Legislation that would reduce 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, zipped through the Arkansas Senate Revenue and Taxation Committee on Monday, the first day of a special session called by Gov. Sarah Huckabee Sanders.
The measure also would provide a temporary $150 nonrefundable income tax credit for individual taxpayers in Arkansas with net income up to $89,600 and a temporary $300 nonrefundable income tax credit for married couples filing jointly with net income up to $179,200. The income tax credit would phase out for individual taxpayers with net income up to $103,600 and married taxpayers filing jointly with net income up to $207,200, and would be retroactive to Jan. 1, 2023, under the bill.
In a voice vote with no audible dissenters, the Senate Revenue and Taxation Committee recommended the full Senate approve the bill -- Senate Bill 8 by Sen. Jonathan Dismang, R-Beebe -- over the objections of a handful of opponents who testified the state should instead spend the money on funding services such as after-school and summer school programs, early childhood education and other programs.
About 1.1 million individual income taxpayers would receive a tax reduction and about 7,500 corporations with a net taxable income greater than $11,000 would receive a tax cut under SB8, according to the state Department of Finance and Administration.
Bill Kopsky, executive director of Arkansas Public Policy Panel, said the state should be focused on low- and middle-income taxpayers, not the wealthy, to make itself more competitive.
The tax cut legislation "squanders an opportunity to invest in what would improve conditions for all of our communities," for programs such as pre-kindergarten, after-school and summer programs, rural and small business development, and health care, he said.
"There is simply no data to suggest that trickle down economics like this bill will advance Arkansas," Kopsky said.
Laura Kellams, Northwest Arkansas director for Arkansas Advocates for Children and Families, said the Legislature has enacted $1.6 billion in income tax cuts over the past decade.
"The state budget is a reflection of all of our values," she said.
"If we want our communities to thrive, we need you to invest in our communities," Kellams told the Senate tax committee. "To do that, we need a well-funded state budget. Before you look to pass another tax cut, I ask you to take a hard look at our state's needs and determine if we can truly say that we are addressing and meeting all of those" before enacting another more than $200 million tax cut, she said.
More than half of the state's 3- and 4-year-olds are not enrolled in early childhood education, and "we continue to see news stories about troubles in our foster care system, trouble at keeping enough employees on the job to keep our children staff," she said.
"We don't actually know what the LEARNS Act will cost our state in the coming years," Kellams said, referring to Sanders' signature education bill.
But Dismang told the Senate tax committee "we have cut taxes across the board and that's at all income levels" in recent years.
"This tax cut itself benefits all Arkansans that make above $24,000 a year," he said.
Referring to Kellams' estimate of the state enacting $1.6 billion in income tax cuts over the past decade, Dismang said he has strongly and successfully advocated for ensuring the state cuts taxes for low-income and middle-income taxpayers.
He said his bill is aimed at continuing to lure job creators to Arkansas in order to create high-paying jobs in the state.
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 their income of $8,801 and above under SB8. That top rate also 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 legislation.
Under SB8, the top corporate income tax rate of 4.8% would apply to net income of corporations exceeding $11,000 for tax years starting on or after Jan. 1, 2024.
The state finance department projected that SB8 would reduce state general revenues by a total of $248.5 million in the fiscal year 2024 that started July 1 and ends June 30,2024 -- including $156.3 million for the "inflationary relief income tax credit" -- and $184.5 million in fiscal 2025 that starts July 1, 2024 and ends June 30, 2025.
Cutting the state's top individual income tax rate from 4.7% to 4.4%, effective Jan. 1, 2024, is projected by the finance department to reduce state general revenues by $75 million in fiscal 2024 and $150 million in fiscal 2025, and trimming the state's top corporate income tax rate from 5.1% to 4.8%, effective Jan. 1, 2024, is projected to reduce state general revenues by $17.2 million in fiscal 2024 and $34.5 million in fiscal 2025.
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.
In May, the finance department projected a $423.3 million general revenue surplus at the end of fiscal 2024 on June 30, 2024.
After the Senate tax committee meeting, Dismang said SB8 will be funded with future general revenues and leave the state with a smaller but sizable general revenue surplus.
The Senate Revenue and Taxation Committee on Monday also advanced Senate Bill 1 by Sen. Jimmy Hickey, R-Texarkana, that would create the Arkansas Reserve Fund Set-Aside in the Restricted Reserve Fund and require the state's chief fiscal officer to transfer $710.6 million from the state's general revenue allotment reserve fund to the Arkansas Reserve Fund Set-Aside.
SB1 would require a two-thirds vote of either the Legislative Council outside of a legislative session, or the Joint Budget Committee in a legislative session, to transfer funds from the Arkansas Reserve Fund Set-Aside at the request of the state's fiscal officer for particular programs.
From the $1.161 billion fiscal year 2023 surplus, $710 million of that "remains uncommitted/available" at this point, according to Scott Hardin, a spokesman for the state Department of Finance and Administration.
The state's $1.161 billion general revenue surplus in fiscal 2023 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.
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, Hardin said.
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 January 1, 2023.
The top individual income tax rate of 4.7% included Arkansans reporting more than $87,000 in net income and is applied to any 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% applied to net income of corporations exceeding $25,000 for tax years starting on or after Jan. 1, 2023. The tax cut legislation signed into law in April 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 multi-state 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.
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.