Arkansas Gov. Asa Hutchinson announced his intention recently to call a special session for legislators this fall to examine proposals to reduce state income-tax rates.
The idea is timely. Last June, the National Bureau of Economic Research in Cambridge determined the economy peaked last February, ending a record U.S. expansion that began in mid-2009.
Payroll employment, the broadest state-level indicator, expanded most in regional states without an income tax: Texas (25.7 percent) and Florida (25.6 percent). They topped the U.S. (16.4 percent) average, U.S. Bureau of Labor Statistics data show. Arkansas' jobs creation rate (11.3 percent) trailed the U.S. It also trailed the national average in the preceding expansion (November 2001-December 2007).
Tax rates are not the only economic development factor. Others are infrastructure (I-40 at Memphis is a powerful reminder); a skilled work force and educational system; and a non-arbitrary regulatory climate.
The governor's announcement is a reminder tax rates are a factor.
Critics object to phasing out the income tax, arguing it would weaken Arkansas' fiscal position. A review of fiscal proposals in recent decades show three major tax cuts have been enacted since 1999. These reduced capital gains, grocery, and, more recently, income-tax rates. Each passed with bipartisan support.
Act 1005 of 1999 (sponsor: Sen. Jim Hill, D-Nashville) reduced the capital gains tax, with support from members of both major parties. Act 110 of 2007 (Sen. Bobby Glover, D-Carlisle) cut the grocery tax, and passed chambers unanimously.
Act 22 of 2015 (Sen. Jonathan Dismang, R-Beebe) cut income taxes for middle-class Arkansans. Two "no" votes were recorded. Act 78 of 2017 (Sen. Jim Hendren, I-Gravette) reduced low-income rates. No opposing votes were cast. Act 182 of 2019 (Dismang and Rep. Joe Jett, R-Success) cut rates for other Arkansans, with only five dissenters in the Senate and 14 in the House. These acts reduced the top rate from 7.0 to 5.9 percent.
They did not weaken the state's fiscal position. The current-year surplus exceeds $700 million, though some of this is artificial and the result of federal stimulus.
Arkansas' top rate is lower than 20 states, Federation of Tax Administrators data shows. These are California (12.3 percent); Hawaii (11.0); New Jersey (10.75); Oregon (9.9); Minnesota (9.85); New York (8.82); Vermont (8.75); Iowa (8.53); Arizona (8.0); Wisconsin (7.65); Maine (7.15); South Carolina (7.0); Connecticut (6.99); Idaho (6.925); Montana (6.9); Nebraska (6.84); Delaware (6.6); West Virginia (6.5); Louisiana (6.0); and Rhode Island (5.99).
The surplus means the top rate can be reduced to 4.9 percent over a multi-year period, placing Arkansas ahead of 14 other states: New Mexico (5.9); Georgia, Maryland, Virginia (5.75 percent); Kansas (5.7 percent); Missouri (5.4); North Carolina (5.25 percent); Alabama, Kentucky, Massachusetts, Mississippi, Oklahoma (5.0); and Illinois and Utah (4.95).
Such a move would mean Arkansas had dropped from the top third of states, in terms of rates, to the lowest third in a decade.
Greg Kaza is executive director of the Arkansas Policy Foundation, a think tank founded in 1995 in Little Rock.