On November 10, Governor Hutchinson announced several tax proposals for his legislative agenda as part of the FYE 2022 budget (Arkansas’s fiscal year runs from July to June). These proposals — and the overall budgetary context — set the agenda for the upcoming legislative session where fiscal space will be tight but with room for a few tax cuts and reforms. Hutchinson’s tax proposals are aimed largely at low- and middle-income Arkansans, including a sales tax reduction on mid-priced used cars.
Arkansas is blessed to be in a stable fiscal situation, having taken significant cuts to the 2020 budget because of the coronavirus epidemic. FYE 2021 to-date has been 12% ahead of projections so far and a surplus is projected. FYE 2022 revenues are currently projected to decline by 1.1% compared with 2021, largely due to tax cuts kicking in, continued economic uncertainty, and the one-time boost that 2021 had from deferred income tax payments.
Governor Hutchinson’s budget proposes $50 million in tax cuts, to be partially offset by a $25 million rollover from the 2021 surplus. Hutchinson wants the cuts to focus on low-and middle-income earners. The details still need to be worked out with the legislature, where different legislators have been considering different ideas (including rate cuts or an earned income tax credit).
One item Hutchinson would like to see is to reduce the state sales tax rate on mid-priced used cars by 3%, from 6.5% to 3.5%, for used vehicles priced between $4,000 and $10,000. The projected cost is $13 million. Used vehicles priced under $4000 would continue to be excluded from tax under Ark. Code Ann. section 26-52-510(b)(1)(B). (Some other proposals floating around the legislature would simply increase the $4,000 threshold.)
Hutchinson also wants to offer a reduced top rate for new Arkansans. Individuals moving to Arkansas would enjoy a lower top rate of 4.9% for five years instead of the 5.9% rate that is generally effective beginning in 2021 (based on Act 819 of 2019). The projected cost is $1.5 million the first year and presumably will increase another $1.5 million per year for the four years after that. The proposal is both intended as an inducement to high-earner migration and also as a prelude to a long-term plan of reducing the top rates for all from 5.9% to 4.9%. Governor Hutchinson has referenced a goal of cutting the top rate across the board from 5.9% to 4.9% over five years.
Hutchinson also announced $100 million for the long-term reserve fund. Arkansas has been growing its long-term reserve fund over the past four years. This reserve fund improves the state’s credit rating and can help cover sudden revenue shortfalls.