The 2019 Arkansas General Assembly finished its work, and you have finished filing your annual tax return. Can we stop talking about taxes for a while? Of course not!
The Legislature made some good changes to the tax code this session, but plenty of work remains to be done. Now is the perfect time to start thinking about it. Besides, you pay taxes every day on the income you earn, as well as when you spend that income on goods and services. The General Assembly's focus should also be ongoing.
Let's recap recent tax changes in Arkansas.
Changes to the individual income tax will most directly impact your budget. In 2019, the Legislature once again reduced individual income-tax rates, the third time since 2015. The most recent changes primarily impacted high-income Arkansans, but what are the cumulative changes since 2015?
For a single taxpayer earning $20,000, income taxes in 2021 (when the law is fully phased in) will be about $154 less than without these changes. That's a 30 percent cut in the amount of income taxes paid. A single individual earning $50,000 will see a $333 cut in 2021 compared with 2015, or about a 14 percent cut. A single individual earning $100,000 will have the income tax bill lowered by $367, or a 6 percent cut. And since Arkansas has no marriage penalty, two-income households can roughly double these amounts.
But won't some taxes be going up? Yes, in some specific areas: sales taxes on Internet purchases, and the gas tax. Arkansas is following almost every state and using its new authority granted by the U.S. Supreme Court in the Wayfair decision to collect sales taxes from some out-of-state Internet retailers. The exact amount of new revenue collected is hard to pin down, but the Arkansas Department of Finance and Administration estimates it will be about $47 million for both state and local governments combined. That's about $16 more for every Arkansan per year, though the amount varies widely depending on how much online shopping you do.
Increases in the gas and diesel taxes will raise about $58 million for the state and $26 million for local governments. One more potential tax increase, also designed to fund highways, is possible in the future. But this one is up to you, the voters. In 2020, you will be asked whether to make the half-cent sales tax to fund highways permanent (voters approved a temporary tax in 2012). This permanent tax would raise about $300 million per year, with about one-third going to local governments.
One other change that may impact you if you own a home: the homestead tax credit was increased by $25, effectively cutting your property tax bill by that amount.
Important changes were also made to the corporate income tax, which is paid by about one-third of Arkansas businesses (the other two-thirds pay under the individual income tax, just like you). The top tax rate will be lowered to 5.9 percent, the same as the new top individual income-tax rate. But more importantly, changes were also made to the structure of the tax. Two big changes: how multistate corporations are taxed and how many years a business can "carry forward" losses. All of these changes will make Arkansas more competitive.
So what changes should citizens and legislators be thinking about from now until the next legislative session? In our 2016 book Arkansas: The Road Map to Tax Reform, we suggested two bigger changes to improve Arkansas' tax code.
First, we argued that it is very possible to reduce the top income-tax rate to 5 percent, as well as lower other income-tax rates. Important progress was made in this area, but Arkansas still has four neighboring states with lower individual income-tax rates (two at zero percent). We also recommended extending the sales tax to a number of goods and services that are currently exempt or partially exempt. While the second recommendation may seem like a big tax increase, these two ideas are linked: broadening the tax base allows us to lower tax rates while keeping overall government revenue relatively constant.
In the meantime, Arkansans should enjoy their income-tax cuts but also think carefully about what future changes we need to make Arkansas an even better place to live and work.
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 vice president of federal and special projects at the Tax Foundation.
Editorial on 05/31/2019
Print Headline: Talk about taxes