By Joseph Johns
The Arkansas Legislature adjourned its Special Session today after accelerating income tax cuts it passed during special session of late 2021. The legislature chose to move the tax cuts forward due to a historic state surplus of over $1.6 billion as of June 30, 2022.
SB1 lowered the top marginal individual income tax rate to 4.9 percent beginning this tax year. This means that taxpayers earning over $23,600 will have their top income tax rate lowered by 0.6 percentage points starting immediately (the tax cuts are retroactive to the beginning of 2022). Under the prior legislation, this change would have taken an extra three years to take effect. The passage of SB1 ensures that middle-income earners will keep more of their hard-earned income starting just next year. The legislation also provides a $150 tax credit for inflation relief to single taxpayers earning up to $87,000, and a $300 credit for married couples filing jointly (with higher income limits). This acceleration from last year’s tax cuts comprises more than half of the total savings to Arkansas families who will file next year.
SB1 also hastens the reduction in the top corporate income tax rate from 5.9 percent to 5.3 percent, providing another 0.6 percent drop in corporate income tax burdens, effective in 2023.
A single filer in Arkansas earning the median household income of around $50,000 who files next year can expect to save around $214 from the adoption of SB1. Those who earn as much as $84,500 will save around $421 as a result of the legislature’s actions during the special session. These are permanent tax cuts and are in addition to the one-time $150 credit that they will receive in 2022.
These changes are an important step forward, but more can be done to ensure Arkansas is keeping pace with its neighboring states. The bill also accelerated the income tax cut for Arkansans earning above $84,500 to 4.9 percent.
The legislature also adopted a $50 million school safety plan, utilizing only a fraction of the over $1.6 billion surplus the state has generated over the past two years. The accelerated income tax reductions, the inflation relief credit, and the modified business deduction expensing changes will cost the state around $500 million in FY 2023, making them the largest income tax reductions in state history. For future tax years, the Department of Finance and Administration, projected the accelerated income tax cuts would continue to decrease state revenues by $166.6 million more in fiscal year 2024, and another $96 million cumulative over the following three fiscal years, compared with the prior baseline of tax revenue.
SB1 also conforms Arkansas tax code to the current Section 179 of the federal tax code “which provides an income tax deduction for the expensing of certain property.” This change would increase the business property expense deduction, from its current $25,000 under Arkansas state law to $1 million and allow for immediate expensing rather than depreciating the assets over time. By matching the federal tax code this will simplify taxes and decision making for businesses in Arkansas, while also encouraging capital investment.
In previous writings, Dr. Jeremy Horpedahl (ACRE Director) and Joseph Johns (ACRE Policy Analyst) discussed more actions that could be taken to return excess revenue collections to taxpayers during the special session as well as during the upcoming 2023 regular session. We will continue these efforts to reform state budgeting rules that could provide a more prosperous economic future for all Arkansans.