By “tax cut” we do not mean cutting one tax while raising other taxes, as has been the pattern in recent years. For example in 2019 politicians bragged on a couple of tax cuts but passed more in tax increases than tax cuts.
By “tax cut” we mean the total tax law changes in 2021 are likely to result in a reduction of the tax burden on Arkansans. It is long overdo.
WHY DO WE THINK 2021 MAY BRING A NET REDUCTION IN ARKANSAS TAXES?
We think 2021 may bring a net reduction in Arkansas taxes because of the unique political environment in 2021-2022.
First and foremost, is the political impact of the upcoming redistricting of legislative districts for the 2022. This political environment is likely to make Arkansas Senators and Representatives want to use 2021 to create a better record on taxes in preparation for campaigning in 2022.
Every ten years legislative boundaries change to make the districts equal in representation. Incumbents are more vulnerable after boundary changes for two reasons. An incumbent will have to convince people to vote for him who previously weren’t in his district and may not know him. Plus, with the boundary change, it is more likely a strong candidate will choose to run against an incumbent.
Redistricting also means all 35 state senator seats are up for election. Normally, only half of the seats are up for election in any election cycle because of staggered terms.
Second, Governor Hutchinson and his nephew, Senator Jim Hendren, have ambitions for higher office. They need to use 2021 to make their records on taxes look better to cover up for the tax increases they pushed in 2019.
Third, incumbents just witnessed some of their colleagues lose in the primary or general election in part because of voting for several tax increases. The old game of claiming to have cut taxes while not mentioning voting for several tax increases didn’t work for more vulnerable incumbents.
Other factors contributing to the political environment include:
- In 2019 Governor Asa Hutchinson and the legislature didn’t just shift the burden from one tax to another, they increased the overall tax burden on Arkansans by passing more in tax increases than tax cuts. Now that they are taking more out of taxpayer pockets it should be easier to give some of it back, without having to cut bloated state budgets to fund a tax cut.
- Arkansas is a high tax state and in recent years has moved closer to the top of the list of high tax states. Most legislators want to see Arkansas at least start dropping down that embarrassing list.
- Arkansans are watching Congress to see if Democrats will be able to repeal the Trump tax cuts and possibly add more taxes. With concern about federal taxes, people will also be more concerned about state taxes. The Republican super majority in the Arkansas legislature will not want to be compared to Congressional Democrats.
IF PASSED, WHEN WILL A TAX CUT BE EFFECTIVE?
Don’t get too excited about getting a tax cut in 2021. A tax cut passed in 2021 may not come into effect for some time. A tactic Governor Hutchinson has used has been to delay tax cuts into the future while making tax increases effective immediately. For example, while some taxpayers are still waiting to receive a full income tax cut passed in 2019, tax increases such as the internet sales tax, and the gasoline and diesel fuel tax increases became effective in 2019. This tactic lets politicians have money to spend in the state budget in the current year and the loss of revenue from future cuts will be partially offset by normal revenue growth.
CHANCES LOOK BETTER BUT ARE NOT ASSURED
While the possibility of a net tax cut looks more favorable in 2021, it is not assured. Draconian shutdowns for COVID-19 are a real possibility. If that happens bureaucrats will be even more opposed to calls for Arkansas tax relief.
