In its past two regular sessions the Arkansas legislature has lowered state income tax rates and also made significant reductions in other types of state taxes.
In preparation for the next regular session, in 2019, a panel of legislators is working on further tax reductions. The Senate chairman of the group has said that further reductions of about $100 million a year should be a starting point for income tax reductions.
The Tax Reform and Relief Legislative Task Force has 16 members – eight from the Senate and eight from the House of Representatives. Its duty is to recommend changes in the state tax code that will create jobs and make Arkansas more attractive to businesses. Also, it will recommend reforms that will modernize and simplify the tax code, while making it fairer for all taxpaying entities within the state.
During a series of early November meetings at the Capitol, the task force concentrated on the structure of the Arkansas sales tax and our various excise taxes. In December the task force is scheduled to focus on property taxes and will bring in experts from other states that have recently enacted tax reforms.
Sales taxes are one of the three major sources of revenue for Arkansas state government, along with individual and corporate income taxes. The task force has contracted with a consultant to research our tax structure and compare it with other states.
The research indicates that Arkansas is very near the national average in the percentage of state revenue that is generated by sales taxes. Nationally, the average is 47.5 percent and in Arkansas it is 48.6 percent.
Sales taxes fall within the category of taxes on consumption. One of the main arguments against over reliance on sales taxes is that they can be regressive, meaning that poor people pay a higher proportion of their income on sales taxes than do people in upper-income brackets.
On the positive side, sales taxes are economically efficient because almost everyone pays them. They are not collected on two major generators of economic growth, which are capital investment and people’s savings. They do not create a disincentive that dampens people’s motivations to work and earn more.
The Arkansas sales tax was adopted in 1935 and the current state rate is 6.5 percent. In 1981 the legislature granted cities and counties the authority to hold elections on locally applied sales taxes. Voters in more than 200 of the state’s 500 municipalities, and in 73 of our 75 counties, have approved local option sales taxes.
Arkansas, like most states, has approved exemptions from the sales tax for specific industries or products. Groceries and medications are commonly exempted, either partially or totally.
Arkansas exempts motor fuels from sales taxes, which lowered state revenue by $380 million in 2011. However, motorists and truckers paid even more in taxes when they filled their tanks. In 2011 motor fuels taxes on gas and diesel generated $444 million.
Excise taxes are collected on specific items or activities, such as tobacco, alcohol, tourism and gaming. Nationally, excise taxes generate 16.2 percent of states’ revenues, on average. In Arkansas they generate 13.5 percent of state revenue, or more than $1.3 billion a year.