Publications – Research and Commentary: Arkansas May Cut Personal Income Tax Rate During Special Session

The Arkansas House of Representatives and Senate have passed new legislation that would lower the personal income tax rate in the Natural State. Senate Bill 1 successfully made its way through both chambers (as Bill 1002)

SB 1 would reduce Arkansas income taxes, accelerate future Arkansas income tax reductions, pass a federal law regarding depreciation and expense of property, and create an income tax credit. income for some taxpayers.

Throughout the 2022 legislative sessions, many elected officials have turned to state revenues and budgets. The legislative sessions were particularly unique following the COVID-19-related economic downturn, which was exacerbated by the highest level of inflation in 40 years.

These economic concerns have prompted many legislatures and governors to advocate for harmful economic policies, such as income tax increases and minimum wage hikes. SB 1 attempts to reverse this trend by lowering the personal income tax rate. The move would encourage Arkansans and small business owners to stay in the natural state, instead of moving to places like Florida or Texas, which have no state income tax.

Conversely, high state income taxes induce productive residents to move to other states with more favorable tax codes, and these wealthy taxpayers carry their income, capital, and tax revenue with them.

Examples of this phenomenon have occurred in New York and other states where state income tax is excessive. Many of these states are experiencing mass exoduses due to the fallout surrounding the COVID-19 pandemic and accompanying lockdown orders from mostly Democratic leaders. According to the US Census Bureau, net inland emigration from 2010 to 2019 saw 1.4 million people leave New York; 912,000 deserting California; and 865,900 fleeing Illinois.

Moreover, the optimistic revenue projections resulting from the increase in tax rates have been insufficient in the states where they have been imposed. Relying on a high tax rate with a small base is historically unreliable and can lead to large budget deficits. It’s obvious that lawmakers in the Arkansas House of Representatives and Senate understood this economic fallacy when they voted to pass SB 1.

Senate Bill 1 would likely encourage Americans to consider moving to Arkansas, broadening the tax base and contributing to the growing economy of the Natural State.

Increases in personal and corporate income taxes are generally considered the most destructive economic policies because they discourage production, stifle innovation and discourage investment. Recent studies show that states with no income tax or with low income tax rates perform better economically while facilitating population growth and job creation.

On the other hand, high income taxes discourage economic development by deterring high earners and new capital from settling in a state. A study by the Americans for Tax Reform Foundation found that “every 1 percentage point difference in positive tax burden between states decreases the ratio of income migration to the high-tax state by 6.78% over the course of ‘a given year’.

High-tax states grow more slowly than low-tax states, after controlling for other controlling factors. A ranking of all states according to their overall tax burden ultimately shows that real personal income increases more on average in states where state and local taxes are lowest as a percentage of income.

With all of this in mind, it would behoove Governor Hutchinson to carefully consider any positive economic growth that would likely occur after the reduction in the state’s personal income tax rate. As the country enters a recession, tax hikes are not a viable economic solution, especially increasing income taxes. All states should follow the example of Senate Bill 1 instead of turning to destructive and unreliable tax hikes.

The following articles provide more information on state income tax and the associated economic effects.

Ten principles of state fiscal policy

https://www.heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy

The Heartland Institute provides policymakers and municipal and business leaders with a highly condensed, easy-to-read guide to the principles of state fiscal policy. The principles range from “Above all else: keep taxes low” to “Protect state employees from politics”.

Federal Tax Reform: The Impact on the States

Federal Tax Reform: The Impact on States

The Tax Foundation’s Nicole Kaeding and Kyle Pomerleau examine the effect of federal tax reform on states and how they can use the changes to push for their own tax reforms.

Tax Reform Shifts in the United States: Implications for State Revenues and Opportunities for Reform Following Federal Tax Reform

https://taxfoundation.org/state-compliance-federal-tax-reform/#9

This article by Jared Walczak of the Tax Foundation examines the options available to states when responding to federal tax changes. “In the wake of federal tax reform, states have a golden opportunity to move their own tax codes in a simpler, neutral, and growth-friendly direction,” Walczak writes.

Tip Sheet: State Income Tax Reform

http://heartland.org/policy-documents/tip-sheet-state-income-tax-reform

This Policy Tip Sheet from The Heartland Institute examines state income taxes, documents economists’ judgment of them as the most destructive tax and a deterrent to economic development, and provides data showing that states with no income tax perform better economically and enjoy greater employment and population growth than those with a higher rate. taxes.

Taxing the rich will bankrupt your state

https://www.heartland.org/publications-resources/publications/taxing-the-rich-will-bankrupt-your-state

John Nothdurft explains the drawbacks and negative consequences of “millionaire” taxes and overtaxing upper income brackets.

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Nothing in this research and commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of the Heartland Institute. For more information on this and other topics, visit the Budget & Tax News website, the Heartland Institute website, our Consumer Freedom Lounge, and PolicyBot, the free online research database of Heartland.

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