It’s All About the Context: A Closer Look at Arkansas’s Income Tax

The tax task force is rounding out its extensive review of the Arkansas tax code this week by looking at one of the most contentious tax topics these days: income taxes. So, are we a high-income-tax state or a low-income-tax state? In Arkansas, it depends a lot on how much money you make, and how you make it. For example, retirement income is exempt for the first $6,000; military retirement income is completely exempt; there are border-city exemptions if you work in Texarkana; and capital gains income from things like stocks or real estate sales is taxed much more leniently than wage income. To sort this all out, you have to look at the tax code as a whole.

Our state tax revenue does not depend as much on individual income taxes as other states do (see slides from the presentation below). Additionally, the per capita income tax collection in our state is right in the middle for states in our region. These measures, however, don’t give a good idea of how different income groups are affected. When it comes to income taxes, it is important to put everything in context. Income taxes are just one element of the tax code, so just looking at individual rates can be extremely misleading.

States that rely heavily on sales taxes (which hurt low-income workers more) tend to ask less in income tax from high-income earners. This is the case in Arkansas, where the lower income tax rate for low-wage workers is more than made up for by our dependency on sales taxes. In other words, people working low-wage jobs still get hit hard by taxes in Arkansas, just not as much by income taxes. Also, our “high” top marginal rates for upper-income earners is mitigated by, among other things, our very low property and capital gains tax rates (which primarily benefit these same well-off individuals).

Here, context matters. If you put all types of state and local taxes together, and then break it down by income group, you’ll see that Arkansas asks low and middle-income workers to pay about twice the rate in state and local taxes as the top 1 percent. There is a problem, but it certainly isn’t that we are over-taxing upper-income earners in our state.

A solution to this would be a state Earned Income Tax Credit. The EITC was mentioned at this week’s Tax Task Force meeting, and it received at least qualified praise from legislators on both sides of the aisle. Why? Because it is a pro-work, anti-poverty tax tool that reverses the effects of our sales-tax-heavy tax code without being as costly as a tax-rate reduction. In short, it’s a cheap way to help our workforce and make our tax code more progressive. Let’s hope it catches on.

If you missed all of the other meetings so far, you can check out all 180 pages of the interim report put together by the Task Force’s consultant group here. Or, you can just take a look at AACF’s summary blogs for a quick review. Those blogs cover the goals of the task force, recommendations for an EITC, sales taxes, and interstate competition.

The full presentations, which include historical context and comparisons with other states are available online. Click here to see the presentation on individual income taxes and here for corporate income taxes. The next meeting is open to the public, and is scheduled for 9 a.m., Monday, February 5at the State Capitol. More information on meeting times can be found on the Arkansas Legislative website.