Arkansas Tax Cutters

 February 11, 2019
Note: this article appeared in the Wall Street Journal, Feb. 9, 2019. To see the original article, click here.

Gov. Hutchinson wants to make his state more competitive.

Democrats around the country want to raise taxes, but Arkansas has a better idea. As Gov. Asa Hutchinson begins his second term, he and the GOP Legislature are moving to make the state more economically competitive with an ambitious tax reform.
 
The state Senate in Little Rock this week passed what would amount to the second-largest income-tax cut in Arkansas history. The proposal is especially notable because it would cut tax rates for the highest earners—households with an income of $80,500. The top marginal rate would fall over two years to 5.9% in 2021 from 6.9% today.
 
No one’s taxes would rise under the plan, and lawmakers twice cut taxes for lower earners in Mr. Hutchinson’s first term. In 2016 middle-income households saw their top marginal rate fall to 6% from 7% and now it would go to 5.9%. This year households earning less than $21,000 will pay an income-tax rate of no more than 3.4%, down from 4.4%. The grocery tax also dropped to 0.125% from 1.5%, which will save Arkansans $61 million in 2019.
 
The tax cut “is necessary because our tax rate is higher than many of our neighboring states,” says Mr. Hutchinson. “The state tax rate is one of the top considerations for a CEO who is looking to expand to another state.”
 
Each of Arkansas’s neighboring states now has a lower top marginal rate. Under the new cuts, higher-income families in Arkansas would enjoy income-tax parity with Missouri, and they would pay less than comparable taxpayers in Kentucky, Louisiana, Georgia, Kentucky and West Virginia. Texas doesn’t tax individual income, and Tennessee taxes only income from interest and dividends.
 
Businesses in Arkansas face a corporate tax rate of 6.5% on income of more than $100,000, which is part of the reason the state ranked 46th in the nation for its overall business tax climate, according to the Tax Foundation’s 2019 index. Only Connecticut, New York, California and New Jersey rank lower, which is a bad tax neighborhood. Mr. Hutchinson has asked the state’s Tax Relief and Reform Task Force to make recommendations, and already there’s talk of bringing the top marginal corporate rate down to 5.9%, too.
 
Critics will raise the specter of Kansas, which cut taxes in 2012 without restraining spending. But the Arkansas tax plan would reduce that revenue by only an estimated $97 million in a budget of $5.453 billion in fiscal 2018. A separate bill amended last week proposes a new online sales tax, which would make up some $24.5 million a year in revenue. Arkansas lawmakers may also eliminate sales-tax exemptions on magazines or limit deductions on alimony, mortgage interest or other items.
 
Since taking office, Mr. Hutchinson has used attrition to cut the number of state employees in executive agencies by more than 1,400. Mr. Hutchinson and lawmakers have also introduced legislation to reduce cabinet-level agencies to 15 from 42, which they estimate will save at least $15 million a year.
 
Many Governors lose policy momentum in their second terms, as Scott Walker did in Wisconsin. Mr. Hutchinson seems determined to be an exception.
 
Appeared in the February 9, 2019, print edition.

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