They say nothing is certain but death and taxes, but perhaps there is a close third: Wherever there are Republicans, tax cuts will be on the agenda.
With the party benefiting from a supermajority in the Natural State, it is no surprise that traditional Republican policies of tax cuts and reduced government spending are already making headway under Gov. Sarah Huckabee Sanders.
“Gov. Sanders is proud to have lowered Arkansas’ income tax by over 20 percent in just two years and is continuing to work to responsibly phase out the state’s income tax, including through Arkansas Forward, her initiative to cut government spending and improve efficiency that has already identified at least $300 million in taxpayer savings,” reads a statement provided by the governor’s office to Arkansas Money & Politics.
Arkansas is not alone in its pursuit of reducing and ultimately eliminating the state income tax. Mississippi Gov. Tate Reeves this year signed the Build Up Mississippi Act outlining a plan to phase out the state’s income tax, and, in 2022, Kentucky passed House Bill 8 to establish savings and revenue goals that would trigger reduced income tax rates with the possibility of eventually doing away with the tax entirely.
Joseph Wood, chairman of the Republican Party of Arkansas, said he views the eventual repeal of Arkansas’ state income tax as a sure thing.
Joseph Wood
“You can see it right before us,” he said. “More has happened in the past couple years than has happened in, obviously, decades — all the talk, if you will — so the talk is meshing up very well with the walk.”
He added that lawmakers are taking a conservative approach to implementation by making cuts gradually after assessing surpluses in the budget.
“The legislators, the governor are obviously being measured and are obviously making sure all the T’s are crossed, I’s are dotted,” he said. “You constantly are taking a check of what’s going on inside your state, let alone what’s surrounding you.”
House Minority Leader Rep. Andrew Collins (D-Little Rock) is not so sure the state will eliminate its income tax — at least, not anytime soon.
Rep. Andrew Collins
“There have been people that talk about getting rid of the income tax, but I think we’re a long way from actually doing that here in Arkansas,” he said. “I think that is more a popular talking point than something we’re realistically going to move toward in the next few years. I would be shocked if we actually got rid of the income tax during Gov. Sanders’ term in office.”
The vast majority of states still have an income tax, he said, adding that those that do not have an income tax often have a specialized industry that can be taxed to make up for it, such as gambling in Nevada and oil and gas in Texas and Alaska.
With no such industry to replace the revenue, he said, Arkansas would likely have to make up the difference by having high sales taxes like income-tax-free neighbor Tennessee.
“Arkansas already has one of the highest sales taxes in the country, so doubling it would put us off the charts,” he said. “Also, the sales tax is more regressive than the income tax because it hits low-income people hardest, so getting rid of the income tax to increase the sales tax would be a bad policy choice if you believe in opportunity and economic mobility.”
Michael Pakko, chief economist at the Arkansas Economic Development Institute at the University of Arkansas at Little Rock, said although discussions about eliminating the income tax may be popular politically, tax cuts do not unleash enough economic growth potential to pay for themselves. He noted that the state income tax makes up roughly half of the gross general revenues of the state budget.
Michael Pakko
“If you’re going to eliminate that source of revenue for the government, you’ve either got to cut the budget, the general revenue budget at least, by about 50 percent or bring in more taxes, substitute more sales taxes or property taxes for the lost revenue of the income tax,” he said. “That’s about it for a state government. You can’t go out and borrow, though the federal government can.”
He pointed to a massive tax cut passed by Kansas in 2012 that led to a downgrade of the state’s bond rating, a budget crisis and the eventual repeal of the bill in 2017.
“Initially, the shortfall in revenue was made up by just cutting spending to the bone, and that turned out to be very politically unpopular,” he said. “That’s why, ultimately, tax rates were reinstated to where they were before.”
One way to ensure a successful tax cut is by already having an economic surplus, he said. Fortunately, Arkansas has such a surplus, which is one reason why the most recent tax cuts have not necessitated a reduction in government spending.
“Of course, the danger is in the future, when the budget gets tighter. Then we’re left without that revenue source that would have been there had the tax rates remained in place,” he added, “but that’s, I guess, in our current circumstances, a perspective issue that needs to be kept in mind but not a pressing issue with policy.”
Just as the federal government has emphasized reviewing government spending to eliminate waste and fraud, so, too, is the state examining its services to identify redundancies and implement savings opportunities such as centralizing purchasing to make better use of economies of scale, Wood said.
“I don’t think the services will continue to be what they are,” he added. “Assessing and making sure that we’re not doing things that our private sector is doing, people in our nonprofits are doing — we don’t have to double and triple up on some of the same types of work if we can make those available, so the services, obviously, have to be revealed and looked at. What are we doing, and are they critically necessary, and if not, then should we be doing it?”
