Arkansas' top individual income tax rate dropped to 5.5% Saturday, the first day of the new year, as part of what state officials say is the largest tax cut in state history.
Other changes include: low-income and middle-income tax tables will be consolidated; a nonrefundable tax credit will be created for low-income taxpayers; and the standard income tax deduction will be adjusted by the cost of living. The top rate was 5.9%.
State officials project that Acts 1 and 2 of the Dec. 7-9 special legislative session will reduce state general revenue by $135.25 million in fiscal 2022, which ends June 30, gradually increasing each year until it reaches $497.9 million by fiscal 2026.
Proponents of the cuts said each taxpayer will benefit, and tax relief won't come at the expense of essential state services.
House Speaker Matthew Shepherd, R-El Dorado, said the House of Representatives, Senate and Gov. Asa Hutchinson each have their own pieces included in the income tax cut law.
Shepherd said he pushed for a significant reduction in the top individual income tax rate on behalf of the House Republican Caucus.
Sen. Jonathan Dismang, R-Searcy, promoted consolidating the low- and middle-income tax tables, and Rep. David Ray, R-Maumelle, advocated adjusting the standard income tax deduction by the cost of living.
Hutchinson said the goal of the tax cut law was twofold.
"First, we wanted to continue the record income tax relief that has benefited taxpayers at every level of income over the last few years," the Republican governor said in a written statement.
"Through a middle-income reduction in 2015, a cut for low income Arkansans in 2017 and the overall relief of the 5.9[%] plan, we demonstrated the ability to provide significant tax relief while maintaining and supporting state services."
Secondly, Hutchinson said he was certainly aware of the environment in which Arkansas competes with other states for job creation and expansion.
"My goal has been to get the individual rate down to 5.0%," he said. "The recent tax reduction law gets us there. The largest tax cut in the state's history is one more indication to companies that maintaining a world-class business environment is a priority in Arkansas."
Most Democratic lawmakers opposed income tax cuts.
They said the tax cuts benefit the wealthy, while having little impact on lower-income earners.
Democrats said the money saved would be better spent on meeting Arkansans' needs.
"Granted, Arkansas is not a wealthy state, but we can still be extraordinary," Rep. Denise Garner, D-Fayetteville, said during the December special session.
"All Arkansans can thrive but not with this tax plan. Lower- and middle-income Arkansans will see very little benefit," she said. "Those lucky enough to be in Arkansas' 1% ... will see their taxes decrease on average by more than $10,000, but most Arkansans will only see the decrease of $40 to $60 or the equivalent of a family dinner at a fast-food restaurant. Concentrating tax cuts to serve the wealthy will benefit far fewer Arkansans than using those dollars to benefit popular programs."
LAST BIG CUT IN 2007
The largest previous tax cut in Arkansas history was Act 110 of 2007, which cut the sales tax on groceries from 6% to 3%, said Scott Hardin, a spokesman for the state Department of Finance and Administration.
State officials projected that Act 110 of 2007 would reduce state revenue by $122.1 million in fiscal 2008 and $131.2 million in fiscal 2009, according to Arkansas Democrat-Gazette's reports at the time.
Democratic Gov. Mike Beebe, who served from 2007-15, led the Legislature to reduce the sales tax on groceries over time.
On Jan. 1, 2019, the sales tax on groceries dropped from 1.5% to 0.125%, which is a tax for conservation levied under the state constitution.
TAX CUT DETAILS
Acts 1 and 2 of the December special session reduced the three existing tax tables to two by combining the low- and middle-income tables, effective Saturday.
The new table applies to those with net taxable incomes of up to $84,500, while the high-income tax table applies to those with net taxable incomes above $84,500.
The top individual income tax rate, now 5.5% as of Saturday, drops to 5.3% in a year.
The top rate will apply to net taxable incomes between $39,700 and $84,500 for people in the combined low- and middle-income table, and to the incomes of at least $8,501 for people in the high income table.
