The 2019 state legislative session is developing into a “perfect storm” for the Arkansas’s low-income taxpayers. The Governor’s personal income tax cut for high-income earners (SB211) has received most of the attention this session. It has already passed the legislature and has been signed into law. But other tax changes are on the horizon, including property tax cuts, corporate income tax cuts, the collection of online sales taxes, and increases in sales tax on fuel. Collectively, these changes would make the tax system less fair for low-income families. Several would reduce revenue for the state budget and undermine Arkansas’s ability to make critical investments in Arkansas children and families.
The most impactful piece of tax legislation this session will be the personal income tax cut for the wealthy contained in SB211. That bill will cut the top marginal rate from 6.9% to 5.9% for high income earners. AACF previously released an in-depth analysis of the bill. There are two things you need to know about the impact of SB211. First, nearly all the benefits will go to high income earners. According to the Institute on Taxation and Economic Policy (ITEP), seventy percent (70%) of the tax cut will go to the top one percent of Arkansas taxpayers making more than $456,000. Ninety percent (90%) of the benefits will go to the top five percent of taxpayers making more than $205,000. The bill will provide no relief for the bottom 40% of taxpayers and only token relief for middle-income families (average tax cut of $6). This state tax cut comes on top of the 2017 federal tax bill passed by the U.S. Congress, which has proved to be an economic boon for high income earners and corporations.
The other thing you should know about SB211 is that it will have a major impact on the state budget and reduce potential funding for programs serving children and families. The Arkansas Department of Finance and Administration (DFA) estimates the annual revenue loss from the new law eventually will be $97 million. ITEP, which analyzed the bill using more updated income estimates, found the cost of the bill will be much higher at $157 million annually when fully phased in.
Corporate tax cuts may also be coming this session. The report issued last year by the Arkansas Legislative Task Force on Tax Reform and Tax Relief contained recommendations for major corporate income tax cuts. It’s unclear which of these proposals will be introduced and passed this session. But they are likely coming. Like the personal income tax cut that has already passed, the benefits of corporate income tax cuts would go mostly to wealthy corporate shareholders. Many of these shareholders likely don’t even live in Arkansas. Again, low-income taxpayers are unlikely to see any benefits from these cuts.
But the “perfect storm” doesn’t stop there. Another tax change being proposed is HB1321, which would increase the homestead property tax credit from $350 to $375. The benefits of that tax cut would go mainly to middle and upper-income homeowners. Why? Most low-income taxpayers won’t benefit from the increase in the credit because: (1) they are much less likely to own their own homes than middle and upper-income taxpayers and (2) Arkansas does not have a renter’s credit that provides tax relief for renters (twenty-two other states currently have credits for renters). The bill wouldn’t have an impact on state general revenue because the credit is paid for out of a dedicated fund for property tax relief. It would, however, worsen tax fairness for the low-income taxpayers who won’t benefit from the change.
Other proposals are a mixed bag, like a plan to increase funding for highways and roads. The plan would raise $414 million a year. The largest part of the plan — $205 million – would ask the voters to permanently extend the state’s half-cent sales tax for highways that is scheduled to expire in 2023. Other tax measures in the highway funding plan are outlined in SB336. That bill would create a new wholesales sales tax on motor fuel (which would be passed on to consumers); increase the gas tax by 3 cents a gallon; and increase the diesel fuel tax by 6 cents a gallon. The new wholesale tax on motor fuel would be indexed but would grow by no more than 0.10 of a cent a year. The other part of the plan would include at least $35 million that would be generated by casino tax revenue or other sources including a restricted reserve fund or possibly general revenue.
There is widespread agreement that Arkansas’s roads and highways are in poor shape and need to be upgraded if the state is to compete economically. The issue is who will bear the burden of paying for highways and roads. On one level, it makes sense to use fuel related taxes to pay for highways because those taxes are tied to those who use our roads and highways. However, there is no denying that low-income taxpayers would bear a disproportionate share of the burden under this proposal. Sales and fuel taxes are inherently regressive, meaning they impose a larger burden for low-income taxpayers relative to their income.
Finally, there is the internet sales tax bill (HB1002), which would require out-of-state sellers to collect sales taxes due on online purchases by Arkansas consumers. While Arkansas’s consumers already owe these taxes under existing law, there has been no real mechanism to force out-of-state sellers to collect and remit these taxes to the State of Arkansas. A recent court decision has opened the door for states to change that. HB1002, if passed this session, would force sellers to begin collecting the tax from Arkansas consumers and remitting the revenue to the State. Given the growing prevalence of online purchases by consumers everywhere, this bill is critical to maintaining the integrity of the Arkansas sales tax base and the ability to generate the revenue needed make investments in our children and families. But like the sales and fuel tax increases in the highway funding bill, the collection of online sales taxes would place a greater burden on low-income taxpayers unless something is done to offset their regressive nature.
Some policymakers argue that low-income taxpayers were taken care of during the 2017 legislative session through a personal income tax cut that cut taxes for taxpayers with annual incomes of less than $21,000. The reality is that the impact of the 2017 tax cut was very limited in its scope. It only reduced or eliminated their personal income tax burden, which was a very small part of their state and local tax burden. It did nothing to offset their much higher sales tax burden. Even after the 2017 tax cut for low-income taxpayers, they still had a much higher overall state and local tax burden. According to a 2018 ITEP study, the bottom 40 percent of Arkansas taxpayers still had a much higher state and local tax burden, relative to their income, than the top 1 percent of taxpayers. Going into the 2019 session, the bottom 40 percent of taxpayer paid over 11.3% percent of their income in all state and local taxes, compared to just 6.9 percent for the state’s highest income earners. This gap in fairness will only get worse given the tax changes likely to be adopted during the 2019 session.
If all these measures are adopted, the 2019 legislative session could forever be known as the “perfect storm” that hit Arkansas’s low-income taxpayers. Arkansas has failed to adopt the one policy change that could offset the impact of these tax changes and improve the fairness of the state and local tax system for our low-income working families: creating a state earned income tax credit (EITC). AACF has written extensively about the need for a state earned income tax credit (EITC) and its many benefits. A state EITC has strong support among Arkansas voters, with nearly 80 percent of voters supporting it. The question is not if Arkansas should create a state EITC, but when it will do it. The time is now.