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Arkansas

State Tax Primer from A to W: Arkansas

December 30, 2008 · 14 comments

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!

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/

Income Tax

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.

Sales Tax.

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.

Tobacco 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.

Gas Tax

The gas tax rate in Arkansas is $.218 per gallon (the 19th lowest in the country).

Property Taxes

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.

Miscellaneous Tax

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.

taxgirl says

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…

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(Note: tax rates were current as of 12-28-2008 and were taken from the AR Department of Revenue web site unless otherwise noted.)

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Election Results: State Tax Legislation

November 5, 2008 · 3 comments

It was a historic day on yesterday with the election of President Elect Barack Obama. It’s almost easy to forget that there were other elections and ballot issues to consider but voters in some states faced a laundry list of issues. Among those were several state tax measures, including:

In Arkansas: Voters supported an amendment to the Arkansas Constitution which, among things, eliminated a reference to the poll tax.

In Colorado: Voters said no on several tax measures, including a state sales tax increase. Amendment 58, which would end a property tax credit for Colorado’s oil and gas industry and boost severance tax revenue by $321 million a year – seven companies, including Chevron and Conoco each contributed $1 million towards the opposition campaign. Severance taxes are imposed on minerals extracted from the state, or “severed,” to compensate for nonrenewable resources.

In Florida: Voters defeated Amendment 8, which would have authorized counties to ask voters if they want to increase the sales tax for up to five years to aid the local community college. Voters approved Amendment 4, which would give conserved property a lower tax assessment; the amendment also eliminates property taxes on lands placed in a perpetual conservation easement.

In Louisiana: Voters said no to a bill that would dedicate additional state severance taxes to parishes (like counties) of origin (See Colorado above).

In Maine: Voters approved a measure vetoing a new tax on beer, wine and soft drinks, which would help finance a state health care program.

In Massachusetts: Voters rejected another measure that would have cut, and then eliminated, the state’s personal income tax. A similar measure was rejected in 2002.

In North Dakota: Voters rejected an income tax cut. Measure 2 would have cut income taxes in half and corporate income taxes by 15%.

In Nevada: Voters shot down an attempt by the Nevada Legislature to amend or repeal the sales and use tax without voter approval.

In Oklahoma: Voters overwhelmingly approved an exemption from personal property tax for injured veterans and veterans’ surviving spouses. Voters also approved a measure that would require a person or business to file an application in order to receive a property tax exemption.

In Oregon: Voters said yes to an exemption that required 50% voter turnout to pass property tax increase measures. Voters turned down a measure that would have allowed federal taxes paid to be deducted from Oregon taxable income.

(Note: Findings were based on local newspaper and media reports. If you have additional information, please share!)

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Tax Talk 2007: Mike Huckabee

May 23, 2007 · 5 comments

Our next presidential candidate to be featured in our series of interviews is Mike Huckabee, a Republican and former Governor of Arkansas.

I posed the following six tax-related questions to the Governor:

1. What’s the single most important tax issue facing Americans today?

2. If you could only make one “quick fix” in terms of an extra credit, a disallowed deduction, whatever – what would it be?

3. Which is a more egregious tax on the American public: the AMT or the federal estate tax?

4. It has been suggested that the IRS should be eliminated. Do you believe that this makes sense, and if you do, what would you establish in its place?

5. Do you think that significant tax cuts are possible considering the current state of the economy, specifically the escalating cost of the war in Iraq?

6. And just for fun, if Uncle Sam handed you a huge refund check right now, what would you do with it?

In response, Governor Huckabee offered this statement which I am posting unedited:

I’d like you to join me at the best “Going Out of Business” sale I can imagine – one held by the Internal Revenue Service. Am I running for president to shut down the federal government? Not exactly. But I am running to completely eliminate all federal income and payroll taxes. And do I mean all – personal federal, corporate federal, gift, estate, capital gains, alternative minimum, Social Security, Medicare, self-employment. All our hours filling out forms, all our payments for help with those forms, all our shopping bags filled with disorganized receipts, all our headaches and heartburn from tax stress will vanish. Instead we will have the FairTax, a simple tax based on wealth. When the FairTax becomes law, it will be like waving a magic wand releasing us from pain and unfairness.

The FairTax will replace the Internal Revenue Code with a consumption tax, like the taxes on retail sales forty-five states and the District of Columbia have now. All of us will get a monthly rebate that will reimburse us for taxes on purchases up to the poverty line, so that we’re not taxed on necessities. That means people below the poverty line won’t be taxed at all. We’ll be taxed on what we decide to buy, not what we happen to earn. We won’t be taxed on what we choose to save or the interest those savings earn. The tax will apply only to new goods, so we can reduce our taxes further by buying a used car or computer.

Our current progressive tax system penalizes us for working harder and becoming more successful. As we climb the ladder, the government lurks on each rung, hungry for a bigger bite out of our earnings. The FairTax is also progressive, but it doesn’t punish the American dream of success, or the old-fashioned virtues of hard work and thrift, it rewards and encourages them. The FairTax isn’t intended to raise any more or less money for the federal government to spend – it is revenue neutral.

Expert analyses have shown that the FairTax lowers the lifetime tax burden of all of us: single or married; working or retired; rich, poor or middle class. Under the FairTax as our disposable incomes rise, so will consumption and our gross domestic product.

Under the FairTax, we’ll all be treated the same: no more tax avoidance by those who can afford the most creative – and most expensive – lawyers and accountants. No more clever loopholes for the few at the expense of the many. No more lobbyists buying tax breaks for their clients from Congress. No more lying and cheating on taxes and no more untaxed underground economy.

The FairTax will instantly make American products 12 to 25% more competitive because the cost of those goods will no longer be inflated by corporate taxes, costs of tax compliance, and Social Security matching payments. When we buy products now, those taxes are built into the cost, so all of us pay corporate taxes indirectly on top of the personal taxes we pay directly. Compliance costs are just make-work with no real added value, yet they consume as much as 3% of our gross domestic product annually. These costs are an especially heavy burden on small businesses, which generate most of our jobs.

If you buy a bottle of domestic wine, you’re paying the taxes/compliance/matching payments of all the folks who produced the grapes, the wine, the bottle, the cork, the label. If you buy a bottle of French wine, the producers had their Value Added Tax rebated to them when the wine was exported. So French consumers pay those taxes, but you don’t. Our current tax system puts our goods at a disadvantage both here and overseas. Other governments give their goods an advantage on the world market, an advantage estimated at 18% compared to American goods.

So no matter how hard Americans work, no matter how innovative and creative we are, no matter how superior our products are, we suffer from a built-in competitive disadvantage simply because of our tax system. A recent study by MIT found that our tax system deprives us of about $1 billion in exports annually. When you export over-priced goods as we have, you inevitably end up exporting jobs and industries as we now are. We are the square peg trying to fit into the round hole of international trade. The rest of the world isn’t going to change, it’s time that we do.

Under the FairTax, American companies are far less likely to move overseas and foreign companies are far more likely to come here, hiring Americans to build and work in their new plants. The FairTax encourages growth by promoting investment and capital formation.

We have to scrap a 20th century tax system that is holding us back and keeping us down in the 21st century. The FairTax is the path to greater prosperity and job security for us and for our children.

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Governor Huckabee also granted me the opportunity to question him by phone on some of his tax policies. That interview will be posted within the next few days.

For more information about Governor Huckabee’s policies, visit his web site.

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