A report says Arkansas should adopt a combined corporate income tax reporting requirement after tax legislation passed this year will cut corporate taxes to benefit wealthy individuals while raising internet sales taxes for those with lower incomes.
But Gov. Asa Hutchinson disputed the report’s findings, telling Talk Business & Politics that collecting more tax revenues “is not the objective” and that raising internet sales taxes was done “for the sake of fairness.”
Arkansas Advocates for Children & Families, which supports increased government spending on social programs, released the report Wednesday (Oct. 16). Written by Bruno Showers, senior policy analyst, its name is “Corporate Income Tax Cuts: The Need for Combined Reporting.”
The report comes after lawmakers this year passed Act 822, which required remote sellers to remit sales taxes on online purchases and reduced the top corporate tax rate from 6.5% to 6.2% in 2021 and to 5.9% in 2022.
The report says lower-income families pay a higher percentage of their income in sales taxes, so the internet tax will hit them harder. Meanwhile, it says corporate income taxes generally have benefitted the wealthy.
It cites the Institute on Taxation and Economic Policy, which found the changes, along with a 3-cent gasoline and 6-cent diesel tax increase, will result in tax increases for all but the top 5% of earners. Meanwhile, 70% of the corporate tax cut will benefit the top 5% of wage earners making more than $205,000 a year, and 81% will go to out-of-state shareholders.
The report says multi-state corporations shift their revenues between parent and subsidiary corporations to avoid taxes. A combined reporting system treats parents and subsidiaries as a unitary business. The report says such a system is fairer to smaller, in-state businesses.
“Combined reporting would help plug the hole left in our state budget and ensure that large multi-state corporations pay their fair share,” it said.
The report says states have estimated combined reporting systems would increase corporate income tax receipts between 10% and 25%. For those estimates, it cites the Center on Budget and Policy Priorities, a national group that also supports government programs to alleviate poverty.
Twenty-seven states plus Washington, D.C. have combined reporting systems. Among Arkansas’ neighbors, only Texas has a combined system. Other nearby states with a combined system include Kansas, Illinois and Kentucky. But no other states in the South have combined systems.
Hutchinson responded to the report by saying, “The report makes the case that the state can collect more in tax revenue by the combined income approach. Collecting more in tax revenue is not the objective. Our goal is to have a competitive and fair tax code. The internet sales tax exemption was closed, and this was closed to treat all businesses the same for the sake of fairness.”
One of the rationales for enacting the internet sales tax was that it was fairer to local businesses, which previously had no choice but to remit the sales tax and therefore charge a higher price than online out-of-state sellers. Before the law was passed, buyers were required to pay the tax – few did – but sellers were not required to collect it.
Hutchinson continued by saying, “The corporate tax reduction has not taken place yet, so it is speculative to know the exact impact, but the reduction was necessary to be more competitive with surrounding states and to create more jobs. This is good for every taxpayer.”
Hutchinson and the Legislature have enacted three income tax cut packages since he took office. In 2015, they passed a middle income tax cut for individuals earning between $21,000 and $75,000 annually, which was estimated at the time to reduce state revenues by $100 million annually. In 2017, lawmakers enacted a tax cut for individuals earning up to $21,000, which was projected to reduce incomes by $50 million annually. In 2019, lawmakers reduced upper income taxes from 6.9% to 5.9% over a two-year period, which was projected to reduce revenues by about $97 million a year when fully implemented.
Referring to the tax cuts passed in 2017, Hutchinson said, “The report also ignores the income tax reduction of $50 million that went to those making less than $21,000. The effective tax rate cited in the report is not the effective income tax rate but includes the sales tax rate. This is misleading as the effective income tax rate has been reduced for the lower income taxpayers.”
The report says Arkansas had a regressive tax code before the 2019 legislation was passed. Those making less than $22,000 had an effective tax rate of 11.3% this year, while those making more than $456,000 paid a 6.9% rate, according to the Institute on Taxation and Economic Policy. That group’s website says it provides “recommendations on how to shape equitable and sustainable tax systems.”
The report argues that changes also are needed in light of the Tax Cut and Jobs Act, which Congress passed in 2017 to cut corporate income taxes from 35% to 21%. It says most of the benefits of that tax cut have gone to the wealthy.
According to the report, Americans for Tax Fairness, which says it supports “progressive tax reform,” has said that less than 5% of the American workforce has seen any compensation from the tax cut, and that 157 companies that received $80 billion in tax cuts provided only $7.1 billion in wages and bonuses.
Meanwhile, the Congressional Research Service says the act led to $1 trillion in stock buybacks.