The Arkansas income tax has been a leading policy topic this year.
On Jan. 1, the top marginal rate fell to 5.9 percent, according to the Federation of Tax Administrators. In April, Gov. Asa Hutchinson announced his intention to call the state legislature into special session to consider new income tax cut proposals. In July, legislators retained Moody’s Analytics to study the impact of federal stimulus payments on state revenues, and income tax cuts on Arkansas’ economy. Gov. Hutchinson and legislators are currently negotiating terms of a measure to reduce the top rate to at least 5.5 percent, while consolidating tax tables for low- and middle-income filers.
The policy behind the issue is to improve Arkansas’ economic competitiveness with states in the region. Tax rates are a factor of economic development, though certainly not the only variable. Others include a skilled work force, a function of a state’s education system; a non-arbitrary regulatory climate; and infrastructure. Of these, the income tax has moved front and center.
Policymakers interest in the issue has been building for decades. In the early 1970s, then-Gov. Dale Bumpers and the legislature raised the top rate from 5.0 to 7.0 percent where it remained into the second decade of the 21st decade. In the interim, there were media reports that some Arkansas entrepreneurs fled for states such as Florida and Texas that do not have an income tax. One example was Texarkana where it was reported physicians moved to the Texas side. In 1977, legislators allowed Texarkana residents to vote on a measure to increase their sales tax while ending state income tax. The measure passed and today the Texarkana exemption is unique in Arkansas.
Economic growth in states like Florida and Texas have attracted the attention of regional policymakers. Nonfarm payroll employment is the broadest state level economic indicator. One can compare state job creation rates in periods of economic expansion. The longest economic expansion in U.S. history occurred between June 2009 and February 2020 (source: National Bureau of Economic Research). Job creation rates in Texas (25.7%) and Florida (25.6%) exceeded the U.S. average (16.4%) in the period (source: U.S. Bureau of Labor Statistics). Arkansas (11.3%) trailed the average. Texas (11.5%) and Florida (11.4%) also led the U.S. (5.5%) in an earlier 21st century expansion (November 2001 to December 2007).
Arkansas is not the only state considering the issue. Eleven states have reduced income taxes this year, according to the Tax Foundation.
Four states that border Arkansas took action to reduce income taxes this year:
· Tennessee completed its multi-year phase-out of the income tax on dividends and interest Jan. 1, 2021. Tennessee does not have an income tax.
· Oklahoma reduced its top rate from 5.0 to 4.75 percent.
· Louisiana voters will vote on a tax-swap proposal to reduce the top rate from 6.0 to 4.25 percent in exchange for eliminating deductions.
· Missouri’s top rate dropped to 5.4 percent due to a 2018 measure that reduces it when annual revenue triggers are achieved. Another measure signed in June makes Missouri the final state with a sales tax to “adopt an economic nexus law for remote sales tax collections,” the Tax Foundation reports. Increased sales tax collections will be used to reduce the income tax further–to 4.8 percent in 2028–if revenue triggers are met.
This fall’s session is likely to end with a modest reduction and debate about the feasibility of following Arkansas’ neighbors.
Greg Kaza is executive director of the Arkansas Policy Foundation, a Little Rock economic think tank founded in 1995.