Will your taxes be going up or down in the future? That is the question Arkansas' Tax Reform and Relief Task Force has been working on for more than a year. On Aug. 22, the task force approved its final report, sending recommendations to the General Assembly and the governor.
After months of information-gathering, discussion, and debate, the task force has 22 recommendations to make Arkansas' tax system more competitive. But what does the report mean for Arkansas taxpayers?
If the Legislature adopted all the proposals, most people earning more than $21,000 per year will see an income tax cut. Arkansans may see some higher sales taxes, especially on Internet purchases, but for most taxpayers these increases will be smaller than the income tax cut. Corporations will also get a cut in their income tax rate, with even more important changes to the structure of the corporate tax. These changes make Arkansas' business environment more competitive.
While the corporate tax changes won't affect your tax bill directly, the improvements are significant. Arkansas' corporate income tax currently ranks 39th on the Tax Foundation's State Business Tax Climate Index. These changes would move Arkansas up about 13 spots to 26th place, jumping over states such as Kentucky, Nebraska, California, and Illinois. That's a big improvement in competitiveness, meaning more jobs and investment in the state.
For individuals, if your income is under $21,000, these tax cuts won't impact your tax burden, but if you are feeling left out, don't worry: A $50 million tax cut for low-income Arkansans was passed in 2017 and goes into effect next year. Many proposed changes simply shift middle- and upper-income taxpayers down to the same schedule of tax brackets as low-income taxpayers. That's the same way that every other state does it with just one set of tax brackets.
If your income is between $21,000 and $80,000, your income tax cut is very straightforward: roughly $166. And that's per taxpayer, so dual-earning couples in that range will get a $332 cut since they can file taxes separately in Arkansas. Why all the same? It's simple: Your tax rates for all your income less than $21,000 are being consolidated to match low-income taxpayers.
If your income is above $80,000, your tax cuts will be much larger. For example, if your taxable income is $81,000, your tax cut will be about $720. If your income is $125,000, your tax cut will be approximately $900.
It may seem like high-income people get a larger cut, but we hope you'll think like an economist with us for a moment. Economists prefer to compare based on percentage changes, not just dollars. Percentage changes give us a better idea of how individuals' after-tax incomes change, and if the progressivity of the tax code is changing. Using this method, the person with $81,000 in taxable income is receiving a larger tax cut, 0.89 percent of their income, than the 0.72 percent for that higher-earning individual. The cut for someone with $21,000 of taxable income is about 0.79 percent of their income, meaning the tax cuts are spread throughout the income distribution.
For those higher-income taxpayers, two things are happening. First, their rates are being consolidated just like middle-income taxpayers. Second, the task force recommends cutting the top marginal tax rate from 6.9 percent to 6.5 percent, moving Arkansas closer to its regional peers.
But what about that pesky new Internet sales tax? First, it's important to note that you already legally owe this tax. All Arkansans are required to remit their Consumer Use Tax annually for any Internet purchases where they didn't pay tax, though few do. The recent U.S. Supreme Court decision allows, in some cases, states to require the sellers to collect it.
The task force wants to clarify Arkansas law so that sellers collect the tax. But don't worry too much: One of us who lives in Arkansas and shops online a lot paid his Consumer Use Tax in 2017. It came to $64.98, well below the $166 income tax cut that most taxpayers will be getting.
Of course, none of this is final. Bills must be written, debates will be had, and a lot can happen in a legislative session. But the reforms outlined by the task force meet the objectives set out for them: relief to Arkansas taxpayers and making Arkansas more competitive with other states.
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 here do not represent UCA. Nicole Kaeding is the director of federal projects at the Tax Foundation. Together, they wrote Arkansas: The Road Map to Tax Reform in 2016.
Editorial on 09/13/2018