Taxing the proceeds generated by wealth  — such as capital gains, dividends, and passive business income —  through a new Wealth Proceeds Tax is a simple way Arkansas could raise hundreds of millions in new revenue and improve the fairness of the tax system, according to a new report by the Institute on Taxation and Economic Policy.

Arkansas has long underinvested in policies and programs supporting children in the state. Potential new uses for this revenue include child and child care tax credits, universal pre-K and free school lunch, and wrap-around educational services such as afterschool and summer programs. A state wealth proceeds tax would make a tremendous difference for Arkansas families, lifting many children out of dangerous poverty.

Key Findings of the Report

• Substantial revenue potential: A 4% Wealth Proceeds Tax modeled on federal rules could raise more than $390 million a year for Arkansas; an enhanced version would raise $460 million a year.
• Taxes the wealthy, not the middle class: About 84% of the new revenue would come from households with incomes over $1 million; only 2.6% of taxpayers in Arkansas would owe any wealth proceeds tax at all.
• Fairer treatment of wealth and work: Most of the income generated by wealth currently faces effective federal tax rates roughly 40% lower than wages and salaries. A state Wealth Proceeds Tax would help correct this imbalance.
• Simple to implement: Arkansas could piggyback on federal tax filings, minimizing administrative costs for both taxpayers and the Arkansas Department of Finance and Administration.

Creating a state Wealth Proceeds Tax is simple. Arkansas could build upon the federal Net Investment Income Tax (NIIT), which is a 3.8% levy on the investment returns of high-income households first implemented in 2013. Using the NIIT as a starting point allows states to design new taxes with minimal administrative burden and maximum impact.

Nationwide, nearly three-quarters of all Wealth Proceeds Tax revenue would come from millionaires, and households with incomes under $250,000 for married couples (or $200,000 for single filers) would not pay the tax.

Taxing wealth-derived income would improve tax fairness and provide a new, stable revenue source for Arkansas.