Quick Look: The 2021 Arkansas Income Tax Cut

by Wayne Miller - January 6, 2022

Arkansas lawmakers recently passed legislation reducing state income taxes for individuals and corporations.

Starting this year and continuing through 2025, individual income tax rates will decrease as will corporate income tax rates if certain economic conditions are met. The legislation from the December special session also:

• changed some income tax brackets,
• combined two tax tables for low and middle income earners,
• increased the standard income tax deduction by adjusting for inflation, and
• provided a tax credit for some individuals.

How will my individual tax liability change?

How the 2021 legislation affects you will depend on how much money your household earns in a given year and how much of that income is taxable.

Arkansas’ top tax rate is set to decline from 5.9% to 4.9% by 2025 if certain conditions are met.[1] This change will benefit all individuals with taxable incomes of $39,700 and above but will have a larger benefit for those with incomes above $84,500. Those with taxable income between $84,500 and $90,600 will also receive a tax credit of up to $610 in 2022 and $439 in 2025 to adjust for tax bracket changes.[2]

The combination of low and middle-income tax tables means that people previously using the tax table for those with taxable incomes from $22,000 to $79,300 will see their tax rate decrease slightly.

Additionally, individuals with low taxable income will receive a tax credit up to $60 if they file their returns in a timely manner. The maximum credit of $60 will be given to individuals with taxable income less than or equal to $23,600.

A tax credit will also be given to those with incomes up to $24,700 on a sliding scale, with those with taxable income between $24,601 and $24,700 receiving a $5 credit.

Indexing the standard deduction to inflation using the Consumer Price Index is another component of this legislation which will decrease nominal taxable income.

How will corporate income tax liability change?

Corporate income tax rates will be lowered gradually from the current 6.2% to 5.3% in 2025, provided that state revenue goals are met.[3]

Who will benefit?

The Department of Finance and Administration estimates this income tax cut will cost the state approximately $500 million in annual revenue after the cuts are fully implemented in 2026. The Arkansas Economic Development Commission suggests that this tax cut “puts money in the pockets of all Arkansas taxpayers” and that the $60 tax credit will eliminate income taxes for more than 100,000 individuals in the state.[4]

The Institute on Taxation and Economic Policy (ITEP) analysis of these tax cuts suggests that the state’s richest taxpayers will benefit the most from the combined individual and corporate income tax cuts. ITEP, a nonpartisan nonprofit organization in Washington D.C., estimates that approximately 70% of the tax cuts go to those in the top 20% of income earners.[5]

ITEP also estimates that nearly 75% of the corporate income tax cut will go to the top 20% of income earners and that the vast majority of the shareholders who benefit from this tax cut do not live in Arkansas.

Want to read the legislation?

Check out these identical bills from the special session – House Bill 1001 and Senate Bill 1.

[1] The tax rate changes scheduled to begin January 1, 2024 and 2025 will not take effect if during the previous calendar year funds are transferred from the catastrophic Reserve Fund.

[2] For detailed information on the new tax tables, rates and credits, we suggest you contact the income section in the Arkansas Department of Finance & Administration at individual.income@dfa.arkansas.gov or call 501-682-1130.

[3] The annual tax rate changes scheduled to begin January 1, 2023 will not take effect if during the previous calendar year funds are transferred from the catastrophic Reserve Fund.

[4] The Largest Tax Cut in Arkansas History, AEDC, December 15, 2021.

[5] Tax cut Plan Even More Expensive, Skewed Toward the Wealthy, Arkansas Advocates for Children and Families, November 23, 2021.