Arkansas Can Boost Opportunity and Combat Inequality by Expanding Wealth Taxes

A historically large share of the nation’s wealth is concentrated in the hands of a few, reducing opportunities for millions of Americans and reinforcing barriers that make it harder for people of color to make gains. These inequities are made worse by most state tax systems. By designing better tax policy, state lawmakers can help spread opportunity more widely and build more broadly shared prosperity.

Among the solutions on state policymakers’ lists should be expanding the taxation of assets of the very wealthy, since loopholes and other special benefits currently shield much of the value of these assets from federal, state, and local taxes, a new series of reports by the Center on Budget and Policy Priorities (CBPP) argues. Eliminating these tax advantages would shift some of the responsibility for funding critical public services and investments like schools, roads, and health care from low- and moderate-income taxpayers to those best able to pay while increasing opportunity for everyone.

How States Can Tax Wealth, which launched last week with two short Issue Briefs (listed below), explores how states can better tax wealth and high incomes to make state tax codes fairer, raise adequate funding for public services, and expand opportunity.

  • Issue Brief: State Taxes on Inherited Wealth: State taxes on inherited wealth apply only to the wealthiest individuals and are the primary state tax on wealth. But these taxes have gradually eroded, even as wealth and income have become more concentrated. States with these taxes should maintain them, and states without them should consider enacting them — or consider taxing inheritances as income. State taxes on inherited wealth are not affected by the federal estate tax. Reinstating an estate tax in Arkansas with a $1 million exemption would raise an estimated $70 million each year to fund education, health care, and other important public services.
  • Issue Brief: State Taxes on Capital Gains: Capital gains, which go overwhelmingly to the wealthiest households, receive special tax preferences in a number of states, such as a partial exemption. States with such preferences should eliminate them. There are also several ways that states can boost capital gains revenue to support investments that increase prosperity for all.

“State policymakers across the country and across the political spectrum agree that inequality and the increasing concentration of wealth is a problem,” said Elizabeth McNichol, Senior Fellow at the Center on Budget and Policy Priorities and project lead on this new series. “The good news is there are plenty of policy solutions that can improve state tax systems, raise new revenues for important public investments, and boost opportunities for workers and families striving to get ahead. Our new series can help lawmakers make smarter decisions in 2019 and beyond.”

Nationwide, the top one percent of households own roughly 40 percent of the wealth, while the bottom 90 percent of households own just 21 percent. This top-heavy structure reduces opportunity for millions of American families – particularly Black families, Latinx families, and other families of color, who have faced additional barriers to building wealth due to the legacy of historical racism and the ongoing damage from racial bias and discrimination. In Arkansas, the median net worth of white households is more than eight times that of households of color.

State and local governments largely exacerbate this disparity through the state and local tax code, which asks low- and middle-income taxpayers in most states to pay a larger share of their income in taxes than the wealthiest taxpayers.

In Arkansas, the lowest-income 20 percent of taxpayers face an average state and local tax rate (more than 50 percent higher) than the top 1 percent of households. The average effective state and local tax rate is 11.3 percent for the lowest-income 20 percent of individuals and families, 10.8 percent for the middle 20 percent, and 6.9 percent for the top 1 percent.

The tax proposals we have seen from the Governor and legislature would only exacerbate this problem. The lowest-income individuals would actually see their effective taxes go up, while the burden on the top 1 percent would be cut by 0.5 percent, down to 6.4 percent.

Improving and expanding the taxation of wealth could help bring more balance to our state’s tax code by ensuring the wealthiest families are paying their share toward building a stronger Arkansas. Better tax policies like these are an important tool for creating a state with more opportunity and more broadly shared prosperity.