Reduce State Income Tax Rates

The following chart prepared by the Federation of State Tax Administrators shows that the Arkansas state income tax rate (top bracket) is higher than the six states that share its border:

North Carolina (7.75%) is the only state in the region with a higher rate.

Current Arkansas policy punishes middle-class households. They pay the top 7% rate starting at $32,600, though “the taxes are twice the tax imposed on half the income” for joint returns, according to the Federation.  Middle-class households in Arkansas should not be punished for living on the wrong side of the state line.

There are two ways to correct this problem.  The number of tax brackets could be reduced, with lower rates in all remaining brackets.  Or the number of brackets could remain the same with lower rates.  The Policy Foundation, in 1998, after a three-year study, recommended Arkansas state income tax rates should be reduced over a multi-year period.  The highest bracket should be cut from 7 to 6.5%, while the lowest could be reduced from 1.0 to 0.5%.

Leaving Money on the Table

Current Arkansas policy provides a special tax table for low-income taxpayers to reduce their payments.  But some members of this group are not taking advantage of the federal Earned Income Tax Credit (EITC), a refundable tax credit.  These Arkansans, in sum, are leaving money on the table.  A public affairs campaign, led by high-profile Arkansans and centered on the Delta region is one way to correct this problem of EITC nonparticipation.

Recommendation

∙         Arkansas state income tax rates should be reduced over a multi-year period.

The Federation of State Tax Administrators: http://www.taxadmin.org/fta/rate/ind_inc.pdf