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As tax rates go, Arkansas at top

Little Rock sales levy would widen contrast with other states by Joseph Flaherty | July 11, 2021 at 4:00 a.m.
Ella Davis works the cash register behind the counter at the Lakewood Exxon in North Little Rock in this September 2005 file photo. (Arkansas Democrat-Gazette file photo)

The Sept. 14 referendum on a 1 percentage point sales-tax increase in Little Rock has the potential to generate $530 million over the next decade for parks, infrastructure and public-safety initiatives.

But, if approved, the tax increase will contribute to the gap between sales-tax rates in Arkansas, which tend to be high, and those in other states.

Little Rock's sales-tax rate will increase to 9.625% starting in January if voters authorize the tax increase. The increase would take the city to approximately the same overall rate as communities like Fort Smith and Fayetteville.

However, the prevailing sales-tax rates in Arkansas cities exceed those in many cities outside the Natural State.

According to a midyear report from the Tax Foundation, a Washington tax-policy group, Arkansas' average combined state and local sales-tax rate is 9.48%, making it the third-highest statewide average in the country, behind Louisiana at 9.55% and Tennessee at 9.547%.

Tennessee's sales-tax rate is 7%, the same as Mississippi, Indiana and Rhode Island, according to the Tax Foundation. The highest state sales-tax rate is in California, with 7.25%.

According to the Tax Foundation's methodology, quarterly sales-tax data are weighted by census-derived population figures "to give a sense of the prevalence of sales tax rates in a particular state."

Arkansas has a 6.5% state sales and use tax, with food and food ingredients taxed at a lower rate of 0.125%. Pulaski County levies a 1% sales tax.

Little Rock's municipal sales-tax rate is 1.5%. As a result, state, county and local taxes currently add up to the 9% overall rate in Little Rock.

A three-eighths percent (0.375%) municipal sales tax used for capital improvements in Little Rock will expire at the end of December, meaning the net increase to the local rate will be five-eighths percent (0.625%) if voters give approval in September.

The increase would take effect in January.

If voters give approval in a Sept. 14 referendum, Little Rock's overall local sales-tax rate will increase to 9.625% beginning in January 2022.
If voters give approval in a Sept. 14 referendum, Little Rock's overall local sales-tax rate will increase to 9.625% beginning in January 2022.

COMPARATIVE RATES

Even with the proposed increase, comparable sales-tax rates exist in other Arkansas cities, according to data from the Sales Tax Clearinghouse.

Pine Bluff at 10%, Fayetteville at 9.75%, North Little Rock at 9.5% and Conway at 9.125% all have combined sales-tax rates above Little Rock's level.

But among comparable cities in the region, Little Rock's rate is high.

Springfield at 8.1%, Dallas at 8.25%, Oklahoma City at 8.625% and Kansas City, Mo., at 8.725% all rank below Little Rock in terms of their combined state and local sales-tax rates.

Memphis at 9.75% and Birmingham, Ala., at 10% feature higher local rates, even in light of Little Rock's proposed increase.

Mayor Frank Scott Jr. has championed the tax increase and led the push for a special election in Little Rock Board of Directors meetings, arguing that the additional revenue will fund a slew of quality-of-life improvements.

The proposal loomed large for the Board of Directors for much of this year after Scott unveiled the plan during his State of the City virtual broadcast March 25.

Early on, at a news conference March 31, Scott highlighted tax rates in cities like Birmingham, as well as Chattanooga at 9.25%, Baton Rouge at 9.95% and St. Louis at 9.68%.

"And so with this moderate increase of $53 million based on this one penny, [the increase] gets us still below most cities in our region," Scott said at the time.

His proposal originally called for a permanent sales-tax increase, but a late revision to the package added a 10-year sunset date of Dec. 31, 2031. City directors voted 6-3-1 on June 15 to call the special election shortly after the sunset date was added.

Planned projects using the expected $53 million in new annual revenue include construction of an indoor sports complex, park improvements, street resurfacing and public safety vehicle replacement.

An attempt to move toward a sales-tax increase last year was derailed because of the onset of the covid-19 pandemic.

In a phone interview Friday, Scott called attention to Little Rock's "different realities" as the state capital and the largest city in Arkansas, which has a sizable number of workers who commute into the city.

He said "we know we tend to have more responsibilities," not only for Little Rock residents but also for the large and regional workforce.

Because of differing tax structures, comparisons of sales-tax rates in other states can be "apples to oranges," Scott said.

He suggested that Little Rock can be compared with St. Louis, Memphis, Baton Rouge, Birmingham or Chicago and their respective sales-tax rates.

"When you look at that, you see that we still remain low," he said.

When asked about the cities he sees as aspirational, Scott listed Nashville, Tenn.; Charlotte, N.C.; Austin, Texas; Chattanooga, Tenn.; Memphis, Oklahoma City and the Dallas-Fort Worth area, though he noted that they have different state tax structures.

"But what they have is quality-of-life-and-place amenities," he said.

CITIES 'HAMSTRUNG'

Mark Hayes, executive director of the Arkansas Municipal League, said the best way to understand differences between Arkansas' sales-tax rates and rates elsewhere is to look at the state's longstanding approach to tax policy.

"The state took a position legislatively and then ultimately with some constitutional measures that property taxes would remain essentially very low," Hayes said in a phone interview Thursday.

He added that while the state has an income tax, none of it goes to cities, meaning that for local governments in Arkansas, and cities in particular, sales taxes are effectively the only viable revenue source that exists.

"So when you speak of regional cities, you have to be sure it's an apples-to-apples comparison," Hayes said.

Depending on the state, there are other methods by which cities can raise or receive revenue, he said, and state policies can differ greatly from Arkansas in terms of a substantially larger property-tax base.

Hayes said cities "are really sort of hamstrung."

"Without some legislative policy changes, there's really not a lot that cities can do other than manage the sales-tax revenue that they have," he said.

In a letter issued in April, members of the local group Arkansas Community Organizations cautioned city officials about raising the sales-tax rate at the same moment when residents were trying to recover from the economic fallout of the covid-19 pandemic.

"Many people in our community have lost jobs or have had their hours reduced. Many owe rent and have other debts," the letter said. "Let us recover from this very trying year before holding an election to increase taxes on our groceries and other necessities."

Later, the letter noted that residents "who have suffered the most from the economic downturn caused by the pandemic will pay the biggest percentage of their income if the sales tax is increased."

Board members of Arkansas Community Organizations reiterated their opposition to a tax increase in a statement Friday to the Arkansas Democrat-Gazette.

"At this moment we cannot support an increase in the city sales tax. COVID cases are spiking. People have not recovered economically," Robert Daugherty and fellow board members said in the statement. "It is a bad time to increase taxes on our groceries."

The issue of regressive taxation has been "loudly emphasized in every single sales-tax election in the last two generations, at least," said Kathy Wells, president of the Coalition of Little Rock Neighborhoods.

She said sales taxes support a government "on the backs of its lowest-income citizens, who pay the greatest share of their annual income for government support."

The coalition had questioned aspects of the proposed tax when it was under consideration by the city board. As of Thursday, Wells said the neighborhood coalition has not taken a position of support or opposition regarding the sales-tax increase, although she said the group was scheduled to meet over the weekend.

Wells suggested that few individuals have an interest in following sales-tax comparisons between cities. She said because they pay the tax on every routine purchase, those dollars are paid "in bits every day."

"And nobody is watching it that closely, so they don't feel that badly hurt by the outgo," she added.

Print Headline: As tax rates go, Arkansas at top

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