Arkansas income tax rate changes explained
Governor signs bills providing “relief” for some
The Arkansas Legislature adopted a new law that is expected to provide most individual income taxpayers a reduction. (Photo by Dwain Hebda/Arkansas Advocate)
The Arkansas General Assembly last week convened in special session primarily to enact tax relief.
The law, which easily passed the House and Senate, was billed by proponents as relief for taxpayers in a time of high inflation. Several also referenced the $1.6 billion surplus the state ended with in fiscal 2022.
Opponents argued that the bill prioritized the wrong people. Instead, they said, lawmakers should have raised teacher salaries and provided stronger tax relief for the lower and middle income earners.
How did the law change?
Act 1 had four components:
- It accelerated the reduction of Arkansas’ top income tax rate to 4.9%. The General Assembly last year enacted a plan that would have decreased the state’s top income tax rate over four years until it reached 4.9% in 2025. Under the law enacted last week, the tax cut is no longer phased in, and Arkansas’ top earners will pay the new rate on 2022 income and beyond.
- It accelerated the reduction of Arkansas’ top corporate income tax to 5.3%. State lawmakers last year also approved a phased-in corporate income tax cut that would be fully implemented by 2025. Last week’s changes reduced the top corporate income tax rate imposed on both domestic and foreign corporations to 5.3% for the 2023 and following tax years. The top corporate income tax rate for this year remains unchanged at 5.9%.
- It created a non-refundable $150 income tax credit for individuals with net incomes up to $87,000 a year. The credit gradually decreases for those earning up to $101,000 annually. For married couples, the credit is $300 for joint, net incomes up to $174,000. Similarly, the credit is phased out for couples earning up to $202,000. The “inflationary relief” tax credit is only for 2022 income taxes, and you must be an Arkansas resident for all of 2022.
- It matched Arkansas’ tax rules with federal law on income tax deductions for expensing certain properties. The change adopted 26 U.S.C. § 179 as it existed Jan. 1, allowing businesses a deduction limitation for expensing of property of $1,000,000, which has been subject to subsequent inflation adjustments. Arkansas had limited the deduction to $25,000 a year. It also allows businesses to claim the deduction for the entire price of a piece of property in the year of purchase rather than capitalizing and depreciating the asset over time.
Who benefits from these changes?
In addition to businesses, the Arkansas Department of Finance and Administration estimates more than 83% of individual income taxpayers will receive a reduction under Act 1.
Under the new law, an Arkansan with $20,000 in net taxable income will pay $208 in income taxes for 2022, saving $226 compared to 2021. That’s an effective tax rate of 1.04%
An Arkansan earning $50,000 in net taxable income will pay $1,674, or an effective rate of 3.34%, in 2022. The year-over-year savings will be $482.
An Arkansan with $100,000 in net taxable income will pay $4,711, or an effective rate of 4.71%. The year-over-year savings will be $939.
An Arkansan making $250,000 in net taxable income will pay $12,083, or an effective rate of 4.83%. The year-over-year savings will be $2,417.
How much will the changes cost the state?
The Finance Department projects $500.15 million in lost revenue in fiscal 2023, which began July 1 and ends June 30.
- Accelerating the individual income tax reduction — $295.9 million
- Accelerating corporate income tax reduction — $18.55 million
- One-time Inflationary Relief Tax Credit — $155.3 million
- Conforming to federal property expensing rules — $29.4 million
Are the state’s federal coronavirus relief funds in jeopardy?
Lawmakers from both parties expressed concerns about a federal rule that prohibits states from using American Rescue Plan funds to offset tax cuts.
Arkansas joined a federal lawsuit challenging that rule, and a judge permanently blocked the rule’s enforcement. That ruling has been appealed.
Finance Department officials don’t believe the Rescue Plan funds are at risk, even if the courts rule the regulation is lawful, because the tax cuts are not being offset directly or indirectly by federal relief. Instead, the state can afford the accelerated cuts due to increased revenue tied to inflation, among other factors.
What does this have to do with teachers’ salaries?
A handful of lawmakers from both parties wanted last week’s special session to include a proposal to give raises to Arkansas public school teachers.
Republican Gov. Asa Hutchinson, who had expressed willingness to support such a measure, declined to include it on the session’s agenda because it never gained enough traction among Republicans in the General Assembly.
Instead, GOP leaders have said they’d prefer to tackle teacher raises in next year’s regular session that begins in January. They said such action should come after the House and Senate education committees file their adequacy report, a review of the state’s education funding needs that occurs every two years.
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