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GUEST WRITERS: State status check

Ten Year Challenge: Taxes by Jeremy Horpedahl and Nicole Kaeding Special to the Democrat-Gazette | February 15, 2020 at 2:41 a.m.

Some of your friends have likely flooded social media, posting about the Ten Year Challenge. The end of a decade is a time to reflect, and some people have taken the opportunity to post photos, sometimes hilarious ones, showing how much they've changed over the past 10 years.

But what would the Ten Year Challenge look like for Arkansas' tax system? Some taxes have decreased, while others have increased. Let's take a closer look at how these changes impact our shopping bags, paychecks, and homes.

Sales taxes are up. The statewide sales tax stood at 6 percent in 2010, but it is now 6.5 percent after voters approved a temporary increase dedicated to highway funding in 2012.

Cities and counties in Arkansas can also add their own sales taxes on top of the statewide rate. A decade ago these local sales taxes averaged about 2 percent across the state, while today they are closer to 3 percent.

That means the combined rate that Arkansans paid, on average, has increased from 8 percent to almost 9.5 percent. That's the third-highest rate in the nation, just slightly behind Tennessee and Louisiana.

Arkansas voters are being asked again to approve a permanent extension of that sales tax this fall. If voters approve the 0.5 percent tax for highways, and more local sales taxes increase (such as the proposed 1 percent tax in Little Rock), Arkansas could fight for the dishonor of the highest sales tax in the nation.

Arkansans did get some relief on the sales-tax front: Groceries were taxed at 2 percent a decade ago, while today they are only subject to the one-eighth percent conservation tax. But keep in mind that city and county tax rates do fully apply to groceries, so residents still pay taxes on their purchases. The 1 percent increase at the local level over the decade partially offsets this change, and the proposed Little Rock tax increase would fully eliminate the grocery tax cuts for our largest city. The combined tax rate in Little Rock was 7.5 percent in 2010, but could be as high as 10 percent in the near future.

Income taxes are down. There is much more reason to cheer about the income-tax changes over the past 10 years. Most visibly, the state's top personal income-tax rate was 7 percent in 2010. This year it is being cut to 6.6 percent, and it will drop again next year to 5.9 percent. That's a big improvement, along with the reduction in the corporate income-tax rate, which is being cut from 6.5 to 5.9 percent.

But it's not just high-income earners that have had their income taxes cut, as the top rate cut was the third step in Gov. Asa Hutchinson's plan to reduce income-tax rates across the board. Two previous tax cuts directly benefited middle- and low-income taxpayers.

While Arkansas' three sets of tax brackets are complex, all taxpayers are now paying less in taxes, boosting their after-tax income. We estimate that low-income taxpayers are saving between $100 and $200 per year, while the middle class is saving between $300 and $400 per year. That's a few meals out, a car repair more easily covered, or a surprise for the kids.

What about the third major tax, property taxes? Not too much has changed here. While some tax rates may have increased, on average these have been in line with increases in home value: Average tax rates for owner-occupied homes were about 0.6 percent in both 2010 and in the latest available data, but the homestead tax credit was increased by $25, which will lower property-tax bills slightly in future years.

Overall the Ten Year Challenge for Arkansas' tax code looks positive, but there is more work to do.

Governor Hutchinson has continued to have a goal of getting income tax rates down to 5 percent, a goal we agree is feasible and a welcome improvement. The state's tax code still needs to be modernized to fit with an evolving economy. For example, the shift to purchasing goods online instead of in retail stores meant the state needed new rules for sales taxes on online purchases. The rules shifted in the right direction, even though many taxpayers probably felt a little pinch. Thankfully, other tax changes left Arkansans paying less in total.

Going forward, the explosion of the service-based economy puts pressure on the sales tax too. Without changes, state revenue will decline or our already sky-high sales tax will have to go up ... again.

Let's all celebrate the Ten Year Challenge for Arkansas' tax system, while getting ready for the next decade of improvements to our tax system, economy, and account balances.


Jeremy Horpedahl is a scholar with the Arkansas Center for Research in Economics and an assistant professor of economics at the University of Central Arkansas; the views expressed are his own. Nicole Kaeding is a vice president at the National Taxpayers Union Foundation. In 2016, they wrote Arkansas: The Road Map to Tax Reform.

Editorial on 02/15/2020


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