Big Tax Cuts in Arkansas

News & Media

Little Rock returns some of its booming revenue to taxpayers.

By The Editorial Board | Dec. 19, 2021 5:57 pm ET

Arkansas Gov. Asa Hutchinson | PHOTO: KELSI BRINKMEYER/ASSOCIATED PRESS

Remember a year ago when Democrats were claiming that states needed a federal bailout to make up for a pandemic revenue drought? It wasn’t true at the time, but Congress passed some $325 billion in direct funding for states and localities in March anyway, and now most are swimming in cash. The good news is that some states are now returning some of the money to taxpayers, and the latest is Arkansas.

Gov. Asa Hutchinson recently signed legislation that reduces the top state income-tax rate to 5.5% from 5.9%, effective New Year’s Day. The rate will continue to drop in stages to 4.9% by 2025. The reform simplifies the tax code by combining the bottom two income thresholds into one that would pay a rate of 4.9%.

Lawmakers also adopted modest changes to the state’s corporate tax code. Prior tax reforms had paved the way for a corporate rate cut to 5.9% from 6.5%, and the new legislation reduces it to 5.3% by 2025.

The legislation includes the sweetener of a $60 tax credit for some 535,000 Arkansans who make less than $23,600. The state Department of Finance and Administration anticipates that some 105,000 residents will soon pay no income tax as a result. The tax credit won’t change the incentives to work or invest, but it helped members sell the economically potent cut in tax rates. Arkansas families overall can expect some $431 million in annual income tax relief.

The state closed fiscal 2021, which ended June 30, with a record revenue surplus of some $946 million. That’s more than double the previous annual record. The state’s catastrophic reserve fund is $1.2 billion, or roughly one-fifth of total state spending. The legislation allows pauses to corporate and income tax reductions if the state must dip into reserves.

Cutting taxes is prudent when revenues are booming because such eras rarely last. The alternative is passing new spending commitments that are difficult to cut when the lean years arrive, as they always do. This is how states like New York, California and Illinois are spending their federal-aid boom, and their politicians will eventually be back demanding even higher taxes to pay it.

Wiser are the 12 other states, according to the Tax Foundation’s tally, that have joined Arkansas in cutting taxes this year.

Contact & Newsletter

Fill out my online form.