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Arkansas’ New 15.5% Top Income Tax Rate

The Arkansas legislature adopted major income tax legislation this week, with the accomplished goal of lowering the marginal tax rate on high incomes from 5.9% in 2021 to 5.5% in 2022, with further reductions scheduled for subsequent years that would reduce the top marginal tax rate to 4.9% in 2025.

But one quirky feature of the Arkansas tax code results in an anomalous income bracket for which the effective marginal tax rate is actually 15.5%.  Moreover, over this particular income range, the tax code contains over 60 “tax cliffs” in which small increases in pre-tax income can result tax hikes that actually reduce after-tax income.

The reason for this anomaly is Arkansas’ dual tax table arrangement, where incomes up to a certain threshold are subject to one table, while there is a completely different tax table that applies to incomes above that threshold.

Typically, a progressive income tax increases the marginal tax rate (the tax on the next dollar), in uniformly increasing steps.  The result is a relatively smooth, increasing profile for average tax rates (taxes paid/taxable income).  An example is shown in Figure 1, which shows the marginal and average tax rates in the new legislation for incomes up to $84,500.

Figure 1:

But Arkansas’ dual tax-table system includes a more significant break, where the entire tax table changes for incomes above a certain threshold.  In the new legislation, this break-point is $84,500.

Nominally, the tax tables in the new tax code specify that for incomes above $84,500 the marginal tax rates are 2% on the first $4,300 of income, 4% on income between $4,301 and $8,500, and 5.5% for incomes above that.  But this is just silly.  If the tax table only applies to incomes above $84,500, it doesn’t matter what the marginal rates are below that threshold.  It would be more straightforward, and numerically equivalent, to say that the marginal tax rate is 5.247% on every dollar up to taxable income of $84,500 ($4,434) plus 5.5% above that level.

But however it is described, this presents a problem.  The tax for an income level of $84,501 turns out to be $620 higher than it would be if the lower income table was used. That would be an effective marginal tax rate of over 60000% for that 84,501st dollar of income.

That’s what is known as a “tax cliff.” When statutory thresholds become significant enough that people might change their economic behavior (or at last their tax-reporting behavior) to account for quirks in the tax system, then resources are likely being spent inefficiently.  Here at the Arkansas Economist, we pointed out the problem with tax cliffs when the multiple tax-table system was first introduced in 2015.

The Arkansas legislature’s solution to this problem in 2021 has been to introduce over 60 little tax cliffs to the mix.  The new system of “Bracket Adjustments” specifies that anyone with a taxable income of $84,501 to $84,600 is entitled to a tax-reduction of $620.  For each $100 beyond that, the bracket adjustment is reduced by $10, until it reaches zero for incomes above $90,600.

Figure 2 illustrates the multiple tax cliffs in the new legislation, showing the stair-step nature of the bracket adjustment effect on average tax rates.

Figure 2:

At each of these mini tax cliffs, the marginal tax rate approaches infinity as we narrow the definition of “marginal.”  A one dollar increase in income that raises tax burden by $10 can be described as a marginal tax rate of 1000%.  Decreasing the granularity of the calculation, an income increase of $100 over the bracket-adjustment range results in an increase in tax obligation of $10 plus the 5.5% statutory marginal tax rate—a total marginal tax rate of 15.5%.

Figure 3 puts the two tax tables and bracket adjustments together to show the average tax rates and effective marginal tax rates over income ranges from $0 to $120,000.  The marginal tax rate in Figure 3 is calculated as the increase in tax burden for each $100 increase in income.  The result is an effective marginal tax rate of 15.5% over the bracket adjustment range.

Figure 3:
*Marginal Tax Rate as calculated in $100 increments.

So, under the assumption that $100 increments are an appropriate measure of “marginal” that matters to taxpayers (at least those in the bracket-adjustment range), we might expect people to take measures to avoid the 15.5% marginal tax burden.  Those efforts represent the efficiency loss of the tax system’s complexity.

