The Arkansas House of Representatives on Wednesday voted to send Gov. Sarah Huckabee Sanders a bill that would cut the state's top individual income tax rate from 4.9% to 4.7% and the state's top corporate income tax rate from 5.3% to 5.1%, retroactive to Jan. 1, 2023.
The House voted 85-12 to give final approval to Senate Bill 549 by Sen. Jonathan Dismang, R-Searcy. Democratic representatives Jay Richardson of Fort Smith, Steve Magie of Conway, Deborah Ferguson of West Memphis and Ashley Hudson of Little Rock joined 81 Republicans in voting for the bill.
The bill's House sponsor, Rep. Les Eaves, R-Searcy, said under the tax cut "constituents will have an immediate impact on their paychecks for anyone who makes over $24,300."
But House Democratic leader Tippi McCullough told her colleagues that public schools, the criminal justice system and other essential state services need additional funding.
She referred to updated salary schedules for some school districts, which she said show they are unable to provide veteran teachers with step raises beyond $52,000.
"We're on a reckless path of shifting our tax burden to everyday Arkansans," McCullough said. "The more we cut income taxes, the heavier the burden to keep our government up and running."
The legislation is the individual and corporate income tax cut bill that would implement an agreement that Sanders and legislative leaders announced Thursday.
About 1.1 million individual taxpayers with taxable income greater than $24,300 would receive a tax reduction under the bill, according to the state Department of Finance and Administration.
The bill is projected by the state finance department to reduce state general revenue by $186 million in fiscal 2024 and $124 million in fiscal 2025. The department said the revenue impact assumes that employee withholding would be adjusted by employers on or after June 1, 2023.
Dismang told the House tax committee Tuesday the bill would reduce state general revenue more in fiscal 2024 than in fiscal 2025 because it is retroactive to Jan. 1, 2023.
"Just keep in mind we are building a sizable surplus in which this will just kind of eat away at a little sooner, and I don't think that is necessarily a bad thing," he said.
The state's general revenue forecast projects net general revenue of $6.59 billion for fiscal 2024, so the state's proposed general revenue budget of $6.2 billion would leave a general revenue surplus of $391.1 million at the end of fiscal 2024. That projection for a general revenue surplus doesn't factor in the individual and corporate income tax cuts and other tax cuts that the Legislature is considering enacting in this year's regular session, finance department spokesman Scott Hardin said.
According to the finance department's projections, people with net income of $29,210 would save $10 in 2023 from their 2022 income tax bill of $805, people with net income of $40,000 would save $31, and people with net income of $52,000 would save $55 under the legislation.
People with net income of $70,000 would save $91 on their income tax bill, those with net income of $100,000 would save $182, those with net income of $110,00 would save $202, those with net income of $125,000 would save $232, and those with net income of $150,000 would save $282 in 2023 from their 2022 income tax bill of $7,180, according to the finance department's projections.
Dismang told the Senate tax committee on Monday his bill is part of the Legislature's ongoing work to reduce the state's individual income tax rates, and the Legislature has provided substantial income tax relief to low-income and middle-income taxpayers in previous sessions.
Bruno Showers, a senior tax policy analyst for Arkansas Advocates for Children and Families, told the Senate committee the Institute on Taxation and Economic Policy estimates that 80% of the tax cut dollars would go to the top 20% of Arkansans, or people with net incomes of at least $110,000 a year.
The top individual income tax rate of 4.7% would apply to Arkansans having more than $87,000 in net income and to their income of more than $8,800 for tax years starting on or after Jan. 1, 2023, under SB549. That top rate also would apply to Arkansans having net income up to $87,000 and their income of $24,300 to $87,000 for tax years starting on or after Jan. 1, 2023.
SB549 also recalculates the bracket adjustments based on the reduced tax rates to maintain a smooth transition between the standard income tax table and the upper-income tax table, according to the finance department. For tax year 2023, individuals with net taxable income greater than or equal to $87,001 but less than $91,301 will reduce their income tax due by the appropriate bracket adjustment amount, the department said.
The top corporate income tax rate of 5.1% would apply to net income of corporations exceeding $25,000 for tax years starting on or after Jan. 1, 2023.
In other action on tax cut bills, the Senate Revenue and Taxation Committee on Wednesday endorsed House Bill 1045 by Rep. Howard Beaty, R-Crossett, that would gradually phase out the "throwback rule" on business income over a seven-year period.
The gradual phase-out would begin in the tax year starting on or after Jan. 1, 2024, and be complete in tax year 2030.
Under current state law, a multistate corporation that conducts business in Arkansas must calculate Arkansas income tax through a formula based on its total sales in the state, the finance department said in a written impact statement on HB1045. A multistate business is required to include "unreported" out-of-state sales in its sales in this state. Thus, all sales must be reported somewhere or else a taxpayer would have untaxed "nowhere" income. "Nowhere" sales are recaptured under Arkansas Code Annotated 25-51-716.
Under that state law, for the purposes of calculating corporate income tax, sales of tangible personal property are "in this state" if the property is delivered to a purchaser within Arkansas, the finance department said. Sales also are considered to be "in this state" if the tangible personal property is shipped from an office, store, warehouse, factory or other place of storage in this state and the purchaser is the United States government or the taxpayer is not taxable in the state of the purchaser, according to the finance department. This is known as the "throwback rule."
HB1045 is projected by the finance department to reduce general revenue by $10.6 million in fiscal year 2024 and ultimately reduce general revenue by $74 million a year in fiscal year 2030 and thereafter.
Beaty told the Senate tax committee Wednesday that the bill will make the state more attractive to manufactures and wholesalers, including south Arkansas defense contractors.
In 2018, the Arkansas Tax Reform and Relief Legislative Task Force's recommendations included repealing the "throwbackrule" for multistate business income.