Two committees of Arkansas lawmakers approved measures to decrease income taxes and increase the homestead tax credit on Monday, the first day of the Legislature’s second special session in nine months.

Both the House and Senate Revenue and Tax committees passed, with no dissent, identical bills that seek to cut the top corporate income tax rate from 4.8% to 4.3% and the top individual income tax rate from 4.4% to 3.9%, retroactive to Jan. 1 of this year.

These cuts would reduce the state’s general revenue by a cumulative $483.5 million in fiscal year 2025, which begins July 1, and by $322.2 million each fiscal year afterward, according to the state Department of Finance and Administration’s fiscal impact report on Senate Bill 1 and House Bill 1001.

The committees also passed Senate Bill 3 and House Bill 1002, which propose increasing the homestead property tax credit from $425 to $500. Lawmakers previously increased the tax credit from $375 to $425 during the 2023 legislative session.

Both SB1 and HB1001 have emergency clauses, meaning they would go into effect immediately upon Gov. Sarah Huckabee Sanders’ signature. If they become law, corporate income tax rates will have decreased by 2.8% and individual income tax rates by 1% since April of last year.

The Arkansas special session tax cuts explained

In April 2023, state lawmakers approved more than $100 million in cuts to the top individual and corporate tax rates. During September’s special session, legislators lowered the top individual and top corporate income tax rates from 4.7% to 4.4% and from 5.1% to 4.8%, respectively. They also created a one-time, non-refundable $150 tax credit for those earning up to about $90,000.

The tax cut bills will require $290 million in general revenue to be set aside in a reserve fund on July 2 in case the money is needed to make up for the decrease in state general revenue due to the tax cuts.

No one spoke for or against the homestead tax credit increase before either committee, and the Senate committee passed the proposal with no debate.

The credit is available to property owners on the property that is their primary residence, reducing their real property tax liability, which is paid at the county level.

The homestead bills propose that on or before Jan. 30 of each year, the state’s chief fiscal officer will report the balance of the Property Tax Relief Trust Fund, whether the fund could support an increase of the homestead property tax credit, and if so, how much of an increase the fund could support.

The trust fund had $255.6 million in it at the end of the 2023 calendar year, Paul Gehring, the finance department’s assistant commissioner of revenue policy and legal, told the House committee Monday.

Tax cut discussion

Democratic lawmakers have criticized the proposed income tax cuts for primarily affecting wealthy Arkansans. Republicans, who hold supermajorities in both chambers of the Legislature, have said the cuts will keep money in the pockets of working people.

Nicholas Horton, founder and CEO of the conservative group Opportunity Arkansas, spoke in favor of the tax cuts before the House committee. Horton said the government “takes more than it needs,” echoing Rep. Les Eaves, R-Searcy, the House sponsor of both bills.

“Arkansas can’t continue to see $700, $800, $900 million surpluses and not think that we’re over-collecting from our citizens,” Eaves said.

Sen. Tyler Dees, R-Siloam Springs, said he hoped lower taxes would give people more resources to band together during disasters, such as the tornadoes that swept through his Northwest Arkansas district in May.

High death rates, unchanging poverty level puts Arkansas among worst states for child well-being

“What I’ve seen in the last three weeks is the speed of the private industries and individual citizens to give directly to those impacted instantly,” Dees said. “…I believe the best impact that we can have for those in need is to give dollars back to individual citizens so they can give back to their community.”

Keesa Smith-Brantley, executive director of Arkansas Advocates for Children and Families, said private entities do help people in difficult times, but not uniformly throughout the state, leaving some regions “severely neglected.”

Smith-Brantley spoke against the tax cut bills before both committees. She referenced the latest KIDS COUNT Data Book, released earlier this month, which shows that most areas of child well-being in Arkansas have been getting worse.

Arkansas’ position at 45th in overall child well-being is down two slots from its ranking the last two years, and the state has ranked as one of the country’s 10 worst states for overall child well-being nine times in the last decade.

Cutting taxes reduces the state’s ability to fund initiatives that would improve child well-being, such as early childhood education and health care for pregnant and postpartum Arkansans, Smith-Brantley said.

In response to questions from senators, Smith-Brantley noted that some state agencies that serve children and families have received stagnant or less funding over time in the state budget. The Division of Youth Services within the Department of Human Services received a 0.01% funding increase in the state budget that passed during this year’s fiscal session, but “that amount of funding doesn’t actually keep up with inflation,” she said.

“I know that you care about the children of our state and you want them to thrive, and to do so, some of the critical areas in our state need investment,” she told the Senate committee.