The past year and half have presented many uncertainties, yet death and taxes remain certain.
But how much we pay in taxes is always up for debate. Will Arkansans see more tax relief this year?
Under Gov. Asa Hutchinson's leadership, Arkansas taxpayers saw income-tax rate reductions come out of the 2015, 2017, and 2019 legislative sessions. Despite pandemic uncertainties, Governor Hutchinson and the Legislature seem poised to further lower rates in a possible special session later this fall.
Proposals by the governor and Sen. Jonathan Dismang could include lowering the top rate to either 5.5 percent or 4.9 percent, as well as lowering rates for middle-income taxpayers who don't pay that top rate yet. The changes would likely be phased in over the next several years to avoid any net cuts to state spending.
How might these plans impact taxpayers? At the Arkansas Center for Research in Economics at UCA, we put together some estimates for some sample taxpayers.
If all of the most aggressive parts of the proposed changes are put in place, a married couple with one child, filing a joint return and earning about $50,000 (roughly the Arkansas median household income), could see their income-tax burden reduced from about $1,800 now to $1,500 in 2026. That's about $300 more in your pocket every year.
If that couple instead had $90,000 in income, they owe about $4,700 under the current tax rates, but would see their tax bill drop by about $700 if the top rate were reduced to 4.9 percent. If the top rate is only reduced to 5.5 percent, they would get a tax cut of about $300, similar to the median-income household.
Most of the tax proposals on the table would also eliminate or reduce the effect of some "tax cliffs," when people pay different rates because they make just a few dollars more.
To see the impacts of these potential tax cuts on other sample taxpayers, visit the ACRE website at uca.edu/acre.
We know that tax cuts help individual households, but are these tax cuts good for Arkansas?
Income taxes are unnaturally high in the Natural State. Of our six neighboring states, we have the second-highest top individual income-tax rate as of this year, with only Louisiana slightly higher at 6 percent, according to the Tax Foundation.
A reduction from 5.9 percent to 4.9 percent would align Arkansas with its neighboring states and move Arkansas from the second-highest to the second-lowest top marginal individual income-tax rate among our neighbors that have an income tax. Tennessee and Texas, with no individual income taxes, would still be lower.
And our neighbors aren't standing still either: Mississippi has seriously considered eliminating its income tax. Oklahoma recently lowered its top rate to 4.75 percent, and Missouri will lower its top rate to 4.8 percent over the next several years (using revenue triggers, something discussed in the Arkansas plans too). Voters in Louisiana will soon decide whether to lower their top rate down to 4.25 percent, which would once again make Arkansas the highest in the region if we make no changes.
Even Tennessee, which has never had an income tax on wages, finished phasing out its tax on investment income this year.
In ACRE's 2016 book, "Arkansas: The Road Map to Tax Reform," published jointly with the Tax Foundation, we suggested that Arkansas could lower its top income-tax rate to 5 percent from the then 6.9 percent level to be more competitive in our region. At the time, our neighbors with income taxes had rates of either 5 or 6 percent.
Given the recent changes in other states, our previous recommendations have even more importance today.
Academic research supports the idea that heavy tax burdens can have a negative impact on economic growth. For example, a 2008 study by Robert Reed published in the National Tax Journal found that higher state taxes had a negative effect on state income growth. Furthermore, a comprehensive 2011 study by Jens Arnold and co-authors published in the Economic Journal found that income taxes were the most burdensome for economic growth among Organization for Economic Cooperation and Development countries.
This research suggests Arkansas is moving in the right direction both for helping out households and growing the overall economy.
Arkansas is in a very competitive tax environment. The time is right to further reduce taxes in Arkansas. The state has also been running budget surpluses lately, meaning that tax revenue has been growing faster than anticipated.
While death and taxes have been on all of our minds a lot lately, lowering the burden of taxes on Arkansans will help us move forward out of these challenging times.
Jeremy Horpedahl is an associate professor of economics at the University of Central Arkansas and a research scholar at the Arkansas Center for Research in Economics at UCA. Joseph Johns is a policy analyst at ACRE. The views expressed here are their own, and not an official position of UCA.