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Research and Commentary: Arkansas Governor Looking to Defy Trend of Increasing Taxes with Tax Cuts in New Budget Proposal

November 25, 2020

Governor Asa Hutchinson is breaking 2020 ideological norms by proposing tax cuts in the upcoming biennium budget as the legislative session approaches in Arkansas.

As state legislative sessions approach, many elected officials are turning their sights towards the first agenda item when legislatures convene: state budgets. The 2021 legislative sessions will be particularly unique following the coronavirus-related downturn and an unprecedented amount of special sessions that were called to address struggling state economies across the nation. Arkansas is no exception. Gov. Asa Hutchinson recently unveiled his proposals regarding the state budget and taxes for the upcoming session.

With an expected $240 million budgetary surplus, Hutchinson has outlined proposals that would alter the state’s tax brackets, which would make Arkansas a more competitive state for relief from ever-increasing tax burdens that are occurring in many states, such as California, Illinois, and New York. 

First, Hutchinson would reduce the top individual income tax rate for new residents to 4.9 percent for the first five years of residency. This is an attempt to recruit young professionals to the Arkansas workforce while incentivizing the technology and manufacturing industry to consider Arkansas as a serious contender for a place to relocate, or launch a new business. Furthermore, this is also aimed at luring retirees to the Natural State. 

This proposal has already received steady backlash from many in the state legislature, who claim that their constituents will not back tax cuts for new residents alone. However, Hutchinson retorts their concerns with a long-term plan to eventually lower the income tax for all Arkansans. This is a pro-growth plan dependent on the basic economic principle that follows if more jobs and taxpayers are brought into the state. While new residents' income tax will be reduced for the first five years, overall, the plan would still increase the overall tax base, giving the state the revenue required to eventually plan a comprehensive income tax relief for all Arkansas residents. 

Currently, the top tax rate is scheduled to fall from 6.9 percent to 5.9 percent on January 1, 2021, for Arkansas residents with the 5.9 Tax Plan that was signed into law on February 19, 2019. This plan was designed to simplify Arkansas’ current six-rate upper-income bracket into a four-rate bracket of 2 percent, 4 percent, 5.9 percent, and 6.6 percent. 

Second, Hutchinson’s proposal calls for a reduction of sales taxes on used vehicles priced less than $10,000 from the current 6.5 percent to 3.5 percent, providing another tax break for Arkansans. This is based on the sales of 65,716 used vehicles priced from $4,000 to $9,999 and the sales of 295,814 used vehicles priced below $4,000 in a recent year according to state Department of Finance and Administration records.

This sales tax break is aimed at helping lower-income Arkansans who live paycheck to paycheck in their pursuit to purchase a used vehicle in order to effectively get to work and contribute to the state’s economy. Furthermore, this will begin to break Arkansas away from the dangerous habit many states have of being overly reliant on sales tax revenues. According to the Tax Policy Center, in 2016, states collected $441 billion from sales taxes, accounting for 35 percent of states’ own-source general revenue showcasing how egregious reliance on sales taxes has become. 

Third, Hutchinson’s plan also includes $25 million in unspecified tax cuts from low- and middle-income residents that, according to his office, will develop with the progression of the legislature during the session. 

Overall, these proposed tax cuts will cost $25 million of the state’s surplus, however, the positive economic impact will likely continue well past the state’s biennium budget. Income taxes are directly proportional to the performance of the economy, as evidence from the past century shows.

States with high tax rates grow more slowly than states with lower taxes, after considering other control factors. A ranking of all states by their overall tax burden ultimately shows that real personal income grows more on average in the states with the lowest state and local taxes as a percent of income. 

Gov. Hutchinson and the Arkansas Legislature would do well to incentivize Americans to move to Arkansas. As aforementioned, many states with excessive tax burdens are seeing mass exoduses that are only increasing due to the fallout surrounding the COVID-19 pandemic and accompanying cumbersome lockdown orders from mostly Democratic leaders. According to the U.S. Census Bureau, net domestic out-migration from 2010 through 2019 saw 1.4 million leaving New York; 912,000 leaving California; and 865,900 leaving Illinois.

Many governors will, and have, turned towards tax hikes following the coronavirus pandemic. However, Gov. Hutchinson is showing that low-hanging tax hikes do not always need to be the option and that the economic benefits from reduced taxes are more than worth it over the long term. 

The following articles examine state income tax reform from multiple perspectives. 

Ten Principles of State Fiscal Policy

https://www.heartland.org/publications-resources/publications/ten-principles-of-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.”

Federal Tax Reform: The Impact on States

https://taxfoundation.org/federal-tax-reform-the-impact-on-states/

Nicole Kaeding and Kyle Pomerleau of the Tax Foundation examine the effect of the federal tax reform on the states and how they can use the changes to push for tax reforms of their own.

Tax Reform Moves to the States: State Revenue Implications and Reform Opportunities Following Federal Tax Reform

https://taxfoundation.org/state-conformity-federal-tax-reform/#9

This paper by Jared Walczak of the Tax discusses what options are available to states as they respond to federal tax changes. “In the wake of federal tax reform, states have a golden opportunity to move their own tax codes in a more simple, neutral, and pro-growth direction,” writes Walczak.

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.

Taxing the Rich Will Bankrupt Your State

https://www.heartland.org/publications-resources/publications/taxing-the-rich-will-bankrupt-your-state

John Nothdurft explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.

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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, our Consumer Freedom Lounge, and PolicyBot, Heartland’s free online research database.

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Author
Samantha Fillmore is a State Government Relations Manager for The Heartland Institute.
sfillmore@heartland.org @GRHeartland