Arkansas House advances another tax cut, phasing out the ‘throwback rule’

UPDATE: The full House of Representatives voted unanimously in favor of House Bill 1045 on Tuesday at about 7:40 p.m.

State representatives on Tuesday voted to phase out the state’s so-called “throwback rule.”

The rule is an obscure tax policy that requires multi-state corporations based in Arkansas to report income from other states where revenue from product sales are not taxable, thus “throwing back” the tax liability to Arkansas.

This “nowhere income” is typically not taxed in the states where the buyer resides because those states lack jurisdiction to tax it due to federal thresholds.

Federal law prohibits states from taxing income from the sales of tangible personal property — physical property that can be used, moved or touched — when the seller does not have a presence in the state.

Whether a company has a presence in a state is complicated, but generally, it’s a question of whether the business has an office or employees in the state.

So if a company makes a sale from its home office in Arkansas to a buyer in another state and ships the product by mail or commercial carrier, the income from that sale would not be taxed by the state where the buyer is located. Under the throwback rule, Arkansas can tax that income.

Arkansas is one of 22 states with such a rule.

The goal of throwback rules is to ensure that 100% of a corporation’s income is taxed somewhere — whether in its home state or the state where the sale occurs. The problem is that some states don’t have a throwback rule, making them more attractive for prospective businesses, according to opponents of such rules.

House Bill 1045 would reduce the amount of taxes owed by the affected business by phasing out the throwback rule over seven years, starting in 2024. Sponsor Rep. Howard M. Beaty, Jr., R-Crossett, told the House Committee on Revenue and Tax the rule discourages businesses from locating in Arkansas and its repeal would spur economic development and job creation.

The bill was supported by officials from the Arkansas State Chamber of Commerce and state Economic Development Commission.

The committee passed the bill on a voice vote.

The Arkansas Department of Finance and Administration projects the tax cut will cost $10.6 million in revenue in fiscal 2024, which starts July 1. Department officials expect the hit to state revenues to gradually increase to $74 million in lost general revenue once the rule is completely eliminated in 2030.

Repealing the throwback rule was one of the recommendations made by the Arkansas Tax Reform and Relief Legislative Task Force in 2018.

Income tax

Beaty’s bill is one of several tax cuts making their way through the Legislature during what’s expected to be the final week of the 2023 session.

The House Revenue and Tax Committee on Tuesday also advanced Senate Bill 596, a $124-million income tax cut targeting Arkansas’ top individual and corporate income tax rates.

The legislation reduces the top individual income tax rate from 4.9% to 4.7% — a cut budget officials project will slash state revenue by $100 million annually.

The bill also decreases the top corporate income tax rate by two percentage points to 5.1% — a $24 million-a-year hit to the state budget.

The cuts would start in the 2023 tax year, impacting tax filings in 2024. Bill sponsor Sen. Jonathan Dismang, R-Searcy, said that taxpayers would soon begin seeing the effects of the legislation once passed because it would reduce the amount of state tax withholdings employers take off the top of paychecks.

Arkansans earning more than $24,300 a year, roughly 1.1 million people in the state, would see some tax reduction from SB 596, according to state officials.

Critics have noted that the benefits to Arkansans on the lower end of the tax tables affected would be small while wealthier individuals would reap most of the benefits.

An analysis from the Institute on Taxation and Economic Policy published by Arkansas Advocates for Children and Families, which opposes the legislation, estimates that 80% of the cuts would go to the top 20% of earners in the state.

The bill has already been approved by the Senate and goes next to the House for final legislative approval.