The Arkansas House of Representatives and Senate have passed new legislation that would lower the personal income tax rate in the Natural State. House Bill 1002 has successfully made its way through both chambers and is awaiting signature from Gov. Asa Hutchinson (R).
HB 1002 would reduce Arkansas income taxes, accelerate future reduction in Arkansas income taxes, adopt federal law regarding the depreciation and expensing of property, and create an inflationary relief income-tax credit for certain taxpayers.
The legislation also includes an emergency clause which states that Arkansas has a net general revenue surplus in excess of $1,600,000,000 for the 2022 fiscal year and asserts that the state is collecting too much tax revenue. The clause urges that future tax cuts be expedited to reduce the rate of tax collection, in order to return money to Arkansans during a period of high inflation and economic distress.
Throughout legislative sessions in 2022, many elected officials have turned their sights towards state revenue and budgets. Legislative sessions have been particularly unique following the COVID-19 economic downturn, which has been exacerbated by the highest level of inflation in 40 years.
These economic worries have galvanized many legislatures and governors to advocate for harmful economic policies, such as increases in income taxes and minimum wage hikes. HB 1002 attempts to buck this trend by lowering the personal income tax rate. This move would incentivize Arkansans and small business owners to remain in the Natural State, instead of relocating to places like Florida or Texas, which have no state income taxes.
Inversely, high state income taxes motivate productive residents to move to other states with more favorable tax codes, and these wealthy taxpayers transport their income, capital, and tax revenues with them.
Examples of this phenomenon have occurred in New York and other states with excessive state income tax burdens. 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 U.S. Census Bureau, net domestic out-migration from 2010 through 2019 saw 1.4 million leaving New York; 912,000 deserting California; and 865,900 fleeing Illinois.
Moreover, the rosy revenue projections from higher tax rates have fallen short in states where they have been imposed. Relying on a steep income tax rate with a small base is historically unreliable and can lead to large budget deficits. It is evident that lawmakers in the Arkansas House of Representatives and Senate understand this economic fallacy when they voted to pass HB 1002.
House Bill 1002 would likely spur Americans to consider moving to Arkansas, effectively expanding the tax base and adding to the Natural State’s growing economy.
Personal income and corporate tax hikes are generally considered to be the most destructive economic policies because they deter production, stifle innovation, and disincentivize investment. Recent studies show 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 dissuading high-income earners and new capital from moving into a state. A study by the Americans for Tax Reform Foundation found, “Each positive 1 percentage point tax burden differential between states decreases the ratio of income migration into the high-tax state by 6.78 percent in a given year.”
States with high tax rates grow more slowly than states with lower taxes, after considering other control factors. A ranking of all states by their overall tax burden ultimately shows that real personal income grows more on average in the states with the lowest state and local taxes as a percentage of income.
Keeping all of this in mind, it would behoove Gov. Hutchinson to carefully consider the positive economic growth that would likely occur after lowering the state’s personal income tax rate. As the country enters into a recession, tax hikes are not a viable economic solution, particularly increased income taxes. All states should follow the lead of House Bill 1002 instead of turning to destructive and unreliable tax hikes.
The following articles provide more information about state income tax and the associated economic effects.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Federal Tax Reform: The Impact on States
Nicole Kaeding and Kyle Pomerleau of the Tax Foundation examine the effect of the federal tax reform on the states and how they can use the changes to push for tax reforms of their own.
Tax Reform Moves to the States: State Revenue Implications and Reform Opportunities Following Federal Tax Reform
This paper by Jared Walczak of the Tax Foundation discusses what options are available to states as they respond to federal tax changes. “In the wake of federal tax reform, states have a golden opportunity to move their own tax codes in a more simple, neutral, and pro-growth direction,” writes Walczak.
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 states with no income tax perform better economically and enjoy greater job and population growth than those with higher taxes.
Taxing the Rich Will Bankrupt Your State
John Nothdurft explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.
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