On Tax Day, a Look at How Federal Tax Changes Impact Arkansans

Taxes allow us to invest in public programs that help everyone, but recent federal tax cuts are shifting those dollars to the Arkansans who need it least. Those tax cuts are expensive–to the tune of $1.5 trillion dollars over 10 years. Nearly a third of Arkansas’s total operating budget is made up of federal revenue. This means that on top of federal budget changes, our state budget will also be forced to make cuts to things that Arkansas kids and families rely on today, like parks, community colleges, and firefighters.

Many families affected by those cuts are the same families who didn’t make enough to receive tens of thousands of dollars in tax cuts that went to top income earners in the first place. What should we do about it? A good first step would be to not make things worse with more upper-income tax cuts at the state level.

Many state taxes are “coupled” with federal laws for simplicity. This means that when federal laws change, some state laws also automatically change. But Arkansas is different. Unlike many other states, Arkansas doesn’t automatically conform to any federal tax laws.

The exception to this is through accounting (Arkansas does follow federal accounting methods). These methods were tweaked in the Trump Administration’s recent tax-cut legislation. Changes to Cash Accounting and Accrual Accounting methodology following the Federal Tax Cuts and Jobs Act (TCJA) will cost Arkansas about $10 million in revenue each year. So, except for this accounting change, federal tax laws won’t have much influence on Arkansas state tax revenue. However, Arkansas lawmakers can still elect to adopt provisions of the TCJA through state legislation.

There are several ways that the TCJA directly impacts Arkansas taxpayers (remember, this is federal tax liability, not state). The total federal tax liability in Arkansas is decreased by $1,854,000 directly because of the TCJA. But this savings is not evenly distributed. Low- and middle-income workers get the least benefit, by far.

In almost every state, the top 1 percent of earners gets a bigger share of the tax-cut benefit than the bottom 60 percent. Arkansas is no different. Arkansans making less than about $53,000 a year get only 18 percent of the benefit of the federal tax cut. The top 1 percent gets 29 percent of the federal tax cuts in our state, or about $37,000 annually. That’s about 400 times the benefit going to the lowest-income earners (people making around $13,000 a year).*

Despite the huge tax cuts the wealthiest Arkansans just received on their federal taxes, Governor Hutchinson is proposing another $180 million in state tax cuts for top earners. It’s hard to justify upper-income tax cuts in Arkansas at a time when the very wealthy already received major tax cuts from the federal government, and when revenues in our state are not covering the basic needs of kids and families.

Which basic needs is Arkansas currently neglecting? The Governor’s proposed budget for fiscal year 2019 does not come close to meeting important budget needs for children and families in pre-K, juvenile justice, afterschool and summer school programs, targeted tax relief for low-income families (like a state Earned Income Tax Credit), and adequate funding for K-12 education and facilities, to name but a few. Nor does it come close to meeting the state’s growing infrastructure needs for highways and roads.

Paying for these essentials won’t get any easier if federal funding also gets cut because of budget problems in D.C. States across the nation, not just Arkansas, should expect big changes to federally funded programs in their state. It is hard to anticipate how and where federal budget cuts will happen, but they are virtually inevitable in this environment. Arkansas simply cannot afford to make things worse with more state-level handouts to the rich.

*ITEP analysis of state impact of federal tax changes in 2018