenue to be returned to taxpayers.

There are specific steps that Arkansas could take to provide meaningful tax relief. The state should build on currently proposed income tax reforms, consider ways to guard LTRF balances, and keep Arkansas competitive with its neighboring states. Adopting these reforms puts the Natural State in an even stronger fiscal position.

See more of ACREs work on taxes, transparency, and occupational licensing reform below:

Capitol Preview: The Governor’s Tax Cut Plan – Dr. Jeremy Horpedahl provides a non-partisan summary of Governor Hutchinson’s 2019 tax reduction plan on Capitol View.

Getting to Zero: Is No Income Tax Possible for State? – Dr. Horpedahl explains the necessary steps for Arkansas to eliminate its individual income tax.

Paying for Roads: Sales Tax Not Only Way to Find Cash – Dr. Jeremy Horpedahl proposes alternatives to increasing the sales tax to fund road construction. He cites equity and tax competitive concerns since Arkansas has a relatively high sales tax, relative to its neighboring states.

Occupational Licensing Review Committee Kicks Off Second Session – ACRE Policy Analyst Zach Burt summarizes his testimony on Seed Dealer Licenses before the Occupational Licensing Review Subcommittee.

Curb Temptation– ACRE Policy Analyst Joyce Ajayi explains the need for increased transparency of school district budgets to discourage opportunistic behavior of financially burdened teachers.