Low- and middle-income families in Arkansas pay a far higher share of their income in state and local taxes than do the richest families in Arkansas, according to a new study by the Institute on Taxation and Economic Policy.

“Arkansas lawmakers may be forced to make difficult tax and spending decisions in the upcoming year,” said Matthew Gardner, ITEP’s executive director and lead author of the study, titled Who Pays? A Distributional Analysis of the Tax Systems in All 50 States. “They should be mindful that the Arkansas tax system already falls most heavily on the very poorest families in the state.”

Arkansas’s Tax Code: The Poor Pay More

When all Arkansas taxes are totaled up, the study found that:

• Arkansas families earning less than $15,000-the poorest fifth of Arkansas non-elderly taxpayers-pay 12 percent of their income in Arkansas state and local taxes.
• Middle-income Arkansas taxpayers-those earning between $26,000 and $42,000-pay 11.7 percent of their income in Arkansas state and local taxes.
• But the richest Arkansas taxpayers-with average incomes of $911,500-pay only 5.9 percent of their income in Arkansas state and local taxes.

Click here for a fact sheet with graphics on Arkansas’s tax structure.

Arkansas Sales, Excise, Property Taxes Hit Low-Income Families Hardest

The main reason for the unfairness of Arkansas taxes is the state’s reliance on regressive sales and excise taxes, which fall disproportionately on the worst-off families, and on property taxes. The state’s one progressive tax, the income tax, is not enough to offset the unfair impact of these other taxes.

“Low- and middle-income Arkansans are still shouldering the tax burden, said Rich Huddleston, executive director of Arkansas Advocates for Children and Families. “It’s not right that these families are bearing a disproportionate share when they are already struggling to make ends meet, especially during this economic recession.”

Huddeston said recent efforts by the governor and legislators to reduce the grocery tax and help poor families with income taxes will help a bit, but more needs to be done.

During the last two legislative sessions, the grocery tax has been reduced from 6 percent to 2 percent, helping reduce the regressive nature of the Arkansas tax structure, Huddleston said. In addition, the 2007 Arkansas General Assembly exempted most families with children below the poverty line from paying state income taxes. However the law didn’t give full benefits to nearly 50,000 single-parent families with two more or more children-a flaw the 2009 General Assembly failed to correct.

Huddleston said the state can reduce the burden on low- and middle-income workers by further cutting the grocery tax. Arkansas can also create a state Earned Income Tax Credit to assist working families when the economy turns around and more revenue is available.

Research in other states shows that a state Earned Income Tax Credit, modeled after the federal credit of the same name, helps reduce the tax burden on low-income working families while invigorating local economies. The federal EITC has been so successful in reducing poverty that 24 of the 42 states with personal income taxes (including the District of Columbia) have adopted state-level EITCs to build on the federal EITC.

As Arkansas faces declining revenue because of the recession, it may need to take steps to maintain state funding for critical services for families, such as education, Medicaid and child welfare, Huddleston said. State leaders need to consider raising new revenue that won’t put more weight on low- and middle-income working families. Options include closing corporate income tax loopholes through combined reporting, eliminating the 30 percent percent exemption for capital gains, re-establishing the estate tax, or adopting an income tax surcharge.

“These options need to be part of a balanced approach to the state budget that doesn’t rely on solely on cuts-because cuts alone would further hurt our most vulnerable families,” he said.