LITTLE ROCK — Arkansas is overdue for comprehensive tax reform, according to a report released Monday.
The report by the Washington, D.C.-based Tax Foundation and the Arkansas Center for Research in Economics at the University of Central Arkansas states that although the last several years have seen isolated changes to the state’s tax code, Arkansas has not taken a broad approach to tax reform since 1971.
The groups released the report in advance of a legislative session set to begin in January in which changes to the tax code are expected to be debated. Gov. Asa Hutchinson has said he will ask for a $50 million income tax cut that would take effect in fiscal 2019, but he has not yet revealed details of his proposal.
“Arkansas: The Road Map to Reform” states that Arkansans believe the tax code is too complex and that it favors some businesses over others.
Arkansas has the 14th highest individual income tax in the nation, the 24th highest corporate income tax in the nation and the third highest combined state and local sales taxes in the nation, according to the report.
“No. 1 and No. 2 are Tennessee and Louisiana, so regionally (Arkansas’ sales tax is) a bit more competitive than other taxes,” Nicole Kaeding of the nonprofit Tax Foundation said during a news conference Monday at the state Capitol announcing the report’s release.
Arkansas’ property taxes are among the lowest in the nation, but the overall tax burden on Arkansans is the 17th highest, according to the report.
Kaeding said 10.1 percent of personal income in Arkansas goes to state and local taxes, compared to the national average of 9.9 percent.
The report offers three tax reform options:
Option A calls for repealing the current individual and corporate income tax rate schedules and transitioning to a flat tax rate of 4.95 percent.
Option B calls for repealing the current three individual income tax rate schedules and transitioning to one rate schedule with rates of 0, 2, 4 and 5 percent. It also calls for repealing the current corporate income tax rate schedule and transitioning to a two-bracket system with a top rate of 5 percent.
Option C calls for repealing the current three individual income tax rate schedules and transitioning t0 one rate schedule with rates of 0, 2, 3, 4, 5 and 6 percent. It also calls for repealing the current corporate income tax rate schedule and transitioning to a three-bracket system with a top rate of 6 percent.
Other recommendation in the report include:
— Exempt the sales tax on business expenses such as machinery and repair parts.
— Repeal sales tax credits such as InvestArk and TaxBack.
— Expand the sales tax base to include items such as newspapers, coin-operated car washes, durable medical equipment, personal transportation services, gasoline, self-storage, prescription drugs and membership fees for private clubs.
— Eliminate the state’s inventory and franchise taxes.
— Impose a temporary moratorium on local sales tax elections.
House Speaker Jeremy Gillam, R-Judsonia, said during the news conference he believed the report would be helpful for legislators and said there is “a lot of enthusiasm” for the recommendations in the report.
“I’m looking forward to us being able to take this information and build upon it and work with the Tax Foundation and others as we really try to make sure that Arkansas is in a competitive atmosphere when it comes to our tax structure in all areas,” he said.
Last week, House Democrats secured a majority of seats on the House Revenue and Taxation Committee. Some Democratic legislators have said they want to see an earned income tax credit targeting low- and middle-income working families as part of any tax reform package.