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The way Arkansas calculates individual income tax is unusual compared with many other states, Revenue Commissioner Charlie Collins said. Here are the basics on how the tax system currently works and how it could change if the Legislature adopts a plan endorsed by the governor.
Tax tables
The feature that makes Arkansas’ income tax system unusual is its division into three separate tax tables, Collins said.
In many income tax systems, such as the one for federal income tax, there is only one tax table for each filing status and filers pays the same rate on each level of income.
For example, when it comes to federal income tax, a single person whose 2020 income was $100,000 and a single person whose 2020 income was $30,000 both paid a rate of 10% on the first $9,875 they earned.
This is not the case when it comes to Arkansas income tax.
Arkansas organizes its system into three income tables: low, middle and high.
In 2021, Arkansans who earned up to $22,899 fall into the low income tax table, Arkansans who earned between $22,900 and $82,000 fall into the middle income tax table and Arkansans who earned $82,001 or more fall into the high income tax table.
The low income tax table is set up for 2021 so those Arkansans pay no income tax on the first $4,699 earned, 2% on income between $4,700 and $9,199, 3% on income between $9,200 and $13,899 and 3.4% on income between $13,900 and $22,899.
The middle income tax table is set up for 2021 so those Arkansans pay .75% on income up to $4,699, 2.5% on income between $4,700 and $9,199, 3.5% on income between $9,200 and $13,899, 4.5% on income between $13,900 and $22,899, 5% on income between $22,900 and $38,499 and 5.9% on income between $38,500 and $82,000.
The high income tax table is set up for 2021 so those Arkansans pay 2% on income up to $4,200, 4% on income between $4,201 and $8,300 and 5.9% on income over $8,301.
Filing married jointly versus married separately
There are several filing statuses: single, head of household (someone who was not married but had a dependent), widowed, married filing jointly or married filing separately.
[Related: How to file Arkansas state individual income taxes]
Rob Allen, a state income tax auditor, said if a married couple files jointly, they will end up on the tax table for their combined income, so many married couples file separately to keep their tax burden lower.
For example, if each partner in a couple makes $45,000 and they file jointly, they will be put into the high income tax table because their total income is $90,000. If they file separately, they will each fall into the middle income tax table and overall pay less in taxes.
Possible changes under governor’s plan
Gov. Asa Hutchinson has announced intentions to call the General Assembly this fall for a special session regarding tax cuts.
Hutchinson has endorsed a plan that would mainly do two things.
First, it would lower the top tax rate for people in the middle and high income tables from 5.9% to 5.5% over two years.
Second, it would create “cliff adjustments” for people on the cusp of the low income and middle income tax tables.
Under the current system, a taxpayer with an income of $22,899 pays $535 because they fall into the low income tax table while a taxpayer with an income of $22,900 pays $720 because they fall into the middle income tax table, according to Department of Finance and Administration spokesman Scott Hardin.
That is a tax increase of $185 in taxes, even though the income difference is just one dollar.
Hardin said the low to middle table adjustment plan endorsed by the governor would reduce the tax for someone whose income is $22,900 to $550, so that person is paying just $15 more than someone whose income is $22,899.
The plan would make such adjustments for Arkansans whose incomes are around $22,900 to $25,000.
Cliff adjustments have already been implemented for people on the cusp of the middle income and high income tax tables.