Many tax lessons for lawmakers nationwide to learn from Little Rock.

Governors and legislators have enacted income tax cuts in 25 states since 2020. Among that group of tax cutting states, Arkansas recently became the first to enact two income tax rate cuts in the same year when Governor Sarah Huckabee Sanders (R) signed House Bill 1001 in early September, cutting the top marginal income tax rate from 4.7% to 4.4%. That tax cut also reduces the corporate rate from 5.1% to 4.8%.

The income tax cut enacted in September, which is projected to save Arkansas taxpayers $186 million annually, follows another one enacted in the spring. In April Governor Sanders signed Senate Bill 549, legislation that cut the top marginal individual income tax rate from 4.9% to 4.7% and reduced the corporate rate from 5.3% to 5.1%. Those changes were made retroactive to January 1, 2023.

The pair of 2023 income tax cuts enacted in Arkansas follows another income tax cut approved the preceding year. In 2022, Arkansas legislators cut the top marginal income tax rate from 5.5% to 4.9% and the corporate rate was cut from 5.9% to 5.3%. Governor Sanders has announced her ultimate goal is to phase out the state income tax entirely.

While Arkansas has joined the income tax rate reduction trend that has swept the nation, the state has been a leader when it comes to full business expensing. During a 2022 special session, Arkansas legislators made their state one of the first to ensure immediate deduction of capital expenditures for the year they are incurred.

Governor Sanders’ success in gradually ratcheting down state income tax rates comes less than a decade after Arkansas became the final southern state legislature to switch to Republican control. Just as the approach to tax policy taken by Arkansas lawmakers has evolved over the past decade, so too, it appears, have attitudes towards taxes in Arkansas.

Little Rock Voters Reject Tax Hike They Approved In The Past

In September 2021, one year before the most recent string of state income tax cuts were enacted, Little Rock residents voted down a ballot measure that would’ve raised the local sales tax rate by a percentage point. That sales tax increase was overwhelmingly rejected by Little Rock voters, more than 61% of whom voted against it.

On the night of the election on September 14, 2021, Governor Sanders, then a candidate, tweeted that Little Rock’s rejection of the proposed tax hike demonstrated that “Arkansans want lower taxes.” Sanders went on to add that, once elected, she would “begin phasing out the state income tax to reward work, grow our economy, and create higher paying jobs.” That promise made on the campaign trail in 2021 became a promise kept by Governor Sanders in 2023.

The rejection of that sales tax increase in 2021 came almost exactly 10 years after a similar tax hike was approved by Little Rock voters. In September 2011, a ballot measure to raise the local sales tax passed with support from 54% of Little Rock voters. Opponents of that 2011 sales tax hike attributed its passage to superior funding for the Yes campaign. Yet the campaign to defeat the 2021 sales tax was also financially outmatched but still prevailed.

Little Rock City Board of Directors member Lance Hines notes that much of the change in outcome from 2011 to 2021 is owed to the fact that the 2011 measure was a citizen-led initiative, whereas the sales tax hike proposed in 2021 was a Mayor-led effort, one that voters thought lacked transparency.

“The voters saw it for exactly what it was, which was a grab bag of money for the mayor to funnel to political supporters,” Hines says about the 2021 sales tax hike, which had progressive organizations and conservative groups working to defeat it. “When you have the left and right working together like that you know you have a bad idea.”

Even though the city currently has a budget surplus, another mayoral initiative to raise Little Rock’s sales tax in 2024 is now advancing. Reforms passed by the Arkansas Legislature in recent years have limited when such local option tax hikes can be placed on the ballot. Citizen-led initiatives must now appear on the primary or general election ballot in even numbered years, when turnout is higher and a greater share of the populace can weigh in.

As Governor Sanders continues to pursue her goal of phasing out the state income tax, Arkansas is in a strong position financially, ending the previous fiscal year with a surplus exceeding $1 billion. “In the most recent fiscal year, the legislature enacted a general revenue budget of just $6 billion, while the state tax system generated over $7.1 billion in net revenue,” economists at the Tax Foundation and the Arkansas Center for Research in Economics wrote in an October 5 blog post exploring further options for reforming the Arkansas tax code.

“Reforming the tax system so that it is raising closer to $6.2 billion is a clear step that could be taken in the immediate future and could pay for the implementation of several fundamental reforms,” the economists added. “It was a rationale for tax cuts adopted in special session, and to the extent that Arkansas continues to experience revenue growth, it can facilitate further reforms in future years.”

Something that many in the national media don’t understand about Arkansas and other southern states is that, though they have voted for Republicans in most statewide contests for three decades or more, they largely did not have conservatives running state government until the last 10 or 12 years. As such, there are many states across the south, like Arkansas, that have been considered to be red states by New York and Washington-based media for a long time but have only recently begun to see free market reforms enacted. While there is Republican dysfunction in Washington, the news out of Arkansas and elsewhere shows the GOP is continuing to rack up major policy victories in the states.