For the third session in the past 13 months, the Arkansas General Assembly will consider cutting the state's income taxes.
The latest session is a special session called by first-year Gov. Sarah Huckabee Sanders. It will begin at 11 a.m. Monday in the state Capitol. Sanders' predecessor, Asa Hutchinson, called lawmakers into special session in August of 2022.
On Friday, Sanders formally called the General Assembly into special session to trim the state's top individual income tax rate from 4.7% to 4.4% and the state's top corporate income tax rate from 5.1% to 4.8%, effective Jan. 1, 2024, and grant an up to $150 one-time income tax credit for taxpayers making less than $90,000 a year, retroactive to Jan. 1, 2023. The session also will include considering an overhaul of the Arkansas Freedom of Information Act and enacting a handful of other measures.
Randy Zook, president and chief executive officer for the Arkansas State Chamber of Commerce/Associated Industries of Arkansas, on Friday praised Sanders' proposed income tax cuts.
"AR's healthy economy continues to generate tax surpluses," Zook said in a written statement.
"Our employers welcome the tax rate reductions proposed by Governor Sanders," Zook said. "This will improve our competitive standing with surrounding states. As a result we will be more attractive for investment by job creators and a more compelling possibility for tax refugees from high tax states. Win, win all around."
Two of Arkansas' surrounding states, Tennessee and Texas, don't levy individual income taxes.
Keesa Smith, executive director of the Arkansas Advocates for Children and Families, said Arkansas has a great need for targeted investments in improving the lives of all Arkansans and communities so it's a major concern that Sanders is moving toward eliminating the income tax that provides critical revenue for the state.
"During the legislative session, there were opportunities to expand Medicaid postpartum coverage from 60 days to 12 months, to provide incentives to grow the number of early childcare workers, and to create a universal newborn home visitation program that were left on the table due to costs," Smith said in a written statement. "State employees did not receive a COLA [cost-of-living adjustment] and Pre-K and afterschool programs did not receive needed additional funding. To be competitive, Arkansas needs better infant and maternal mortality rates, a stronger childcare workforce, and a fully staffed state government. The pathway to these needed improvements is not through multiple rounds of tax cuts."
For tax years starting on or after Jan. 1, 2024, the 4.4% individual income tax rate would include Arkansans reporting more than $87,000 in net income and apply to income of $4,401 and above under identical measures -- Senate Bill 2 by Sen. Jonathan Dismang, R-Searcy, and House Bill 1001 by Rep. Les Eaves, R-Searcy.
That top rate would include Arkansans having net income up to $87,000 and apply to their income between $24,300 to $87,000 for tax years starting on or after Jan. 1, 2024, under the measures.
The top corporate income tax rate of 4.8% would apply to the net income of corporations exceeding $11,000 for tax years starting on or after Jan. 1, 2024, under the identical bills.
Dismang said the up to $150 one-time income tax credit for taxpayers making less than $90,000 a year, retroactive to Jan. 1, 2023, would amount to $300 for a married couple.
The proposed cut in the state's top individual income tax rate from 4.7% to 4.4% would reduce state general revenue by about $150 million a year, and the proposed cut in the state's top corporate income tax rate from 5.1% to 4.8% would cut state general revenue by about $3 million a year, he said. The one-time tax credit for middle-income taxpayers would reduce state general revenue by about $155 million, he said.
In the regular session earlier this year, the General Assembly and Sanders authorized a $177.7 million increase in the state's general revenue budget to $6.2 billion in fiscal 2024, with most of the increase allocated to education and corrections programs.
The General Assembly and Sanders also enacted a measure to authorize the transfer of $1.4 billion in unallocated and unobligated state funds, including $1.3 billion in the general revenue allotment reserve balance, and up to $380.6 million in surplus funds from fiscal 2023 largely to set-aside accounts in the restricted reserve fund for various projects, including prison construction and the state's share of public school building costs.
The state currently has a $1.529 billion balance in the state's catastrophic reserve fund, and a $1.478 billion balance in the restricted reserve fund with set-aside funding for various projects, according to state Department of Finance and Administration spokesperson Scott Hardin.
In May, the finance department projected a $423.3 million general revenue surplus at the end of fiscal 2024 on June 30, 2024.
Sanders said in her written call for the special session that she wants lawmakers to create and transfer existing surplus funds to the Arkansas reserve fund set-aside in the restricted reserve fund.
Sanders spokesperson Alexa Henning said Friday in a written statement the "AR Reserve Fund will help us continue to responsibly phase out the state income tax making us more competitive in attracting jobs and businesses."
Of the state's $1.161 billion fiscal 2023 general surplus, $710 million "remains uncommitted/available," Hardin said.
Sen. Jimmy Hickey, R-Texarkana, who filed Senate Bill 1 to create the Arkansas reserve fund, said Friday the fund is intended to act as a reserve in case of an economic downturn that the retired banker worries about.
"We are not paying for the tax cut and credit out of this fund," Hickey said.
Rep. Lane Jean, R-Magnolia, filed an identical bill as House Bill 1004.
In April, Sanders signed into law a bill that 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. According to the state Department of Finance and Administration, about 1.1 million individual taxpayers were expected to receive a tax reduction under that law.
The top individual income tax rate of 4.7% includes Arkansans reporting more than $87,000 in net income and is applied to their income over $8,800 for tax years starting on or after Jan. 1, 2023. That top rate included Arkansans having net income up to $87,000 and is applied to their income between $24,300 to $87,000 for tax years starting on or after Jan. 1, 2023.
The top corporate income tax rate of 5.1% applies to net income of corporations exceeding $25,000 for tax years starting on or after Jan. 1, 2023. The law is projected by the state finance department to reduce state general revenue by $186 million in fiscal 2024 and $124 million in fiscal 2025.
In April, Sanders also signed into law a bill that will gradually phase out the "throwback rule" on income of multistate corporations over a seven-year period, starting in the tax year starting on or after Jan. 1, 2024, and be complete in tax year 2030. The law 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.
The state's $1.161 billion fiscal 2023 surplus is state government's second-largest general revenue surplus in any fiscal year, behind only the $1.628 billion surplus accumulated in fiscal 2022 that ended June 30, 2022. State government's third-largest general revenue surplus totaled $945.7 million in fiscal 2021 that ended June 30, 2021.
In a special session in August 2022, the General Assembly and then-Republican Gov. Asa Hutchinson enacted a four-pronged tax cut package that the finance department projected will reduce state general revenue by $500.1 million in fiscal 2023, $166.6 million in fiscal 2024, $69.5 million in fiscal 2025, $18.4 million in fiscal 2026, and $8.4 million in fiscal 2027.
The package included acceleration of a reduction in the state's top individual income tax rate from 5.5% to 4.9% retroactive to Jan. 1, 2022, and a cut in the state's top corporate income tax rate from 5.9% to 5.3%, effective Jan. 1, 2023. It also included a $150 income tax credit for taxpayers making up to $87,000 and $300 for married couples filing jointly making up to $154,000.
The August 2022 special session came after the state reported a record general revenue surplus of $1.628 billion in fiscal 2022.