Just hours after getting final approval from the Arkansas Legislature, Gov. Asa Hutchinson on Thursday signed into law the acceleration of tax cuts and a grant program to help schools improve safety.
At the end of the 2022 fiscal year in June, the state reported a budget surplus of $1.6 billion which prompted Hutchinson to call the special session. He has said the session would be used to provide tax relief for Arkansans struggling with inflation.
"This tax relief package that has just been enacted takes over $400 million from the state coffers and puts it in individual Arkansan's pockets," Hutchinson said. "That is a transfer of wealth from the government to the taxpayer, and it could not come at a more important time.”
With the governor signing the tax cuts into law, the top individual tax rate will drop to 4.9%. According to the governor, the tax is now the lowest in state history. When he took office, it was 7%, the highest since first being imposed in 1929.
“In my inaugural address in 2015, I said one of my top priorities was to be more competitive in our tax rate, particularly in the individual income tax rate,” Hutchinson said.
According to the National Conference of State Legislatures, Arkansas is one of 11 states to cut income taxes this year.
At the bill signing ceremony, Hutchinson thanked Rep. Joe Jett, R-Success, and Sen. Jonathan Dismang, R-Beebe, for sponsoring the legislation and getting it through both chambers. Dismang said the income tax cut was needed given that several surrounding states have no state income tax.
“It’s West Memphis, it’s Texarkana, it’s all of the communities surrounded by our border communities that are having to compete with business opportunities across state lines that are being taxed at 0%,” Dismang said. “We need to be competitive, we owe it to our citizens and I think this… it doesn't get us where we need to be but it gets us a step closer.”
According to the Tax Foundation, lowering the state income tax to 4.9% gives Arkansas the fifth highest personal income tax among its border states.
Income tax rate for Arkansas’ border states:
- Texas: no state income tax
- Tennessee: no state income tax
- Louisiana: 4.25%
- Oklahoma: 4.75%
- Mississippi: 5%
- Missouri: 5.4%
The legislation signed by Hutchinson will lower the corporate income tax to 5.3%. The legislation also increased the tax deductible, known as Section 179, used by businesses for equipment to match federal law. For low and middle income earners, a $150 to $300 dollar income tax credit is included.
In addition to tax cuts, the governor approved setting aside $50 million to fund a grant program schools can use to improve safety.
"When parents drop their children off at school, they want to have confidence their children are going to be safe," Hutchinson said. "This $50 million grant program for local school districts will allow schools to implement some of the one-time recommendations that come out of the School Safety Commission."
Details of the programs will be decided at a later date. The Arkansas Department of Education will set the rules and guidelines which will have to be approved by the Arkansas Legislative Council. Lawmakers are wanting to incorporate information from the Arkansas School Safety Commission’s final report due in October.
Implementation of tax cuts
Scott Hardin, spokesperson for the Department of Finance and Administration (DF&A), said the state will adjust payroll withholding tables to account for the tax rate being lowered to 4.9%. Witholdings are the amount of money an employer deducts from their employees’ paycheck and sends to the government, according to Investopedia.
Hardin said the department will let the 80,000-plus employers in the state know of the changes to withholdings.
“By early fall, these changes will be incorporated and Arkansans will see paychecks increase. Additionally, taxpayers will continue to benefit when tax returns are filed in early 2023 [for tax year 2022],” Hardin said in an email. “The 4.9% top rate acceleration will result in more than $295 million remaining in the pockets of Arkansans over the next year.”
Hardin said the $150 tax credit for individuals and $300 for those filing jointly will result in another $156 million for taxpayers when they file their 2022 tax returns.
Final approval by the legislature
The bill to accelerate tax cuts easily won approval in the Arkansas Legislature on Thursday, wrapping up a three-day special session.
Members of the House and Senate cast final votes approving of the package, which accelerates reductions in the corporate and top individual income tax rates.
While no debate was heard in the House on the tax cuts, some lawmakers did attempt to extend the session to consider teacher pay raises. Rep. David Tollett, R-Marvell, who also serves as a school superintendent in southeast Arkansas, said the state continues to lose teachers because of low pay.
“We’ve fallen behind. You don’t have to look at an adequacy report to see that the other states’ starting salaries are higher than Arkansas. Whether we do it now or we wait, I hope that this body will make the commitment to not just give teacher raises, but to put teachers’ salaries at a competitive level with the states that are around us,” Tollett said.
House Speaker Matthew Shepherd, R-El Dorado, argued the state has already increased education funding and will hope to boost teacher salaries next year following the results of an ongoing adequacy study.
“Long before anybody this summer mentioned teacher raises, before the governor ever proposed anything, our education committees were already starting the work on educational adequacy, which includes teacher pay,” Shepherd said. “It’s unfortunate that… just a year ago in 2021, we passed the largest percentage increase in educational funding in the past 15 years. And we’ve increased that funding every year, at least in the last number of years.”
Democrats, the governor and some Republicans had supported increasing teacher pay in this week’s special session, though the majority of lawmakers said they prefer to wait for the results of an ongoing educational adequacy study. Tollett said the wait is unnecessary since lawmakers on Thursday also voted to approve funding for a school safety grant program.
“When I became a legislator I was told, ‘let processes play out.’ In other words, let the process of adequacy play out, let whatever process play out before we make appropriations. Yet we just voted, pretty much unanimously, to approve $50 million for school safety that’s not going to go to every school without letting the process play out,” Tollett said.
Without debate and voting along party lines, the Arkansas Senate approved acceleration of tax cuts.
Lawmakers will return to the state Capitol next year for a regular legislative session. Hutchinson, who is term-limited, said he is confident that the legislature will address teacher pay at that time.
“I’m glad the issue is raised, it's been debated and I think it’ll strengthen that case and the action next year,” Hutchinson said.
Three candidates are running to take Hutchinson’s spot as governor — Republican Sarah Sanders, Democrat Chris Jones and Libertarian Ricky Dale Harrington.
