Arkansas to 4.9%: Comprehensive Tax Cut Legislation Introduced in the General Assembly Special Session

The Arkansas General Assembly reconvenes on December 7 for its Second Extraordinary Session, with a principal purpose of cutting income taxes. Identical bills SB1 (Dismang) and HB1001 (Maddox) have been filed with large majorities of both chambers signed up as cosponsors. The bills are expected to move quickly through the legislature. They will provide phased in top rate cuts, bracket harmonization yielding further relief for the middle class, and other reforms. At $500 million, it is expected to be the largest tax cut in Arkansas history.

The General Assembly had been judicious with tax cuts during the regular session this spring because of the uncertain fiscal outlook. This special session for tax cuts was planned to allow additional time for the revenue projections to materialize and also to allow fine-tuning of tax cut plans. The resulting bill provides significant tax cuts and reforms:

  1. Individual rate cuts to 4.9%: The top rate for individuals and trusts will drop from the current 5.9% to 5.5% in 2022, 5.3% in 2023, 5.1% in 2024, and 4.9% in 2025. The 2024 and 2025 tax cuts have fiscal circuit breakers: if a withdrawal from the Catastrophic Reserve Fund occurs, then subsequent rate cuts generally will be halted. (These rates will also apply for the new passthrough entity tax.)
  2. Corporate rate cuts to 5.3%: The top rate for corporations is currently 6.2% and is already scheduled to drop to 5.9% in 2022. Under this bill, the corporate rate will drop to 5.7% in 2023, 5.5% in 2024, and 5.3% in 2025. The 2024 and 2025 rate cuts have fiscal circuit breakers like those for the individual rate cuts.
  3. Bracket harmonization: Arkansas has had three separate rate tables in recent years, which had received criticism from policy experts. The bill harmonizes the low- and middle-income brackets into a standard bracket schedule, essentially giving middle class taxpayers the benefit of the slightly lower rates on what had been the low-income bracket schedule.
  4. Cliff adjustments: The threshold to jump from the new standard bracket to the upper income bracket is increased from $79,300 to $84,500. The bill also smooths the bracket adjustment amount, which prevents a sudden tax increase when a taxpayer jumps from one bracket schedule to the other.
  5. Low-income tax credit: Low-income taxpayers (generally incomes under $23,600) will receive a $60 nonrefundable tax credit, which phases out quickly through $24,700. The effect of this credit should be to "zero out" many low-income taxpayers so that no tax is owed.
  6. Standard deduction indexing: The Arkansas standard deduction will be indexed to inflation.
  7. CFAP exemption clarification: Arkansas had exempted coronavirus food assistance program (CFAP) payments during the regular session. The bill clarifies the exemption with respect to CFAP2 and provides that it will also apply to any similar future programs.
  8. Catastrophic Reserve Fund: The Long-Term Reserve Fund is renamed the Catastrophic Reserve Fund and is set at 20% of general revenues. This is intended to help restrict the use of reserve funds for only serious emergencies.

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