The Tax Foundation, a national Washington-based nonprofit, on Monday released “Arkansas: A Road Map for Tax Reform,” a report on the state’s tax code and recommendations for how to change it.
The 78-year-old foundation positioned the report, produced in conjunction with the Arkansas Center for Research in Economics (ACRE) at the University of Central Arkansas in Conway, as one that could inform a legislative debate on reforming the tax code and improving the economy.
Speaker of the House Jeremy Gillam, R-Judsonia, and Rep. Jim Dotson, R-Bentonville, attended a news conference announcing the release of the report. Gillam told Arkansas Business that the Legislature wants to make progress on tax reforms in the session that begins in January but that it’s too early to predict how far the effort might go. He characterized the effort as one that’s not a “one-session game plan.”
Among the report’s recommendations: that the state eliminate some of its targeted tax breaks for businesses. It said Arkansas has “a relatively high corporate tax rate for the region, and offsets the impact with tax credits that favor certain businesses over others.”
“The state should seek to lower the rate and remove these targeted tax breaks,” the foundation said, adding that expanding the tax base “would give policymakers an opportunity to repeal harmful tax provisions.”
More: Click here to download the report.
Gillam said that anything lawmakers decide on must be consistent with Issue 3, an amendment to the state Constitution voters approved last week. Among other things, the amendment give state economic developers more flexibility to use state-issued bonds to attract economic “super projects.”
But Gillam said the report would spur good debate.
“I’m looking forward to a great session, looking forward to us being able to take this information and build on it and work with the Tax Foundation and others as we really try to make sure that Arkansas is in a competitive atmosphere when it comes to our tax structure in all areas — and do so in a responsible manner as well,” he said.
He added that, while the governor has proposed $50 million in tax cuts over two years and legislators have their own list of wants, specific plans haven’t been discussed.
Jeremy Horpedahl, a UCA professor and scholar at ACRE, said much of the report is based on six months of interviews with individuals, policymakers, business groups and academics across the state.
Nicole Kaeding, an economist with the Tax Foundation, said three themes emerged in every conversation: that the Arkansas tax code is too costly, too complex and unfair.
Kaeding said Arkansas has the third highest combined state and local sales tax rate, 14th highest individual income tax rate, 17th highest tax burden and 24th highest corporate income tax in the nation.
Kaeding said 10.1 percent of income in Arkansas go to pay state and local taxes, while the national average is 9.9 percent.
The report recommends transitioning either to a flat tax or a one-rate schedule versus the three the state has now for individual income tax. It also recommends lowering corporate income tax rates and transitioning either to a flat tax or consolidating the rate schedule into a two- or three-bracket system.
The report, Kaeding said, gives lawmakers three options to consider. Two of them cut taxes for every Arkansan, but all are either revenue neutral or would not cause a dramatic decrease in revenue because the state would employ “tax triggers” to prevent that, she said.
On sales taxes, she said, Arkansas’ base is not broad enough in some areas and too broad in others. Kaeding explained that the state taxes things it shouldn’t, like repair parts, but then exempts a number of goods and services that should be taxed.
The report also recommends having Texarkana residents pay income tax rather than be exempt as they are now.