Governor Hutchinson announced his individual tax cuts plan today. It is a scaled down version of the 2%-4%-5.9% plan that the Tax Reform and Relief Legislative Task Force had recommended. Essentially it retains Arkansas's unique three-bracket-schedules individual tax system and reforms the tax brackets only for the high-income bracket schedule. There are also some minor upward adjustments to the low- and middle-income bracket schedules. The 5.9% plan comes with a much-reduced fiscal impact: a $97 million reduction in revenue instead of a $192 million reduction. That could mean that the state can enact the business tax reforms needed for competitiveness sooner rather than later.
The bill is SB211. Its sponsors are the leaders of both chambers and their respective revenue and tax committees: Senators Hendren and Dismang and Representatives Shepherd and Jett. (Hendren was also the co-chair of the Tax Reform Task Force.) This bill can be expected to move quickly. The bill will need 75% supermajorities in both chambers, however, because of the flattening of rates in the upper-income bracket.
The new upper-income bracket schedule will follow the old plan closely: For 2020, 2% on the first $4,000 of income, 4% up to $8,000 of income, 5.9% up to $80,000, and 6.6% after that. For 2021, the 6.6% goes down to 5.9%, so that the top marginal rate of 5.9% kicks in at $8,000. Thus, for the highest earners Arkansas will have an almost-flat tax.
For low- and middle-income taxpayers, there are upward bracket adjustments that increase rate thresholds on the retained progressive tax bracket schedules. The top rate for the middle class bracket schedule declines to 5.9%. The income thresholds for the middle- and upper-income brackets also increase, from $21,000 to $22,000 for the low/middle divide, and from $75,000 to $79,300 for the middle/upper divide. In addition, there is a transition credit between the middle- and upper-income brackets to ensure that taxpayers just into the upper-income bracket do not face a large tax penalty.
What is absent from the plan is any change to the standard deduction. Recall that the overall structure of the 2%-4%-5.9% plan was to significantly increase the standard deduction while flattening the rates in a single, simplified 2%-4%-5.9% bracket schedule. That was a significant benefit to most low-income and middle-class taxpayers who will be taking the standard deduction for federal income tax purposes. Not increasing the Arkansas standard deduction means continued recordkeeping burdens for many middle-class taxpayers who will still need to itemize for Arkansas purposes. It also will present an enforcement challenge for the Department of Finance and Administration (DFA), which cannot rely on the Internal Revenue Service (IRS) to police itemized deductions claimed only for state tax purposes.
SB211 does not include any offsetting revenue raisers. Both Tax Cuts and Jobs Act conformity and remote sales tax legislation have previously been proposed as ways to help pay for tax cuts and reforms. (A separate bill, HB1002, has remote seller language and was amended today to add marketplace collection requirements.)
SB211 also does not include the business tax reforms recommended by the Tax Reform Task Force. Those are likely to be introduced in one or more separate bills subsequently. The much reduced fiscal impact of these individual income tax cuts would seem to leave more room to accelerate the business tax reforms that are critical to Arkansas competitiveness.