WASHINGTON -- Arkansas' tax structure places a heavier burden on low- and middle-income families, according to a recently released report, with the state's tax system ranked among the most regressive in the nation.
The Institute on Taxation and Economic Policy -- a Washington, D.C., think tank focused on equity in tax systems -- released its seventh "Who Pays?" report last week in which the organization analyzed local and state tax structures across all 50 states and the District of Columbia. The organization last released a "Who Pays?" report in 2018.
Arkansas has the ninth most regressive tax system in the latest ratings, a jump from 20th in the 2018 analysis. Florida has the most regressive tax structure, with Washington, Tennessee, Pennsylvania and Nevada completing the top five.
Analysts evaluated income taxes, sales and excise taxes, and property taxes in compiling the review. The lowest 20% of income earners nationally pay an average 11.3% share of their income in taxes, while the top 1% pay 7.2%.
According to the report, 44 states have tax structures that "exacerbate income inequality" with lower-income households paying a larger proportion of their income in taxes compared with more affluent homes.
"When we look at how states are taxing their residents, it's clear that they're falling very far short of what most people consider to be a fair tax code," Carl Davis, the institute's research director, told reporters.
"Most state tax systems are regressive, which means the less you make, the more you pay," he added. "A lot of times, we'll call this an upside-down tax code because it's the exact opposite of the kind of progressive taxation that a huge swath of the public supports."
In Arkansas, the lowest 20% of income earners have a 13.1% share of their income in taxes while the top 1% pay less than half of this percentage at 5.8%, according to the report. The middle 20% of earners have an 11.7% income share going toward taxes.
According to researchers, Arkansas' current placement stems from the increased dependence on sales and excise taxes. Around half of Arkansas' tax revenue for the 2023 calendar year came from these taxes.
Tennessee and Louisiana followed a similar pattern with more than half of their tax revenue coming from sales and excise taxes. Louisiana placed 10th on the organization's list.
"Arkansas does have both a reliance on sales taxes but also one of the highest combined sales tax rates in the country," said Jeremy Horpedahl, director of the Arkansas Center for Research in Economics at the University of Central Arkansas.
Neither Horpedahl nor the center worked on the report.
"When we look at what people are spending their money on, low-income families are spending a much bigger share of their income, which means a much bigger share of their income is hit by the sales tax," Horpedahl said. "Groceries -- while we exempt them from the state sales tax -- are included in local sales taxes, and city and county sales taxes have gone up quite a bit in the past few years in Arkansas."
Other factors affecting the state's ranking include the lack of earned income and child tax credits, as well as capital gains tax breaks, according to the report.
Florida Policy Institute CEO Sadaf Knight said another element involves personal and corporate income tax reductions. State political leaders have passed multiple cuts since Republicans took control of the governor's mansion and state legislature in 2015.
"They've done so in a way that overwhelmingly benefits [to] the highest-income families in the state," she said. "That shifted the tax system to become more regressive over the years."
According to the report, if Arkansas had not reduced its personal or corporate income tax rates since the 2018 report, the bottom 20% of income earners would pay a similar income share on local and state taxes, but the top 1% would pay 7.3%. The state would still have a regressive tax structure, but Arkansas would instead place 15th.
"When you have very low property taxes and reducing the personal income tax in this way, it means that the lion's share of your revenue is going to come from taxing what people buy through sales and excise tax," Davis said. "When you structure your system that way, you're going to have a lot of regressivity in it."
During last September's special legislative session, Arkansas' state legislature approved reducing the top individual income tax rate from 4.7% to 4.4% and the state's top corporate tax rate from 5.1% to 4.8%, both of which took effect Jan. 1.
Horpedahl took exception with the report's handling of corporations conducting business across states. He made note of the presence of multiple companies headquartered in Arkansas, such as Walmart, with domestic and international operations.
"If you're a business located in Arkansas and you sell things in another state, who bears the burden then of the corporate income taxes paid? This report essentially ignores that because, I think, it's just really hard to do that," he said.
"I don't think it means the results are totally meaningless, but I think it does mean we are missing some of those taxes that the top 1% are paying in Arkansas, which means we are not as regressive as this report suggests."
The report received strong disapproval from Jared Walczak, vice president for state projects at the Tax Foundation. Much like the Institute on Taxation and Economic Policy, the Tax Foundation is a Washington, D.C.-based tax policy organization, albeit with an emphasis on proposals fostering economic growth.
"The broader issue is progressivity is achieved in two ways," Walczak said, "by how governments raise revenue and how governments spend revenue."
Walczak argued the lowest-income earners -- unlike high-income households -- receive net government transfers and benefits on top of earnings, which the Institute on Taxation and Economic Policy did not consider in its report.
"At the state level, spending systems are highly progressive while tax systems typically are not because states have to compete with each other for jobs, people and businesses," he said. "Therefore, they have often been content to let most of the progressivity take place in both the spending codes and the federal government with its progressive tax and transfer system."
Alexa Henning, communications director for Republican Gov. Sarah Huckabee Sanders, also criticized the report.
"Democrats and liberal advocacy groups like the Institute on Taxation and Economic Policy oppose Governor Sanders' tax cuts because they think government spends the American people's money better than the American people themselves," Henning said.
"The Governor passed tax cuts that benefited every taxpayer in Arkansas and helped spur Arkansas' economic growth by returning $300 million to families and businesses last year."
The Institute on Taxation and Economic Policy placed the District of Columbia as the least regressive tax system, followed by Minnesota, Vermont, New York and California. Researchers stated, however, none of the tax systems are "robustly progressive in a traditional sense," noting uneven curves in rising tax shares.