Since 2014, the state has cut the individual income tax rates seven times. We are now expecting a special legislative session next week to implement another round of cuts. If the session results in a further reduction of the top personal income tax rate to 3.9%, the state will be giving away an alarming $2.08 billion annually (when comparing this new tax structure to the 2014 tax structure, corrected for inflation).
The Governor and many legislators are quick to respond to any criticism concerning the give-away of this important revenue by saying that we continue to generate a budget surplus each year. But now we’ve learned that the Governor is asking agency leaders to identify additional budget cuts. It’s easy to generate a budget surplus if you consistently underestimate the amount of expected revenue and stop investing in programs and policies that help Arkansans and our state thrive. A simple analogy: Many Arkansas families would also generate surpluses if they stopped paying their mortgages or rent. This is of course a questionable strategy, and one that will certainly backfire. As will the continual tax cuts as our elected officials fail to meet the needs of Arkansans.
It is important to identify who benefits from these repeated rounds of income tax cuts. Legislators like to say that all Arkansans benefit. While this is technically true, the benefits are far from equitable. Households in the top 5% income group, making more than $236,000 annually, are receiving 44% of the cut. Those in the top 20% — making $120,000 or more — are receiving over 70% of the tax cut. Said another way, the top 1% is benefiting twice as much as someone in the middle 20%, and almost 8 times as much as someone in the bottom 20%.
Whether comparing average tax change in dollars or tax change as a percentage of income, the $2 billion in tax cuts since 2014 have chiefly benefited the wealthiest Arkansans:
| Household Incomes | Bottom 20% | Second 20% | Third 20% | Fourth 20% | Next 15% | Next 4% | Top 1% |
|---|---|---|---|---|---|---|---|
| Average Income | $11,800 | $30,400 | $51,100 | $89,500 | $154,600 | $335,900 | $1,683,600 |
| Average Tax Change | -$32 | -$266 | -$515 | -$1,198 | -$2,361 | -$5,927 | -$34,992 |
| Tax Change as % of Income | -0.27% | -0.87% | -1.01% | -1.34% | -1.53% | -1.76% | -2.08% |
The results are also inequitable when we examine this analysis — comparing the 2014 tax structure with the new proposed 4% top income tax rate — by race and ethnicity:
| White | Black or African American | Asian | Hispanic | |
|---|---|---|---|---|
| Average Tax Change | -$1,512 | -$725 | -$2,811 | -$789 |
| Tax Change as % of Income | -1.51% | -1.31% | -1.81% | -1.39% |
Here’s one final statistic that should alarm all of us. Around 27% of households in Arkansas make under $35,000 annually. This means that more than 1 out of 4 households in our state make less in a year than the top 1% save in taxes thanks to the tax cuts enacted by our governors and legislatures since 2014.
*Analysis by the Institute on Taxation and Economic Policy, June 2024.