Arkansas unchanged in ranking of ‘most competitive’ state tax codes, think tank says structural reform needed

Arkansas’ position remained unchanged in a highly-watched annual ranking of the states with the nation’s “most competitive” tax codes, according to the State Business Tax Climate Index released Wednesday (Sept. 28).

The 13th edition of the Washington, D.C.-based Tax Foundation’s report measures how well-structured each state’s tax code is by analyzing over 100 tax variables in five different tax categories: corporate, individual income, sales, property, and unemployment insurance.

In this year’s report, Arkansas ranked 38th among the 50 states and the District of Columbia, the same as in fiscal year 2016 and up a spot from 39th in fiscal year 2015. Arkansas ranked best in property, individual income and unemployment insurance tax structure at 24th, 29th and 30th, respectively.  The rankings of the state’s corporate and sales tax structure came in at 40th and 44th in the annual ranking, which lists 1st as the “best” and 50th as the “worst.”

“Arkansas has made positive improvements this year on tax issues, but still ranks among the lowest states for tax competitiveness,” said Scott Drenkard, director of Tax Foundation’s State Projects. “Comprehensive structural tax reform, with lower rates on individual and corporate income taxes, would put the state on a solid footing to attract new jobs and investment.”

HUTCHINSON SAYS TAX CODE BETTER, MORE WORK NEEDED
Gov. Asa Hutchinson touted his tax policy in helping to put Arkansas in a better competitive position, highlighting his 2015 legislation that cut the tax rate for the lowest wage earners by 1% and set the state’s capital gains levy at 40%.

“When I became governor, we passed the largest income tax cut in Arkansas’s history. This demonstrates just one of the many ways that Arkansas is working to become more tax competitive with our neighboring states,” Hutchinson said in a statement to Talk Business & Politics. “While this recent ranking shows improvement, it’s clear that there is still more work to do – which is why I have set a goal to gradually lower our state’s income tax rate to become more competitive and more attractive to businesses looking to relocate or expand their operations.”

The Tax Foundation report may actually provide more ammunition for Gov. Hutchinson in the upcoming 2017 legislation session. In several speaking events over the past few month, Hutchinson has called for ultimately cutting the state’s top income rate to 5% and making other significant changes to the state’s tax code. However, the state’s chief executive and job recruiter has said he would be cautious in the next legislative session with tax cuts and won’t know what the state can do until budget numbers arrive next month in October.

Mike Preston, director of the Arkansas Economic Development Commission, also recently mentioned the annual Tax Foundation report as a barometer for how Arkansas compares to other states in the southeastern U.S. Preston said he is supportive of Gov. Hutchinson’s plan to restructure the state’s tax code, both from a corporate and individual standpoint.

“Obviously, one of the things we get dinged on when you look at rankings from business journals and site selection consultants – is our tax structure,” he said. “We stack up well when we compete with the northeast or the West Coast, but when you look at us compared to the SEC (Southeastern Conference) states we are kind of at the bottom in terms of our tax structure, corporate income tax rate, franchise tax and all these things compared to our competitors.”

ANTI-POVERTY ADVOCATE SAYS TAXES FAVOR WEALTHY ARKANSANS
According to the Arkansas Advocates and Children and Families (AACF), there have been $242 million in tax cuts over the past two legislative sessions. Most of those cuts favor higher income earnings, Eleanor Wheeler, AACF’s senior policy analyst for tax and budget, said in the organization’s recent Arkansas tax cut “cheat sheet.”

Wheeler said she is always cautious about index rankings because components of those surveys can be weighted to reach certain conclusions.

“They are not always straightforward,” said Wheeler, who had not seen this year’s Tax Foundation annual ranking. “What we do know is that the bottom earnings are paying twice the (tax) rate of the higher earnings … and that has been true for a long time. And that will continue to be a problem for a low-income state like (Arkansas).”

In the Tax Foundation’s annual ranking, Wyoming, South Dakota and Alaska are listed as having the most competitive tax codes among the 50 states. Florida, where Preston formerly served as that state’s top economic development officials, is ranked as fourth best, followed by Nevada. Montana, New Hampshire, Indiana, Utah and Oregon round out the top ten.

New Jersey, New York and California are ranked as the states with the least competitive tax code. Vermont and the District of Columbia are tied for the fourth spot, followed by Minnesota, Ohio, Rhode Island, Connecticut, Maryland and Louisiana.

INDEX PROVIDES ‘ROADMAP FOR IMPROVEMENT’
According to the Tax Foundation, which styles itself as a nonpartisan tax research think tank, some states are penalized for overly complex, burdensome and economically harmful tax codes and rewarded for transparent and neutral tax codes that do not distort business decisions. A state’s ranking can rise or fall significantly not only because of its own actions, but also because of reforms made in other states.

“Our goal with the State Business Tax Climate Index is to start a conversation between taxpayers and policymakers about how their states fare against the rest of the country,” said Tax Foundation Policy Analyst Jared Walczak. “While there are many ways to show how much a state collects in taxes, the Index is designed to show how well states structure their tax systems, and to provide a roadmap for improvement.”

Tax Foundation officials said the annual survey can also be used as a tool for identifying state tax trends. For instance, the report shows that a number of states are now opting to simplify tax systems by consolidating individual income tax brackets, or even moving to a flat tax. Hawaii eliminated its top three individual income tax brackets in 2016 and reduced its top marginal rate from 11% to 8.25%, improving its overall rank from 30th to 27th. North Carolina moved to a flat individual income tax in 2014 and continues to phase in rate reductions, building on the success of its historic 2013 reforms and shoring up its place at 11th overall.

Another trend is the tendency for states to shift away from taxes on capital, said Tax Foundation officials. Pennsylvania, for example, has phased out its capital stock tax, boosting its property tax component ranking six places, from 38th to 32nd, and improving its overall state ranking from 28th to 24th.