The Arkansas General Assembly concluded its 2019 session after accomplishing one of its key priorities, tax reform. After two years of intense debate and study, the Natural State has passed a series of tax reforms to improve the competitiveness of the state’s tax code.
Individual Income Tax Reform
The General Assembly pushed through its third phase of individual income tax cuts. Following reductions in 2015 and 2017, the 2019 General Assembly lowered tax rates for individuals with income above $79,300 in income. The top income tax rate will fall from 6.9 percent to 5.9 percent in 2021 and the six brackets will consolidate into three (although the three sets of brackets based on income level will remain).
Corporate Income Tax Reform
Among the biggest changes to the Arkansas tax code are within the corporate income tax. 1) The corporate income tax rate will drop from 6.5 percent to 6.2 percent in 2021, followed by another decrease to 5.9 percent in 2022; 2) the apportionment factor is changing from a double-weighted sales approach to a single-sales factor; and 3) the net operating loss carryforward period is being extended from five years to 10 years. The state seemed poised to repeal its throwback rule, but that was dropped at the last moment due to revenue concerns.
Sales Tax Reform
Arkansas also worked to harmonize its sales tax code with the U.S. Supreme Court’s ruling in South Dakota v. Wayfair. Already a member of the Streamlined Sales Tax Agreement, the state had less work to do than many other states, but Arkansas did codify the remaining components of the Wayfair checklist. The state will now require remote collection by sellers with more than $100,000 in sales or 200 transactions. Arkansas does go beyond South Dakota by also requiring marketplace sellers (such as third-party sellers using the Amazon platform) to also collect sales taxes in some cases. Arkansas also cleaned up several of its sales tax exemptions, ensuring that they are properly targeted on business-to-business transactions and not individual consumption.
The state also took a big step forward by raising its gas tax. The state created a new wholesale tax on gasoline and diesel at a rate of 1.6 percent and 2.9 percent, respectively. This is equivalent to a 3 cent-per-gallon gas tax increase. The state also created a new fee for electric and hybrid vehicles. Additionally, the state is sending voters a constitutional amendment to permanently extend a temporary sales tax increase to fund infrastructure. Originally passed in 2012, the ½ cent sales tax generates almost $300 million a year in revenue for infrastructure projects. The part to be approved by voters represented about three-quarters of the overall highway-funding package that the governor proposed.
Tax Expenditure Review
One of the least reported, but important, reforms advanced in Arkansas is a now regular process for quantifying and reviewing the state’s tax expenditures. Prior to this legislature, Arkansas reviewed its expenditures on an ad-hoc basis, often going years between updates. Prior to the task force’s work, the most recent list of sales tax exemptions dated to 2012. Now, the Department of Finance and Administration will prepare biennial reports on each tax expenditure, including the information about the costs, distribution, and impact of each expenditure.
The state has also made some administrative changes to its franchise tax. The tax will now be administered by the Department of Finance and Administration, instead of the Secretary of State.
Preventing Bad Ideas
Finally, the General Assembly also prevented a few bad items from taking hold. The state briefly debated raising its cigarette tax and creating a new tax on vapor products. It also considered a flawed proposal to create a pass-through entity tax to allow businesses to game the new federal, state, and local taxes paid deduction cap.
Many of these recommendations come directly from our 2016 book on the state’s tax code as well as our frequent testimony to the Arkansas Tax Reform and Relief Task Force. Both authors presented on multiple occasions to guide the thinking of the task force as it considered tax reform proposals in Arkansas. Arkansas’s diligent study of the issue has paid off with comprehensive tax reform in the Natural State.
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