Gov. Sarah Huckabee Sanders on Thursday signed legislation into law that will slice the state's top individual and corporate income tax rates and create a temporary income tax credit for low-income and middle-income taxpayers.
The Republican governor also signed a bill that will create the Arkansas Reserve Fund Set-Aside in the Restricted Reserve Fund and will 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.
The action came after the House and Senate completed action during the fourth and final day of the special session called by Sanders for lawmakers to consider tax cuts, overhauling the Arkansas Freedom of Information Act, and a handful of other items, including reinstating a ban on covid-19 vaccine mandates for public entities ranging from schools to state agencies.
At a news conference in the governor's conference room, Sanders said the Republican-dominated Legislature enacted her goals in the special session with bipartisan support.
"We cut taxes to put dollars back into Arkansas taxpayers' pockets," she said.
"This week's latest inflation report shows that Joe Biden's policies continue to push prices up, making this tax relief more necessary than ever," Sanders said, referring to the Democratic president.
The consumer price index, which measures costs across a broad array of goods and services, rose 3.7% in August from a year ago -- up from the 3.2% pace in July -- the U.S. Department of Labor reported Wednesday.
Sanders said her signature on the tax cut bill will mean "we'll have currently shaved $250 million off of annual income taxes and $58 million off annual corporate taxes."
In addition, "we will have delivered up to $150 in one-time tax relief for middle-class taxpayers and created the Arkansas Reserve Fund to keep responsibly phasing out the state income tax entirely," she said.
Earlier Thursday, the Arkansas House of Representatives voted 84-10 to send the tax cut bill -- Senate Bill 8 by Sen. Jonathan Dismang, R-Searcy -- to the governor. It's now Act 6.
The House also voted 84-10 to approve an identical tax cut bill -- House Bill 1007 by Rep. Les Eaves, R-Searcy -- that died in the House at adjournment, according to the General Assembly's website.
Democratic Reps. Deborah Ferguson of West Memphis, Ashley Hudson of Little Rock and Mark Perry of Jacksonville joined 81 Republicans in voting for the tax cut bills, while 10 other Democratic representatives voted against the bills, according to the General Assembly's website. Three Democratic representatives voted present on the bills, and two Democratic representatives and a Republican representative didn't vote on the bills.
Act 6 will 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.
For tax years starting on or after Jan. 1, 2024, the 4.4% individual income tax rate will include Arkansans reporting more than $87,000 in net income and apply to their income of $8,801 and above under the measure. That top rate also will include Arkansans reporting 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.
The top corporate income tax rate of 4.8% will apply to net income of corporations exceeding $11,000 for tax years starting on or after Jan. 1, 2024, under Act 6.
Act 6 also will create a temporary nonrefundable income tax credit of $150 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, retroactive to Jan. 1, 2023. The income tax credit will phase out for individual taxpayers with net income up to $103,600 and married taxpayers filing jointly with net income up to $207,200.
Eaves, who is the House sponsor of SB8, told the House the individual income tax rate cut will affect anyone making above $24,300 a year.
"We have to keep Arkansas competitive," he said. "States all over the country are reducing their income tax rates and are prospering.
"I've heard the narrative that rich people get the benefit of the tax cut and those in the lower income bracket only get a $150 tax credit," Eaves said. "That's just simply not true. They get the $150 tax credit, but they are also beneficiaries of the reduced rate."
But Rep. Denise Garner, D-Fayetteville, asked her colleagues to oppose the bill, saying it will benefit high-income earners without providing much aid to lower-income earners.
"To cut taxes permanently for our highest earners with a budget surplus due to one-time federal stimulus monies seems irresponsible at best, but to do that while only committing to a one-time $150 check to Arkansans in most need is cruel," she said.
Garner said she would like to see the state support lower-income families by ensuring all Arkansans have a living wage, access to health care and affordable housing. She said Kansas' residents "lived through the failed real-time experiment of trickle down tax cuts."
But Rep. Aaron Pilkington, R-Knoxville, said "cutting taxes creates economic growth [and] when the economy grows, a rising tide lifts all boats."
He said the proposed tax cuts considered by the House on Thursday were unlike the tax cuts enacted in Kansas, which he said were "massive tax cuts that were not planned out.
"We've never done that. We've been very meticulous. We haven't used a hatchet, we've used a scalpel," he said.
Rep. Andrew Collins, D-Little Rock, described the tax cut as "lopsided," saying previous tax cuts included reduced rates for high-, middle- and low-income earners.
"For the middle earners it is inadequate, and for the very, very wealthy it's unnecessary," he said. "There's a way we could do a tax cut -- and I think should do a tax cut -- right now that would really benefit the middle tax. That's not what this is."
Rep. Howard Beaty, R-Crossett, said the $150 income tax credit represents half a week's pay for a minimum wage worker.
"I'm telling you if you vote against this bill and your name is on that board, I hope when election time comes the voters in this state recognize that," he said.
About 1.1 million individual income taxpayers will receive a tax reduction and about 7,500 corporations with a net taxable income greater than $11,000 will receive a tax cut under the tax cut measure, according to the state Department of Finance and Administration.
The state finance department has projected that Act 6 will reduce state general revenues by a total of $248.5 million in 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. Approximately $174 million is projected to remain from the projected fiscal year 2024 surplus with the enactment of Act 6.
On Thursday, the Senate voted 27-4 to send the governor House Bill 1004 by Rep. Lane Jean, R-Magnolia, to create the Arkansas Reserve Fund Set-Aside in the state's Restricted Reserve Fund and to transfer $710.6 million in the general revenue allotment reserve fund to the Arkansas Reserve Fund Set-Aside.
That $710.6 million is what is left over from the state's $1.161 billion general revenue surplus in fiscal 2023 that ended June 30.
HB1004 will 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. The bill is now Act 1.
The House on Thursday voted 89-3 to approve an identical bill -- Senate Bill 1 by Sen. Jim Hickey, R-Texarkana -- that was sent to the governor, according to the General Assembly's website. It's now Act 11.
Scott Hardin, a spokesman for the state Department of Finance and Administration, said Thursday the law establishing the Arkansas Reserve Fund did not include an emergency clause.
"As a result, [state Department of Finance and Administration] will create the fund and make the [$710.6 million] transfer 90 days from now when the legislation is effective," he said in a written statement.
The state 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 Hardin.
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.
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 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 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 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.
Information for this article was contributed by Will Langhorne of the Arkansas Democrat-Gazette.