Experts Agree: Arkansas Needs a Sales Tax Revamp

The tax task force focused on sales taxes again this week. They were visited by two national tax experts* who both agreed on some key points for tax change in our state:

  • Broadening the sales tax base is a good idea for modernizing the Arkansas tax code. As our economy changes, so must our tax system. Arkansas, like the rest of the United States, has been shifting gradually from a “goods” economy to a “services” economy. Because services are less likely to be taxed (we tax a coffee cup but not your lawn service or accountant), that means our sales tax base is shrinking. When the base shrinks, we must choose between a higher sales tax or less money to pay for critical public services like education and public safety. Arkansas should broaden the sales tax when possible to include the taxing of services and eliminate unnecessary exemptions. Another area of agreement: We need to be careful not to tax business inputs for economic competitiveness reasons.**
  • Sales taxes are harder on low-wage workers. If we are going to have a sales tax, we should apply it broadly and evenly. But all taxes have drawbacks. The primary drawback to sales taxes is that low-wage workers bear a disproportionate burden. The best way to offset that is to implement a targeted tax credit, such as a state earned income tax credit or EITC. Both visiting experts also agreed that this type of tax credit would be better for helping low-wage workers than a blanket grocery tax reduction, which benefits all income ranges. Arkansas Advocates for Children and Families would be open to reconsidering the phase-out of the grocery tax, but only if the revenue savings were put into a targeted EITC for working families.

So, that is where the agreement lies. Essentially, it is past time to modernize our sales tax. That modernization should involve careful expansion of the sales tax base. Where opinions begin to diverge is what to do with the extra tax revenue that would be generated from changes to the sales tax. Arkansas should use that money to improve our tax system with an EITC or to beef up underfunded budget areas like child welfare and pre-K. Unfortunately, some groups will try to use any new sales tax revenue (which will hit low-income families the hardest) to fund tax breaks for the wealthiest earners.

If we expanded the sales tax base without also creating a state EITC to offset the sales tax burden, we would be shifting our tax structure in the wrong direction (toward low-wage workers). Any extra revenue should be put into a state EITC or put back into the budget to fund critical programs. The worst-case scenario would be to use the extra revenue from the sales tax to fund budget-busting tax cuts for upper-income earners. Unfortunately, this is an idea with legs. The EITC is a better way to help the hardworking Arkansas families who need it most.

The next task force meetings are at the Capitol on April 19 and 20. The task force will be in high gear because of a looming September 1 deadline for their final recommendations. This final report will influence the tax debate in the upcoming regular session, which starts in January 2019. During the regular session, there is a flurry of thousands of bills, and legislators do not have the luxury of months of distraction-free debate and investigation on a topic. This makes the Tax Reform and Relief Task Force a unique opportunity to shape the tax debate in Arkansas.

*Lisa Christensen Gee from the Institute on Tax and Economic Policy and Nicole Kaeding from the Tax Foundation.

**For more on business inputs see: https://www.cbpp.org/research/state-budget-and-tax/expanding-sales-taxation-of-services-options-and-issues