If no transfer from the state's catastrophic reserve fund, formerly called the long-term reserve fund, is made between July 1, 2022, and Dec. 31, 2023, the top individual income tax rate drops to 5.1% on Jan. 1, 2024. The rate drops again to 4.9% under a specific condition a year later.
If the rate drops to 5.1% but then a transfer from the catastrophic fund is made between Jan. 1, 2024, and Dec. 31, 2024, the top rate doesn't drop to 4.9% on Jan. 1, 2025.
Shepherd said the tax-cut triggers in the law provide "a safety net" for state programs and services.
The state's chief fiscal officer may transfer funds -- with approval by a legislative panel -- out of the reserve fund to cover a revenue shortfall to meet the state's financial obligations to fund schools and operate state government. The revenue shortfall would have to be in circumstances in which general revenue collections are forecast to increase less than 3% over the previous fiscal year because of economic problems.
The chief fiscal officer also may transfer funds out of the reserve fund for the economic development superproject fund under Amendment 82 to the Arkansas Constitution.
Acts 1 and 2 create a nonrefundable income tax credit for taxpayers with net incomes up to $24,700 who file their income tax returns on time. Taxpayers with net incomes up to $23,600 will receive $60 in credits, with the credit reduced for each $100 of additional income.
The laws require the state to increase the standard deduction by a cost-of-living adjustment starting with the 2022 tax year.
The standard deduction for individuals will remain $2,200 and $4,400 for a married couple filing jointly, Hardin said.
Texas and Tennessee don't have an individual income tax, according to the Federation of Tax Administrators.
As of New Year's Day, Arkansas' top individual income tax rate of 5.5% exceeds Louisiana's top rate of 4.25%, Oklahoma's 4.75%, Mississippi's 5% and Missouri's 5.4%, based on information from the Tax Foundation.
CORPORATE RATES
Arkansas' top corporate income tax rate of 6.2% dropped to 5.9% on Saturday, under a 2019 state law.
The special session's Act 1 and 2 will cut the top corporate rate from 5.9% to 5.7% on Jan. 1, 2023.
That rate will drop to 5.5% on Jan. 1, 2024, unless funds are transferred out of the catastrophic reserve fund between July 1, 2022, and Dec. 31, 2023, under Acts 1 and 2.
Unless a transfer from the reserve fund is made between Jan. 1, 2024, and Dec. 31, 2024, another scheduled top rate cut, to 5.3%, will occur, under Acts 1 and 2.
On New Year's Day, Arkansas' top corporate income tax rate of 5.9% exceeded Missouri's and Oklahoma's 4%, and Mississippi's 5% rate, but was lower than Tennessee's top corporate income tax rate of 6.5% and Louisiana's 7.5%, based on information from the Tax Foundation. Texas has no corporate income tax.
Hutchinson said state officials "must remain aware of our competitors and take action, when possible, in order to achieve economic development success.
"While companies consider many factors when expanding or relocating, taxes are certainly among those key factors along with location, workforce and education," he said.
FUTURE FORECAST
In the 2021 regular session, the General Assembly and Hutchinson enacted a general revenue budget for fiscal 2022 totaling $5.84 billion.
For fiscal 2022, the finance department projects a surplus of $264.4 million at the end of the fiscal year, based on its latest forecast released Dec. 16.
The projected general revenue budget for fiscal 2023, which starts July 1, is $6.01 billion, with an additional anticipated transfer of $54.9 million to what's now called the catastrophic fund.
The General Assembly will consider enacting the fiscal 2023 general revenue budget in the fiscal session that starts Feb. 14.
In fiscal 2021, Arkansas' general revenue surplus set an official record, totaling $945.7 million. The surplus allowed the state to boost its reserves to more than $1.2 billion, Hutchinson noted in July.
Information for this article was contributed by Rachel Herzog of the Arkansas Democrat-Gazette.