In 2017, the Arkansas Tax Reform and Relief Task Force (ATRRTF) began to consider various ways the state could cut individual income tax rates. ATRRTF’s goal was to present multiple reform plans to the Arkansas General Assembly. Gov. Asa Hutchinson stated he would like to see the top individual income tax rate cut from 6.9 percent to 6 percent.
The task force plans to send its recommendations to the General Assembly by September 1, in preparation for the 2019 regular session. In June, the task force sent three plans to a consultant for assessment, using a dynamic scoring model. Dynamic scoring examines the effects of tax changes on jobs, wages, investment, federal revenue, and the overall size of the economy.
In addition to the governor’s proposal, the task force sent two reform plans for assessment. The first, known as Option A, would cut the number of individual income tax tables from three to one to simplify the rates. This plan would also lower the top rate from 6.9 percent to 6 percent for people with taxable incomes of at least $80,000 a year. The Arkansas Department of Finance and Administration estimates this proposal would reduce revenue by $276 million per year. This total includes a tax cut passed in 2017 that will go into effect in 2019. This previous cut reduced rates of taxpayers with taxable incomes below $21,000.
Option B is similar to Option A, but weakens the cuts. Option B would also reduce the number of individual income tax tables from three to one. This plan only lowers the top rate from 6.9 percent to 6.5 percent for people with taxable income of at least $80,000 a year. It would also repeal the 2017 tax cut for people with less than $21,000 in taxable income.
Both plans are good public policy, taking positive steps toward reducing the tax burden on individuals. All states imposing income tax reform should lower and flatten their tax systems so there are as few tax brackets as possible. Personal and corporate income taxes are generally considered to be the most destructive taxes because they disincentivize production, innovation, and risk-taking. Recent studies have shown states with no income tax or with lower income taxes perform better economically and achieve greater job and population growth than those with higher income taxes.
High income and business taxes deter economic development by discouraging higher-income-earners and new capital from moving into a state or remaining there. A study by the Americans for Tax Reform Foundation found, “Each positive 1 percentage point tax burden differential between states decreases the ratio of income migration into the high-tax state by 6.78 percent in a given year.”
The task force also generated two proposals for new increases or changes to the state’s tobacco and alcohol taxes. The first would increase the cigarette tax by 15 cents, raising the price to $1.30 a pack; the second would raise the cigarette tax by 50 cents, to a total of $1.65 per pack. Both proposals are problematic, as tobacco taxes are an unreliable and shrinking tax-revenue stream. Relying on this tax for any major expenditure would likely create budget problems in the future.
According to data from the U.S. Census Bureau, state revenue in 2013 from tobacco product taxes fell by 0.9 percent after a 0.5 percent reduction in 2012. The National Taxpayers Union Foundation found tobacco tax collections failed to meet initial revenue targets in 72 out of 101 recent tax increases.
A state’s tax policy should focus on generating enough revenue to cover the costs of necessary government functions with as little negative economic effect as possible. Income taxes are among the most disruptive factors affecting economic growth. Maintaining a complex income tax code imposes high administrative costs on the government and high compliance costs on businesses and individuals. Cutting the income tax would improve Arkansas’ economic competitiveness by leaving more money in the pockets of the state’s citizens and businesses to spend, save, and invest.
The following documents examine income tax reform in greater detail.
How to Bring Tax Relief and Tax Reform to Arkansas
http://www.advancearkansas.org/wp-content/uploads/2017/08/TaxBudgetReform-v5-1.pdf
In this paper from the Advance Arkansas Institute, Marjorie Greenberg outlines several tax reform proposals for the Arkansas Tax Reform and Relief Task Force.
Recommendations for the Arkansas Tax Reform and Relief Task Force
https://taxfoundation.org/recommendations-arkansas-tax-reform-relief-task-force/
In this presentation, Nicole Kaeding of the Tax Foundation outlines a tax reform plan for the Arkansas Tax Reform and Relief Task Force.
Help from Our Friends: What States Can Learn from Tax Reform Experiences across the Country
https://taxfoundation.org/state-tax-reform-lessons-2018/
Nicole Kaeding and Jeremy Horpedahl of the Tax Foundation examines several examples of successful tax reform in states like Indiana, North Carolina and Utah, and how other states could follow their successful reform models.
Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Tip Sheet: State Income Tax Reform
http://heartland.org/policy-documents/tip-sheet-state-income-tax-reform
This Policy Tip Sheet from The Heartland Institute examines state income taxes, documents economists’ judgment of them as the most destructive tax and a deterrent to economic development, and provides data showing states with no income tax perform better economically and enjoy greater job and population growth than those with higher taxes.
Rich States, Poor States
https://www.alec.org/publication/rich-states-poor-states-11th-edition/
The eleventh edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
Tax and Expenditure Limits for Long-Run Fiscal Stability
https://heartland.org/publications-resources/publications/tax-and-expenditure-limits-for-long-run-fiscal-stability
Emily Washington and Frederic Sautet of the Mercatus Center examine how states can correct for the inflexibility inherent in state expenditure systems to respect taxpayers’ desires for government services over time. Although they are not a perfect solution, binding tax and expenditure limits prevent policymakers from increasing state spending beyond voters’ willingness to pay for government services, the authors argue.
What Is the Evidence on Taxes and Growth?
https://heartland.org/publications-resources/publications/what-is-the-evidence-on-taxes-and-growth
In this Tax Foundation study, William McBride examines the effects of tax policy on economic growth. He finds the literature on the topic demonstrates long-term economic growth is, to a significant degree, a function of tax policy. If governments seek to spur investment, he writes, they should lower taxes on the earnings of capital. If they seek to increase employment, they should lower taxes on workers and the businesses which hire them. The report also includes a discussion of the effects of progressive tax systems.
Five Things to Consider Before Raising Tobacco Taxes: A Review of the Research
https://heartland.org/news-opinion/news/five-things-to-consider-before-raising-tobacco-taxes-a-review-of-the-research
This Heartland Institute Policy Brief argues, “Tax increases above current levels are not justified by appealing to the costs smokers impose on nonsmokers. Smokers already pay more than this measure could justify.”
Research & Commentary: Top Ten Reasons Not to Raise Tobacco Taxes
https://heartland.org/publications-resources/publications/research–commentary-top-ten-reasons-not-to-raise-tobacco-taxes
John Nothdurft of The Heartland Institute argues targeted tax increases serve only to put sound fiscal policies and real budget reforms on the public policy backburner. Legislators concerned about the public health effects of tobacco should encourage the use of readily available smoking cessation products and services instead of supporting bad tax policy.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, the Heartland Institute government relations director, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
