On December 9, 2021, Arkansas Governor Asa Hutchinson (R) signed into law SB 1, which will provide the largest tax cut in state history and reform the state tax code.  When the law goes into full effect in 2025, the individual income tax rate will drop from 5.9 percent to 4.9 percent while the corporate tax rate will decline from 5.7 percent to 5.3 percent if the state meets revenue triggers included in the bill.

This tax reform comes on the heels of several other tax reform efforts undertaken by Gov. Hutchinson.  Arkansas has reduced taxes every two years since Gov. Hutchinson took office in 2015.  The first tax cut, which took effect in 2016, reduced the income tax rate from 6 percent to 5 percent for individuals earning between $21,000 and $75,000.  The rate on taxable income between $35,000 and $75,000 was reduced from 7 percent to 6 percent.  In 2017, Gov. Hutchinson led reforms to lower taxes for individuals with incomes below $21,000 per year and removed 120,000 low-income residents from the tax rolls.  The state’s 2019 tax cut package replaced the six-rate upper income bracket with a four-rate bracket ranging from 2 percent to 6 percent.  The legislation also lowered the top marginal tax rate from 6.6 percent to 5.9 percent in 2021.

Arkansas’s reforms come at a time when the state is experiencing a budget surplus and expects to see continued growth in the years to come.  After the 2019 tax reforms went into effect in 2021, the state saw an increase in revenue that helped to provide a $945 million surplus, giving the state a total surplus of $1.315 billion between fiscal years 2020 and 2021.  The state’s reserve fund now stands at a strong $1.22 billion.  Tax Foundation Senior Policy Analyst Timothy Vermeer noted that the tax reforms, “will encourage in-migration and ha[ve] the potential to generate income, sales, property, and excise tax revenue for years to come.”

The success of tax reforms demonstrates the benefits of lower taxes.  When states take steps to lessen the tax burden on individuals and corporations, they open the door to greater opportunity and success.  Further, the decision to use a budget surplus created by a flood of federal funds through the COVID-19 relief bills shows a willingness to take a taxpayer-first approach rather than leave residents on the hook for unsustainable and costly new programs.  More states should follow Arkansas’s example and reduce income taxes to create a more welcoming environment for residents and businesses alike.