The state sales tax rate paid by purchasers of used vehicles, trailers and semi-trailers priced between $4,000 and $10,000 dropped to 3.5% Saturday, thanks to a state law passed in 2021.
The previous rate was 6.5%. Vehicles priced below $4,000 already are exempt from the sales tax.
Act 1013 -- sponsored by Rep. John Payton, R-Wilburn -- is projected by the state Department of Finance and Administration to reduce state sales tax revenue by $6.5 million in fiscal 2022, which ends June 30, and $13.1 million in fiscal 2023.
The drop in the rate, however, doesn't affect collections of city and county sales taxes, according to the finance department.
In fiscal 2021, the state collected $298.4 million in revenue from the tax on used vehicle sales.
By comparison, in the same fiscal year, the state took in $215.8 million in tax revenue on the sales of new vehicles, said Scott Hardin, a spokesman for the finance department.
The average price for used vehicles purchased in Arkansas in fiscal 2021 was $13,437.89, Hardin said.
Comparable information for previous fiscal years was unavailable, he said. Determining the figures for fiscal 2021 alone took state officials about three days to compile the data since they have to manually review individual lines of data, he said.
New car sales in Arkansas and the rest of the country have suffered because of a lack of vehicles. Manufacturing issues caused a scarcity of computer chips and other materials needed to produce new vehicles. The shortage of new vehicles drove up demand for used ones.
Act 1013 embodies Gov. Asa Hutchinson's plan to reduce the sales tax on used vehicles, trailers and semi-trailers priced between $4,000 and $10,000 by 3%. Earlier this year, Payton described it as a compromise with the Senate.
Hutchinson said the reduction in the used tax will help alleviate the tax burden on low- and middle-class families.
"Because of this, these individuals can now afford a more reliable vehicle that can last longer and require less maintenance," the Republican governor said in a written statement.
Asked why Act 1013 is better policy than exempting the first $10,000 of a used vehicle, Hutchinson said, "By reducing the rate from $4000 to $10,000, we provided tax relief to many Arkansans with a reasonable impact to state revenue.
"Additionally, we provided tax relief and avoided a tax cliff in which a one-dollar price difference can cost the taxpayer hundreds of dollars in sales tax," he said.
Payton said he has fought for tax relief on the sales of used vehicles for several years in the Legislature.
"I feel good we got something done, but it didn't satisfy what needs to be done," he said.
"If I'm elected to the Senate, I'll definitely be filing a bill to raise that [sales tax exemption for used vehicles]," said Payton, who has announced his plan to challenge state Sen. James Sturch of Batesville in the Republican primary election in May.
Payton said he owns two used-car lots in Heber Springs and Searcy, and "I can't say [the law] helps my business.
"Most of our business is above that price range anyway," he said. "There are very few that are priced below $10,000."
During the 2021 regular session, the House of Representatives voted 97-0 to approve Payton's House Bill 1160, which would have increased the sales tax exemption for used vehicles from those priced below $4,000 to those priced below $7,500, and then to those priced below $10,000 two years later.
"I think that it is only reasonable that the state allow ... hardworking, salt-of-the-earth Arkansans to buy these more dependable cars duty free," Payton told the House Revenue and Taxation Committee during the session.
The finance department projected that the bill would reduce state sales tax revenue by $9.5 million in fiscal 2022, gradually increasing to $28.4 million in fiscal 2025.
The Senate Revenue and Taxation Committee amended HB1160 to exempt used vehicles priced between $4,000 and $7,500 from the state sales tax. Senate President Pro Tempore Jimmy Hickey, R-Texarkana, said he worried that the bill would create an incentive for car dealers to boost the price of used vehicles to right below the $7,500 price threshold and that it would hurt consumers. But Payton countered that the problem is the supply of used vehicles priced below $7,500. The bill never made it out of committee before the session ended.
The difference over the conflicting used-vehicle tax proposals helped contribute to voting difficulties for an unrelated bill.
The bill to grant spending authority for the Arkansas Division of Medical Services fell short of the required three-fourths vote for approval in the House of Representatives four times during the 2021 regular session before the House approved the appropriation. The appropriation provided spending authority for the state's Medicaid program.