Legislation that would cut the state’s top individual income tax rate from 4.9% to 4.7% and the state’s top corporate income tax rate from 5.3% to 5.1%, retroactive to Jan. 1, 2023, zipped through the Arkansas Senate on Monday.
Twenty-nine Senate Republicans and Democratic Sen. Fred Love of Little Rock voted 30-0 to send Senate Bill 549 by Sen. Jonathan Dismang, R-Searcy, to the House of Representatives for further consideration. Four Democratic senators voted present and another Democratic senator didn’t vote on the bill.
The Senate’s approval of the legislation late Monday afternoon came after the Senate Revenue and Taxation Committee recommended approval of the bill earlier in the day. Dismang told the Senate this will allow the House Revenue and Taxation Committee to consider the bill this morning.
SB549 is the income tax cut bill that would implement an agreement between Republican Gov. Sarah Huckabee Sanders and legislative leaders announced Thursday.
Dismang told the Senate Revenue and Taxation Committee his bill is part of the Legislature’s ongoing work to reduce the state’s individual income tax rates, and the Legislature has provided substantial income tax relief to low-income and middle-income taxpayers in previous sessions.
About 1.1 million individual taxpayers with taxable income greater than $24,300 would receive a tax reduction under the bill, according to the state Department of Finance and Administration.
The bill is projected by the state Department of Finance and Administration to reduce state general revenue by $186 million in fiscal 2024 and $124 million in fiscal 2025.
The department said the revenue impact assumes that employee withholding would be adjusted by employers on or after June 1, 2023, with payments being received by the state on withholding payments after July 1, 2023, corresponding to the start of fiscal year 2024.
Dismang said the bill would reduce state general revenue more in fiscal 2024 than fiscal 2025 because it is retroactive to Jan. 1, 2023.
The top individual income tax rate of 4.7% would apply to Arkansans having more than $87,000 in net income and to their income of more than $8,800 for tax years starting on or after Jan. 1, 2023, under SB549. That top rate also would apply to Arkansans having net income up to $87,000 and their income of $24,300 to $87,000 for tax years starting on or after Jan. 1, 2023.
SB549 also recalculates the bracket adjustments based on the reduced tax rates to maintain a smooth transition between the standard income tax table and the upper-income tax table, according to the Finance Department. For tax year 2023, individuals with net taxable income of greater than or equal to $87,001 but less than $91,301 will reduce their income tax due by the appropriate bracket adjustment amount, the department said.
The top corporate income tax rate of 5.1% would apply to net income of corporations exceeding $25,000 for tax years starting on or after Jan. 1, 2023.
“We have a substantial surplus being accumulated right now and this will eat a portion of that surplus,” Dismang said.
Bruno Showers, a senior tax policy analyst for Arkansas Advocates for Children and Families, told the Senate tax committee the Institute on Taxation and Economic Policy estimates that 80% of the tax cut dollars would go to the top 20% of Arkansans, or people with net incomes of at least $110,000 a year.
Under the bill, about 400,000 Arkansans would not receive an individual income tax cut, including many elderly and disabled people and others on fixed income, and they are hurt by the high inflation rate and the state’s relatively high sales tax, he said.
Showers said funds that would go for tax cuts under this bill could be used to improve the state’s early childhood education, address the rising cost of raising children, and modestly expand Medicaid coverage to address the high rate of maternal mortality.
“Instead of another round of tax cuts … to the already well-off, we just think that that revenue could be used to address some of those long-standing issues of our state, so that’s why we oppose this legislation,” he said.
Dismang said he expects the Senate tax committee will consider a tax cut bill from the House that would phase out the “throwback rule” relating to business income.
“We have had issues with various industries that have either contemplated leaving or have not settled in Arkansas because of what we have for the throwback,” he said.
An impact statement from the state Department of Finance and Administration on the amended version of House Bill 1045 by Rep. Howard Beaty, R-Crossett, was not available late Monday afternoon. The bill would phase out the throwback rule over several years.
Sanders, who was sworn in Jan. 10 as governor, said last week that “As long as we continue to have some of the highest tax rates in the region, the simple truth is that the talent, the families, and the businesses we create will leave our state for greener pastures.”
The Republican governor said she made a campaign pledge to responsibly cut income tax rates and she is delivering on that promise. With Texas and Tennessee not having state income taxes, Arkansas has to continue to work toward wiping the income tax off the books, she said.
Four months ago, the state’s top corporate income tax rate dropped from 5.9% t0 5.3% on Jan. 1, 2023.
The 0.6% reduction in the state’s top corporate income tax rate was the result of former Gov. Asa Hutchinson and the Legislature’s enactment of measures in the Aug. 9-11 special session that also accelerated the reduction of the state’s top individual income tax rate from 5.5% to 4.9%, retroactive to Jan. 1, 2022.
The tax cut measures enacted in the August special session also granted a temporary nonrefundable income tax credit of $150 for individual taxpayers with net income up to $87,000 and of $300 for married taxpayers filing jointly with net income of up to $174,000, and adopted the 2022 federal Section 179 depreciation schedule as it existed Jan. 1, 2022, which provides an income tax deduction for the expensing of certain property.
The measures were projected by the finance department to collectively reduce state general revenue by $500.1 million in fiscal 2023 that ends June 30, $166.1 million more in fiscal 2024 that starts July 1, $69.5 million more in fiscal 2025, $18.4 million more in fiscal 2026, and $8.4 million more in fiscal 2027, according to the finance department.
Arkansas enacted an individual income tax in 1929 with a top rate of 5%. Act 221 of 1971 increased the state’s top individual income tax rate to 7%.
Hutchinson has noted the state’s top individual income tax was 7% when he was elected as governor in 2014 and now is 4.9%.
In fiscal 2024, the finance department has projected collecting $3.6 billion in individual income taxes, $3.3 billion in sales and use taxes and $492.9 million in corporate income taxes as part of its forecast for general revenue collections of $8 billion. The department has projected individual income tax refunds of $542 million and corporate income tax refunds of $76.7 million in fiscal 2024.
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