Nov 9, 2023 - News

Report outlines steps to kill Arkansas' income tax

Data: Arkansas Department of Finance and Administration; Chart: Axios Visuals

provides state policymakers and legislators a blueprint for eliminating the state income tax.

Why it matters: Supporters say lower or no state income taxes give Arkansans more money to spend and makes the state more competitive with its neighbors for industry.

  • Opponents say tax cuts mostly benefit top wage earners and that the money could be used to expand broadband, mental health services and bolster the pre-school system.

Backstory: Former Gov. Asa Hutchinson signed the largest tax cut in state history in 2022, chopping the top individual income tax rate from 5.9% to 4.9%.

  • During the regular legislative session this spring, lawmakers reduced the top rate to 4.7%, and then Gov. Sarah Huckabee Sanders signed a tax cut in September following a special legislative session that cut Arkansas' top individual income tax rate from to 4.4%, effective Jan. 1, 2024.
  • Sanders has said eliminating income tax is a goal of her administration.

Yes, but: Details for getting to zero are "fuzzy," Nic Horton, founder and CEO of Opportunity Arkansas, told Axios.

  • "We can think bigger and there are more strategies beyond simply relying on growth that we can utilize to really accelerate the phase out of the state income tax."

What they're saying: "The top 1% — people with average incomes over $1.6 million annually — would benefit from an average tax cut of $3,409, while a middle-class Arkansas family making $52,000 would only see a $35 tax cut," Arkansas Advocates for Children and Families said about the latest round of cuts in September.

Details: The report proposes six strategies to eliminate the income tax:

  • Tax-cut triggers — Incremental income tax reductions would be triggered by end-of-year budget surpluses.
  • Limit spending increases — Allow government to spend more only as personal income grows for residents of the state.
  • Control major budget items — By focusing on the largest expenses — Medicaid is called out — the state can reduce its spending.
  • Reduce bureaucracyReduce state government jobs.
  • Eliminate wasteful spending — The report outlines duplicative spending for various boards and commissions — many agricultural related — it proposes to consolidate.
  • Reduce tax exemptions — More than $1 billion a year is "given away to special interests" through exemptions, such as feedstuffs, fertilizer, pollution-control equipment and charitable hospitals.

The intrigue: The report doesn't outline strategies for eliminating the state's corporate taxes. Horton said the organization doesn't have a position on the issue.

What they're saying: Horton points to the fact that revenue from sales tax is up in the past few years despite the individual income tax rate going down, as proof it works.

  • "You leave more money in people's pockets, they have more money to spend. They're going to spend it, and they're probably going to spend it better than state government," he said.
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