He added that he expects a safety net to remain in place for those in need, as well as critical services such as criminal justice. Wood said he also expects growth in the state economy to be taken into account when evaluating future tax cuts.
“I see it as a combination of both businesses developing and growing, flourishing and then obviously goods and services being bought and generating that much more revenue for the state on top of, obviously, the reduction,” he said.
Collins was skeptical of the idea that simply reducing unnecessary expenses would be enough to make up for lost revenue while still maintaining adequate funding for schools, law enforcement and other government services.
“If we were to get rid of $4.5 billion from our budget, which is about what the income tax represents, that’s getting deep into the core functions of government,” he said. “That’s not trimming the fat. That’s really gutting what we provide, so I think the more likely scenario would be that if the income tax went away, other taxes would be increased, and I’m not sure that’s really better than where we are right now.”
He added that he disagrees with the recent tax cuts, which have been targeted toward the state’s wealthiest residents.
“Those cuts have been disproportionately focused on top earners,” he said, “and so while I don’t particularly want to see high taxes on anyone, I do think that when we cut for top earners, more of the burden shifts to the middle class and lower income Arkansans, so I would have liked to have seen different tax relief that was a little bit more oriented toward helping middle-class Arkansans.”
Wood said the income tax cuts help Arkansas stay competitive when it comes to attracting both business and talent. With abundant natural resources and opportunities for outdoor recreation, eliminating the income tax, when coupled with improvements to schools and public safety, would make Arkansas one of the most attractive places in the U.S. to relocate a business, he said.
“If you are in a place that’s high tax, you can move to a state like Arkansas and see a big reduction in your cost of doing business, and so I think it becomes more business friendly when you can eliminate state income tax,” he said. “You can now do creative things with your employee benefit packages, etc. Obviously, overall, just recruitment in general is going to be a big plus when you do something like that, and the economy, overall, starts to flourish that much more like it’s doing here in Arkansas.”
Eliminating the income tax also provides Arkansans with a pay raise, he added, allowing them to keep more of their hard-earned dollars, rather than entrusting them to a government that might not spend that money in ways taxpayers support.
“Those dollars that were being expended on going to the state, now you can keep a little more of those dollars,” he said. “Whether it’s sending your kids to certain schools or special activities, what have you, you as the taxpayer get a chance to have more say with your dollars, and that’s a win.”
Collins said he expects another round of tax breaks for top earners is forthcoming, but the timing is tricky for any major cuts. Not only is the state government putting money into school vouchers and a new prison, but it is likely that the state will see significant reductions in federal support for education and health care.
“I think that makes it challenging to get rid of our main source of state revenue or even significantly reduce it,” he said.
He added that although he is unlikely to support any additional income tax cuts for the top brackets, he might support some income tax relief targeted toward low-income and middle-class taxpayers.
“We’re always looking for ways to save taxpayers money. We also want to make sure that when we do so, we’re doing it responsibly and we’re doing it in a way that is fair,” he said. “We already have a high sales tax burden in Arkansas. I think we have the third-highest sales tax burden in the entire country, so moving away from the income tax and toward more sales tax is going to put even more of that regressive burden on low-income people and middle-class people, so I think it’s unlikely that I, personally, would support further reductions in the top income tax rate.”
Pakko said he also anticipates another round of tax cuts in the near future.
“I think the current administration would be open to another opportunity to cut marginal tax rates even further, so I would think that if our surpluses continue to come in positive, they might find a way to implement that kind of an additional change,” he said.
He noted that although he is incredulous that that state could eliminate its income tax entirely, given that the tax makes up half the state’s revenue, there are ways of looking at the budget that show the state income tax to be a smaller component.
“For instance, that 50 percent of the state’s gross general revenues doesn’t take off refunds,” he said. “Now, if you’re going to look at the impact of revenue taxes and the overall state’s budget, you really ought to take into account those refunds.”
That brings the proportion of gross general revenue brought in by the state income tax to 45 percent, rather than 50, he said.
“Then there’s a whole other class of special revenues that don’t even appear in the revenue stabilization law framework that the legislature goes through every year,” he said. “Those are primarily sales taxes and some other excise taxes.”
Factoring that revenue into the budget pool brings the state income tax figure down to about 40 percent, he said, and factoring in intergovernmental revenue, namely federal grants, brings that number down even further to about a third of the state’s revenue.
“There, maybe, it sounds a little bit more doable to cut spending by a third, but then again, those different categories that I’ve just described are not all completely flexible,” he said. “Some are there because of clauses in the constitution and things that you can’t easily change, can’t easily rearrange, so the budget process we have is what we’re stuck with, at least for the time being anyway.”
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