Opinion-Guest writer

Reform taxes now

By standing still, we fall behind

In December, the federal government passed tax reform for the first time in 31 years, and now, states are taking a hard look at their own tax codes and asking the important question: How can we be more competitive? Many states are rising to that challenge; so far, multiple states have made significant progress reforming their tax codes, including Georgia, Kentucky, and Iowa.

These states are lightening tax-code burdens, minimizing complexity for individuals and businesses, and becoming more competitive. As the Arkansas Tax Reform and Relief Legislative Task Force continues its important work, these states provide even more reason for Arkansas to be bold. Arkansas is falling behind by standing still.

Georgia will cut taxes by $5.5 billion over the next five years, including cuts to its individual and corporate income-tax rates and expanding its standard deduction. The state's top individual income-tax rate, at the end of the five years, will be 5.5 percent, well below Arkansas' top rate of 6.9 percent. For years, Georgia Gov. Nathan Deal, a Republican, opposed tax reform, as he was concerned about the state's bond rating, but this year he decided it was time for Georgia to tackle reform.

Kentucky overhauled its tax system too. The plan consolidated the state's individual and corporate income taxes into flat 5 percent rates. It suspended several business tax credits. The state paid for these reforms by expanding the state's sales tax to include a number of services. The new tax code will vault Kentucky from 33rd in the Tax Foundation's State Business Tax Climate Index to 18th overall, a significant improvement. Unlike Georgia, the tax reforms in Kentucky will actually increase state tax revenue, showing that good tax reform can increase, decrease, or leave revenue unchanged while still making meaningful changes.

After years of debates and conversations, Iowa's tax reform package lowers the state's individual and corporate income taxes and adopts many provisions from the federal Tax Cuts and Jobs Act. And to ensure that the state has adequate resources to provide services to its residents, the state's tax code is contingent on revenue targets being hit.

Tax reform plans are advancing in other states daily. Arkansas' neighbor to the north, Missouri, is currently debating multiple tax reform options, while states like Minnesota are likely to pass tax reform in the next several weeks. Even blue states such as Oregon have made substantial tax changes this year to improve the state's competitiveness.

These states are copying the models of recent successful tax reforms in places like Utah, Indiana, North Carolina, and the District of Columbia. We analyzed these reforms in our new essay, "Learning from Other States' Successes and Failures in Tax Reform," released last week by the Arkansas Center for Research in Economics at the University of Central Arkansas. Other states are being aggressive in simplifying their tax codes. They are reducing the costs for individuals and will attract new jobs and investments to their state because they were prudent as well. By expanding their sales-tax bases and using tax triggers, the states successfully balanced revenue availability and stability with simpler and more neutral tax codes.

Arkansas' tax code was last reformed in 1971, and sadly, it looks like it. The state ranks 38th in the Tax Foundation's State Business Tax Climate Index, and it is hardly the tax code that any policymaker would sit down to create today. After almost 50 years of well-intentioned tweaks and changes, the code's fundamental structure needs to be rebuilt.

Thankfully, the state's Tax Reform and Relief Task Force is asking tough questions and setting the stage for a comprehensive tax reform during the 2019 legislative session, while Gov. Asa Hutchinson continues to push for tax reforms on the campaign trail.

These efforts were important before, and are even more important now as states continue to pass by Arkansas on the road to tax reform.


Nicole Kaeding is director of special projects at the Tax Foundation in Washington, D.C., and Jeremy Horpedahl is an assistant professor of economics at the University of Central Arkansas and a scholar at the Arkansas Center for Research in Economics (the views expressed are not an official statement of UCA). Kaeding and Horpedahl are the authors of Arkansas: The Road Map to Tax Reform.

Editorial on 05/21/2018