Improved position
Tax cut potent fiscal conservatism
The recent reduction of state income-tax rates is the latest chapter in a multi-decade effort by fiscal conservatives to advance pro-growth economic policies and improve Arkansas’ competitive position versus other states.
The tax cut reduces the top individual rate from its current 5.9 percent to 5.5 percent (2022), 5.3 percent (2023) and 4.9 percent (2025) if the state achieves revenue goals. These fiscal triggers are prudent because the state, unlike Washington, D.C., must operate with a balanced budget.
It also improves Arkansas’ competitive position. Prior to the action, Arkansas’ 5.9 percent rate was fourth-highest in the 12-state Southeast region. A reduction to 4.9 percent would give Arkansas the third-lowest rate, behind only Florida and Tennessee. Neither have income taxes. It also moves Arkansas’ rates from second-highest to second-lowest among border states such as Texas, another state without an income tax.
The leadership of Gov. Asa Hutchinson and state legislators were crucial to the tax cut. Two years ago, Hutchinson advanced the largest state government reorganization in nearly 50 years. The idea was rooted in the market-based idea of fiscal conservatism, which seeks to identify cost-savings and efficiencies in government operations.
This month’s tax cut shares the same fiscal conservative roots. Governor Hutchinson’s statements demonstrate that he understands Arkansas’ economy faces national and global competition. Arkansas is not “competing with itself,” a once-prevalent idea that has diminished in the 21st century as local capital has fled to states without income taxes.
Fiscal conservatives acknowledge that economic decision-makers consider variables such as tax rates; a skilled workforce and the educational system; infrastructure; a non-arbitrary regulatory environment; and others that vary by state.
They also contend markets respond to these variables. In the early 1970s, the Arkansas income-tax rate increased from 5 percent to 7 percent. Capital flight to Texas led to Texarkana’s border-city income-tax exemption. In the 1990s, the Democrat-Gazette reported cases of entrepreneurs fleeing to states without income taxes.
In 1998, the Murphy Commission, a Policy Foundation project, examined these issues. French Hill, today a U.S. House member, noted, “Taxes do matter when seeking higher economic growth.”
Nonfarm payroll employment is the broadest economic indicator at the state level. In the 21st century, U.S. Bureau of Labor Statistics data show employment growth in Florida, Tennessee and Texas exceeding U.S. and Arkansas averages through multiple business cycles.
The panel also observed that “savings and investment should not be deterred by non-competitive levels of taxation on families attempting to save, to buy a house, start a business or send a child to school.” Nor should tax policy “significantly favor one type of business or professional endeavor over another.”
Arkansas’ tax cut did not occur in a vacuum. This year, four border states also reduced their income-tax rates. In sum, Arkansas fiscal conservatives have effectively advanced government reorganization and tax cuts tied to prudent fiscal triggers. Other policymakers are acting. Will they be as effective?