Income Tax Relief August 2022
Earlier in August the Arkansas General Assembly approved much needed Arkansas income tax relief. Almost every Republican voted FOR the tax cuts while Democrats voted AGAINST or DID NOT VOTE (which has the same effect as voting against). Identical bills HB1002 and SB1 are now Act 1 and Act 2 of the Third Extraordinary Session 2022.
The legislation did four things:
- TEMPORARY INCOME TAX CREDIT. It created a temporary individual income tax credit for Arkansas Residents of $150 per taxpayer ($300 per couple) for the 2022 tax year. The amount of the credit starts phasing out above $87,000 of taxable income per taxpayer ($174,000 per couple). There is no credit if the taxpayer’s income is $101,001 or above ($202,001 per couple). The credit is against taxes owed and is non-refundable. You will see the credit as an increased amount in the withholding tables. Most taxpayers will get immediate relief because less withholding means increase net paychecks for the remainder of the 2022 calendar year.
- TOP INDIVIDUAL TAX RATE REDUCED. Last year the legislature passed reductions in the top individual income tax rate but much of the reduction was to be phased in over several years. The new legislation moved up the tax cuts so that the top rate is now 4.9%. This change also triggers a reduction in the withholding tables which will provide immediate relief to most taxpayers in this bracket.
- CORPORATE RATE REDUCTION. The legislation also moved up the corporate rate reduction of 5.3% to apply beginning January 1, 2023.
- DEPRECIATION PROVISION ALIGNED WITH FEDERAL. The legislation updated Arkansas’ Section 179 depreciation election to alignment with the Federal Section 179 election. The Section 179 election allows for the full depreciation (expensing) of a “qualifying asset” in the year which the asset was purchased, as opposed to expensing the cost of the asset over the estimated useful life of the asset. A “qualifying asset” generally refers to equipment or items with a depreciable life of five years. The Arkansas cap was $25,000 and the legislation adopts the federal cap of $1,000,000. This change is retroactive to January 1. 2022.
All the members of Arkansas Senate and Arkansas House of Representatives who voted for the legislation deserve much praise for this significant tax relief.
More Income Tax Relief Needed.
The focus has been on income tax but do not forget the state passed several tax increases in 2017 and 2019. Most notable was the Internet Sales Tax which Arkansas consumers now pay on item purchased from out-of-state sellers. It is likely the Internet Sales tax and the passage of other taxes for specific spending instead of using general revenues contributed significantly to the $1.6 BILLION revenue surplus for the year ending June 30, 2022.[i]
In 2017 Conduit for Action listed several recommendations for tax relief including an individual income tax rate of no more than 4.9%.[ii] Although it has taken a lot longer to get to this first step than we hoped, but the recent legislation is a great start. Hopefully Arkansas legislators are already working on further income tax relief legislation for introduction in the regular legislative session next year.
Arkansas is still a high tax state and is still a high income tax state. Before this tax cut Arkansas’ top income rate for individuals was higher than all six surrounding states: Louisiana, Mississippi, Missouri, Oklahoma, Tennessee, and Texas.[iii] With this legislation the rate is now better than in Mississippi and Missouri, but the rate is only temporarily better than Mississippi. The Mississippi individual tax rate is scheduled to drop below the Arkansas rate in 2024. The Mississippi rate is scheduled to decrease to 4.7 percent in 2024, 4.4 percent in 2025, and 4 percent in 2026.[iv]
If Arkansas fails to pass further income tax relief the Arkansas rate will be higher than five of the six surrounding states in 2024 and being better than one of our neighboring states assumes Missouri does not wise up and reduce its rate.
This is how Arkansas’ top individual income tax rate compares to the surrounding states:
- AR 9%
- LA 25%
- MS 0% (4.7 percent in 2024, 4.4 percent in 2025, and 4 percent in 2026 )
- MO 4%
- OK 75%
- TN NONE
- TX NONE
Another problem Arkansas has in competing with neighboring states is Tennessee and Texas do not have an individual income tax. In August 2021 Arkansas’s Attorney General Leslie Rutledge said she was organizing a petition drive to put the issue of eliminating the individual income tax on the ballot in November 2022 but that effort does not appear to have gotten of the ground.[v]
Completely eliminating the Arkansas individual income tax is a big goal. Perhaps the next step should be to lower the Arkansas rate below that of the surrounding states that tax individual income (which is currently Louisiana with a rate of 4.25% and in 2026 will be Mississippi with a rate of 4%).
[i] State surplus seen climbing to $1.6B, Democrat-Gazette, July 4, 2022