Welcome to my fourth in a series on state taxes! For information about what I’m trying to do, read my introductory bit. Next on the agenda, the bane of every elementary aged school child when it comes to spelling: Arkansas!
Population: 2,834,797 (32nd)
Capital: Little Rock
Largest City: Little Rock
Gross Domestic Product: $87 billion
GDP per capita: $27,875 (49th)
2008 election winner: John McCain
web site: http://www.state.ar.us/
Arkansas does collect personal income tax. Taxes are fixed according to a series of six brackets, depending on net income. For 2007, the brackets are:
- If net income is at least $0, but not more than $3,699, the tax rate is 1%;
- If net income is at least $3,700, but not more than $7,399, the tax rate is 2.5% minus $55.49;
- If net income is at least $7,400, but not more than $11,099, the tax rate is 3.5% minus $129.48;
- If net income is at least $11,100, but not more than $18,599, the tax rate is 4.5% minus $240.47;
- If net income is at least $18,600, but not more than $30,999, the tax rate is 6% minus $519.45; and
- If net income is $31,000 or more, the tax rate is 7% minus $829.44
There is a separate Low Income Tax Table which may be used in certain circumstances. Beginning in 2007, the Low Income Tax Table offers a full exemption to those with income below the federal poverty level. There is additional tax relief for taxpayers earning less than 133% of the federal poverty level income.
Arkansas residents are generally taxed on the same income that they report for federal income tax purposes. However, Social Security beneﬁts, VA beneﬁts, Workers’ Compensation, Unemployment Compensation, Railroad Retirement beneﬁts and related beneﬁts are exempt from tax. Additionally, there is a $6,000 exemption on taxable retirement income and a $9,000 exemption on military income per taxpayer.
Arkansas has an odd set of rules related to capital gains. Briefly, 30% of net capital gains are excluded from income with the remaining 70% treated as ordinary income. Short-term capital gains (held less than one year) are 100% taxable as ordinary income.
One interesting addition: beginning in 2007, Arkansas imposed a 3% ﬂat tax on winnings from “electronic games of skill” (really, games of chance but the legislature has outlawed most of those – nonetheless, slots and the like are considered games of skill). Winnings which are taxed at 3% are not otherwise included as income to the taxpayer.
Some of the specific disallowed deductions for medical expenses were pretty funny… I mean, who doesn’t think that ear piercing should be disallowed as a medical expense? But apparently some folks do since it made it onto the list. Also on the list? Tattoos, maternity clothes, “spiritual guidance” (not kidding) and a gravestone. Note to residents of Arkansas: if you’re purchasing a gravestone, no further medical deductions are necessary. Just saying.
And those Arkansas politicians aren’t stupid: on your Arkansas tax return, you may take political contributions as a tax credit (up to $50 per individual and $100 per couple) in each tax year.
Arkansas does participate in the Set Off program. An Arkansas state tax refund will be taken to satisfy any outstanding liabilities owed to the State of Arkansas or to the Internal Revenue Service; a federal refund will be taken for same.
Arkansas sales tax is 6%. Some cities and counties may add a local sales tax, bringing the rate to as high as 8.5-9% across the state.
Sales tax is imposed on most retail goods and some services. Sales of food are taxed at a reduced rate of 3%. Prepared food and dietary supplements are taxed at 6%.
An additional mixed drink tax of 10% is imposed on the sale of alcoholic beverages (excluding beer) at restaurants. A 4% tax is imposed on the sale of all mixed drinks (except beer and wine) sold for “on-premises” consumption. There is a 3% “off premises” tax on retail sales of liquor and wine, and an additional 1% tax on sales of beer.
Sales of prescription medicines are exempt from sales tax. Additionally, sales of insulin and test strips for diabetes testing are exempt from sales tax.
Arkansas’ tax rate on cigarettes is a low $.59 for a package of twenty cigarettes, ranking them 33rd in the country. The national average is $1.14 per pack.
There is a proposal – being met with much resistance – to raise the tax on cigarettes by $.50 in 2009.
The gas tax rate in Arkansas is $.218 per gallon (the 19th lowest in the country).
In Arkansas the property tax generates revenue for school districts (77%), county (15%) and city governments (8%). Additional special district taxes may apply.
In 2002, property taxes accounted for 16% of Arkansas’ state and local tax revenue, about half the national average of 31%. Only five states (West Virginia, Kentucky, Alabama, New Mexico and Louisiana) rely less on property taxes than Arkansas (source: US Census).
The average 2003 property tax rate was tax rate of $47.81 for every $1,000 of assessed property (source: Arkansas Assessment Coordination Dept).
Inheritance and Estate Tax
Arkansas does not impose an inheritance tax or a gift tax. Like most states, Arkansas no longer has an estate tax since it was tied to the federal estate tax state death tax credit.
As a beauty pageant girl (see, there’s lots about taxgirl that you didn’t know), I couldn’t let the miscellaneous tax for “beauty pageant registration fees” go by without a mention. Rates vary.
There is also a soft drink tax collected by every distributor, manufacturer, or wholesale dealer in Arkansas (sorry Dad).
Overall Tax Burden
The overall tax burden in Arkansas, taking into account taxes paid by individuals, results in a ranking as 14th most-tax burdened state in the country, according to Tax Foundation. Arkansas’ tax burden ranking has been dropping for a number of years – many pundits credit former Governor Huckabee.
Arkansas is an interesting state when it comes to taxes. Like Alabama, it has a relatively low GDP per capita. Yet, the tax burden by percentage is higher than the national average.
And it’s not just the numbers. The income tax structure is overly complicated – six tiers? Really? With a span of 1% to 7%? That’s a big difference. And a top rate of 7% puts Arkansas near the top of the country in terms of maximum tax rates.
The sales tax system is regressive. Taxes on food – including groceries and prepared foods – are generally most difficult for those with lower incomes. The sales tax rate also stands above the national average. Overall, Arkansas is a low income state. A regressive, high sales tax a low income state seems a bit incongruous. Interestingly, many organizations in Arkansas have protested an increase in the cigarette tax with the regressive tax argument – I wonder why there isn’t much outcry about the existing sales tax?
Even with a relatively high tax burden, Arkansas still depends on the feds for extra funding. Like Alabama (but unlike Arizona), Arkansas taxpayers receive more in federal funding per dollar of federal taxes paid than the average state. In 2005, Arkansas citizens received approximately $1.41 of federal spending for every $1.15 paid to the Treasury.
When it comes to property taxes, Arkansas can boast some of the lowest in the nation. Since the schools are the biggest recipient of property tax dollars, you’d expect education to suffer. Yet, Arkansas sits more or less in the middle of high school graduation rates (source: Manhattan Institute). This means one of two things: either Arkansas receives federal funding to put towards its schools or increased school dollars don’t always correlate to educational success. I haven’t been able to figure out which.
So, low property taxes, regressive sales taxes and income taxes that are all over the place. It’s hard to characterize Arkansas’ tax structure other than to say that the overall burden remains relatively high compared to taxpayer income. As federal dollars certainly shrink, it will be interesting to see how Arkansas compensates: you can’t get blood from a stone.
Anyone from Arkansas want to chime in? I’m curious to hear whether Governor Beebe is a popular choice in a post-Huckabee economy…
(Note: tax rates were current as of 12-28-2008 and were taken from the AR Department of Revenue web site unless otherwise noted.)