The last two years have been historic ones for the Arkansas tax and budget system. The Arkansas General Assembly enacted nearly $500 million in tax increases to plug a Medicaid budget shortfall for vulnerable populations and to reform K-12 education in response to an Arkansas Supreme Court mandate in the Lake View school-funding case.

Among the major state tax changes Arkansas adopted during the 2003 and 2004 legislative sessions:

• The working taxpayer credit (a personal income tax credit) was repealed for everyone except for families who file Arkansas income taxes using the low-income tax tables.
• A 3 percent state income surcharge was enacted for individuals and corporations.
• The state sales tax was increased by 7/8s of a percent to 6 percent and the sales tax base was expanded to include a variety of small business services, such as wrecker and towing services, dry cleaning, etc.
• The cigarette tax was increased by $12.50 per 1000 cigarettes (about 25 cents per pack) and the excise tax on cigars and other tobacco products was increased by seven percent.
• The minimum corporate franchise tax was increased from $50 to $150 or $100 to $300 for those corporations and limited liability corporations paying the minimum tax.

While these changes raised much needed revenue for critical areas such as health care for low-income populations, quality pre-school for 3 and 4 year olds, and K-12 education reform, they also had major impacts on the overall fairness of the Arkansas tax system.