Tax Reform Steadily Progressing in Arkansas

Arkansas Governor Asa Hutchinson (R) gave a speech to legislators earlier this month outlining his balanced-budget proposal, and urged that tax cuts be an integral part of improving his state’s economic competitiveness. Given that state lawmakers have spent the last few months working to advance their own tax reform recommendations, it appears both the Executive and Legislative branches are on the same page to deliver much-needed relief to millions of taxpayers. This news could not come at a better time for overburdened citizens in The Natural State who are strained with one of the worst tax systems in the entire country.

In its current form, Arkansas’s tax code is complex and uncompetitive. It’s the only state in the country to have three different rate structures, which puts taxpayers on different schedules within their own brackets, depending on their total taxable income. The Tax Foundation has written about this unique system and why it holds Arkansas back. This poor structure is also coupled with high tax rates, making Arkansas less attractive to capital investment and development. With a top marginal income tax rate at 6.9 percent, Arkansas has the highest income tax rate in the south. Unfortunately for the state, Arkansas is surrounded by seven states that each have a lower tax rate, including two states that have no income tax at all.

Thankfully, during Governor Hutchinson’s first term, he has proven to be a friend to taxpayers, working successfully to reduce taxes and the size of government. He was the architect behind the two largest tax cuts in state history, a $150 million middle class tax cut in 2015 and a $50 million tax cut for lower-income taxpayers in 2017. And if his budget address is any indication, another large tax cut is on the way.

In his address Governor Hutchinson noted: “With this budget, I am submitting a plan to you that will continue that reform of our income tax code over the next four years. This tax plan simplifies our tax tables and brackets and it provides for a sizable increase in our standard deduction.”

The Governor’s tax plan, which he has dubbed the “2-4-5.9” plan, would consolidate rates into three tax brackets at those rates, and make several other noteworthy changes to the state tax code. His plan gradually reduces the top marginal individual income tax rate down from 6.9 percent to 5.9 percent over four years. The plan would rightly reduce the number of individual tax tables from three to one, thereby easing what has been a complex and time consuming process for taxpayers. Standard deductions would also be raised. These changes will save taxpayers $111 million annually once fully phased in.

The Governor’s budget comes on the heels of a series of recommendations approved by the Tax Reform and Relief Legislative Task Force, a group of 16 state lawmakers who have spent nearly a year reviewing options for comprehensive reform. On the individual side, the task force plan would reduce the number of rate schedules from three down to one, which includes seven tax brackets with a lower top rate of 6.5 percent. On the business side, the task force approved exploring additional ways to reduce the corporate income tax rate from 6.5 percent down to 5.9 percent and broaden the sales tax base. This plan is a $260 million tax cut for taxpayers and businesses.

Tax reform is likely to be a top priority for the 2019 legislative session, as tax bills can only be considered in odd-numbered years. Based on the work of the Governor and legislature thus far, taxpayers should be optimistic about the prospect for pro-growth tax relief in the upcoming year.