Sanders, Arkansas Legislature enact income tax cuts on final day of special session

Arkansas lawmakers on Thursday once again slashed the state’s top income tax rate after debate over whether the relief should more precisely target the state’s lower- and middle-income citizens.

The Arkansas House voted to enact the cuts for the state’s top earning individuals and businesses and create a one-time, $150 tax credit shortly before adjourning this week’s four-day special session. 

Gov. Sarah Huckabee Sanders, who called legislators to Little Rock this week, quickly signed the cuts into law.

“If you’re a business owner looking to relocate or a young family looking for a new place to settle down, moving to Arkansas has never been better,” Sanders said at a Thursday bill signing ceremony.

The income tax reduction is the latest in a series of cuts enacted since 2015 when Republicans took majorities in both chambers of the General Assembly and Governor’s Mansion. 

Calls for a special session began after the state ended fiscal 2023 on June 30 with a $1.16 billion surplus.

The legislation passed comfortably in both chambers, with only Democrats objecting over what types of Arkansans will most benefit from the changes. A better approach, House Minority Leader Rep. Tippi McCullough, D-Little Rock, suggested, would be to make the $150 credit permanent.

Republicans have said Arkansas must continue reducing taxes to remain economically competitive with neighboring Tennessee and Texas, which do not levy state income taxes. Attracting new businesses and job creators to the state will have a “trickle down” effect, they’ve argued.

“I’ve heard the narrative that rich people get the benefit of the tax cut, and those on the lower income brackets only get a one-time, $150 tax credit,” said House sponsor Rep. Les Eaves, R-Searcy. “That’s just simply not true… They are also beneficiaries of the reduced rate.”

Arkansas’ top rate begins to kick in for those who earn more than $24,300 annually — about 1.1 million taxpayers — but critics of the plan have pointed out that the greatest share of savings go to the upper class.

An analysis by the Institute on Taxation and Economic Policy, a progressive think tank, concluded that roughly 70% of the proposed benefit of SB 8 will go to the wealthiest 20% of Arkansas households – those with average annual incomes of $264,000.

For example, someone who earns $1.6 million a year will receive an average tax cut of $3,409, while households making an average of $52,000 a year will see a $35 tax cut, according to the institute.

The Arkansas special session tax cuts explained

Rep. Andrew Collins, D-Little Rock, said the Legislature used to give equal attention to the upper, middle and lower class when trimming the state income tax, but consecutive tax cuts have primarily benefited the upper class, leaving lower earners with savings “you can hardly take your family out to dinner” on.

Other critics of the plan have pointed to the more than $1.6 billion in personal income tax cuts the General Assembly has enacted since 2014 while continuing to rank at the bottom in the U.S. when it comes to a number of state services. 

“Consistently, Arkansas has ranked at either the bottom, or near the bottom, of several measures of child well-being,” said Keesa Smith, executive director of Arkansas Advocates for Children and Families. “We’re told there’s not enough in the state budget to give raises to state employees who provide needed services, or to expand high-quality PreK or afterschool programs. At the same time, we’ve cut more than a billion dollars from the budget that could be used to fund all of these critical measures.”

Republicans have disagreed, saying services and revenues have remained high.

“We’ve cut taxes time and time again, and we’ve not seen a dip in the level of services we provide,” Rep. Aaron Pilkington, R-Knoxville, said.

In all, the tax cuts will cost $248.5 million in state revenue this fiscal year, which ends June 30, 2024.

Once the tax credit sunsets next year, the permanent income tax rate change will cost the state $184.5 million a year.

In concert with SB 8, the Legislature also created a new reserve fund, transferring the $710 million remaining from last year’s billion-dollar surplus. 

“That can be used, if we need it, to backfill [the budget] if we have cut taxes too much. Frankly, I don’t think we have,” Eaves said.