Tax Fighters Take Aim at Arkansas Income Levy

If Arkansas politicians succeed in a push to abolish the state personal income tax, partly to avoid losing ultra-wealthy residents, the state must reckon with what it will give up: $3 billion a year in revenue.

Gov. Asa Hutchinson is expected to call a tax-cutting special session of the General Assembly this year, and he has the backing of the Republican-dominated Legislature, citing a drumbeat of monthly budget surpluses, which totaled nearly $1 billion at the end of the fiscal year in June.

Both GOP candidates to replace Hutchinson, Attorney General Leslie Rutledge and former Trump administration press secretary Sarah Sanders, support ending the income tax entirely. Eight states, including Arkansas’ neighbors Tennessee and Texas, do not have one.

“The trend is in that direction,” said Matt Boch, a lawyer whose practice area includes tax law at the Little Rock firm Dover Dixon Horne.

“I have a lot of concerns about potentially eliminating more than $3 billion of general revenue, with no clear plan for how to replace it or where to make the requisite budget cuts,” Boch said.

Hutchinson presented his tax relief proposal last month, a proposal that included lowering the top income tax rate from 5.9% to 5.5% in 2023, and then lowering it again to 5.3% by 2024. His tax relief plan would cost the state about $321 million annually starting in fiscal year 2024, according to information shared at a press briefing last month.

But eliminating personal income taxes completely — as backed by at least one state legislator, Rutledge and Sanders — could cost the state about $3 billion in revenue annually, according to a study by the Arkansas Department of Finance & Administration.

Hutchinson also is discussing a corporate tax cut. That would require the state to meet certain financial revenue responsibilities. “This is a good tax reduction plan and, most importantly, can be paid for out of recurring revenue and not one-time money,” Hutchinson said of his tax-cut plan.

As of Wednesday, a date for the special session had not been set.

State Sen. Trent Garner, R-El Dorado, told Arkansas Business last week that his long-term goal is to have the state’s income tax rate at zero. “That needs to be our No. 1 mission when it comes to tax reform in Arkansas,” said Garner, who introduced legislation in March to cut all individual income tax rates to zero. That bill was recommended for a study.

A spokesman for DF&A said the agency is aware of statements regarding the elimination of the state income tax, but doesn’t details. “In order to speak to it, we would have to have quite a bit more information as we would be guessing and assuming all of the details of the plan,” DF&A’s Scott Hardin said via email.

Randy Zook, president of the state Chamber of Commerce, told Arkansas Business that he supports cutting the income tax “to be more competitive with surrounding and neighboring states, but we don’t have to be zero. … We don’t have to be Texas, or Tennessee.”

Rich Huddleston, the executive director of Arkansas Advocates for Children & Families, called the idea of eliminating the tax “just ridiculous.”

“Where are you going to come up with the revenue if you eliminate income taxes?” he asked.

Income taxes account for more than half of Arkansas’ total gross revenue. In the current fiscal year, income tax revenue, including business income tax proceeds, is projected to generate about $3.8 billion.

Huddleston said that if the income tax is eliminated, he fears programs to help children and families won’t receive adequate funding.

Huddleston also said that if income taxes were abolished, other taxes would have to be raised — or large parts of state government would have to be cut.

“We think calls for eliminating income taxes … are just absurd and really reflect a total lack of understanding of the state budget,” he said.

‘A Lot of Attention’

Not having an income tax could draw people and businesses to Arkansas, said Garner, the state senator. “It’s something that would attract a lot of attention in positive ways for Arkansas,” he said.

Having no state income tax also could help the economy, depending on how the tax policy is implemented, said Boch, the attorney. States that have slashed taxes without a solid plan to replace the lost revenue have landed in financial problems.

In 2012, the legislature in Kansas exempted a large category of business income, noted Jeremy Horpedahl, associate professor of economics at the University of Central Arkansas in Conway. “They had no plan of how the revenue would be made up,” Horpedahl said. “There were no other additional taxes; there were no planned cuts to state spending.”

He said that once state revenue came in below projections, Kansas had to cut spending and raise other taxes.

If Arkansas decided to eliminate its income tax, one of the safest ways to implement the policy would be to have the tax rate reductions subject to state revenue hitting a certain level or growth rate before the tax cuts started, Boch said.

Boch said Arkansas’ state and local spending is above average for the South. “So maybe there is room for cuts,” he said. “Although I don’t know where those are, or what they might be.”

Arkansas’ sales taxes could be raised, but Arkansas already has one of the highest rates in the country. Its combined state and average local sales tax rate is 9.51%, the third highest among states, according to the Tax Foundation of Washington. “So it’s hard to see that going that much higher,” Boch said.

Sales taxes could be added on services that aren’t taxed, such as some farm equipment. “Although, the people who are involved with whatever particular services you’re dealing with really don’t like it when that happens,” Boch said.

Raising property taxes also might be too controversial, he said. “We do have one of the lowest property tax burdens in the country when measured on a per dollar basis,” Boch said.

Boch said that if the state income tax were eliminated, a tax that’s applied to a company’s gross sales could be added to replace lost state revenue. “I wouldn’t be surprised to see something like that.”

Excise taxes could be raised on tobacco, alcohol, medical marijuana and gambling, “but there’s not a lot of room there either,” Boch said.

Garner, the state senator, said the state could replace revenue from income tax by having “a good economy where you have more revenue coming off of what you already tax.”

He also said the government could be slashed to lower its expenses or taxes could be increased to generate revenue. “Now what taxes would you increase and what that would look like, that would be an open discussion,” Garner said.

State Rep. Joe Jett, R-Success, who serves on the House Revenue & Taxation Committee, said he’s opposed to abolishing the state income tax.

He said there are too many unanswered questions as to what would happen if the state didn’t have an income tax, including what it would mean for about $16 billion in federal matching funds Arkansas receives.

“There’s literally hundreds, if not thousands, of things out there that we need to answer … before we enact a huge, drastic, policy change,” Jett said.

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State Income Tax Rates Across the Country
Top marginal individual income tax rates, 2021

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