To further illustrate the point, let us consider a tax system that is roughly equivalent to the newly adopted regime, but one that eliminates the tax cliffs.  The calculations underlying Figure 3 provide guidance for how to construct such a system.  Taking the marginal tax rates from the lower-income tax table, extending the table to impose a 15.5% explicit marginal rate on incomes between $84,500 and $90,700, with a return to the 5.5% marginal rate for incomes above $90,700, we can reconstruct an average tax profile that is virtually indistinguishable from the one shown in Figure 3.

Zooming in on the bracket-adjustment range shows how this hypothetical unified tax table eliminates the stair-step nature of the tax cliffs while retaining the ramping-up of average tax rates—revealing the relevance of this near-observationally equivalent representation of the newly-adopted tax code.

Figure 4:

So, in a very real sense, the new tax code includes a 15.5% effective marginal rate over a specific range on incomes.

But does this all matter?  When it comes to a static analysis government revenue, the relevant measure is how the average tax rate schedule and the population income profile overlap. That is also true when it comes to the tax burden on individuals.  But when it comes to economic decision-making, marginal calculations matter  To the extent that the tax-cliffs and brackets with high effective marginal rates affect taxpayer behavior, a static revenue projection might be overstated relative to a dynamic analysis that takes tax-avoidance behavior into account.  Ultimately, whether the effect is quantitatively significant or not is an empirical question.

 

Arkansas Taxable Sales – 2014:Q2

Newly compiled data on Arkansas Taxable Sales (ATS) suggests a slight slowdown in spending during the second quarter of 2014.   After surging 1.3% in the first quarter, ATS fell 0.3% in the second quarter (seasonally adjusted).  Compared to a year earlier, ATS was up only 0.2%.  A broader measure — Arkansas Taxable Sales Including Gasoline (ATSIG) — was also down 0.3% for the quarter.

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement
Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement
Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement
Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

In the five years since the trough of the recession (2009:Q2), ATS has increased 15.6% and ATSIG has increased by 17.8% — corresponding annual percentage growth rates of 2.9% and 3.3%, respectively.  It is worth noting, however, that the taxable sales statistics are not adjusted for inflation.  Using the price index for personal consumption expenditures, we can express ATS and ATSIG in real (inflation adjusted) terms.  As shown in the figure below, real measures of ATS and ATSIG remain below their previous cyclical peaks.  Since the recession trough, real ATS has increased by only 5.9% (a 1.1% annual rate), while real ATSIG has increased by 7.9% (a 1.5% annual rate).

Sources: Department of Finance and Administration, Oil Price Information Service, U.S. Bureau of Economic Analysis, Institute for Economic Advancement
Sources: Department of Finance and Administration, Oil Price Information Service, U.S. Bureau of Economic Analysis, Institute for Economic Advancement

# # #

Arkansas Taxable Sales (ATS) is calculated by the Institute for Economic Advancement to serve as a timely proxy for Arkansas retail sales. The series is derived from sales and use tax data, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.  Arkansas Taxable Sales Including Gasoline (ATSIG) incorporates data on the state motor fuel tax and gasoline prices from the Oil Price Information Service.

A spreadsheet of the data is available here: Arkansas Taxable Sales 2014:Q2 (Excel file)

Arkansas Taxable Sales – 2013:Q3

Arkansas Taxable Sales (ATS) declined slightly in the third quarter, down 0.3% from the previous quarter (seasonally adjusted).  Compared to the same period a year earlier, however, ATS was up 5.7%.  ATS includes all items subject to Arkansas sales and use taxes, so it does not include retail gasoline purchases.  Using data from the state’s motor fuel tax to augment the data produces a slightly broader measure of retail spending: Arkansas Taxable Sales Including Gasoline (ATSIG).  Total spending on gasoline was down 0.7% in the third quarter, so there was little difference in the quarterly growth rate of ATS and ATSIG.  Compared to the third quarter of 2012, however, lower prices drove a 5.5% decline in spending on gasoline.  So over the past year, ATSIG increased by only 4.8%.

ATS&ATSIG-Q313-tab
Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

It has been four years since ATS hit the cyclical trough associated with the 2008-2009 recession.  Since that time it has expanded by 15.4% — an annual growth rate of 3.6%.  Over the same period, ATSIG has expanded at a 3.9% annual rate.

ATS&ATSIG-Q313
Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

# # #

Arkansas Taxable Sales (ATS) is calculated by the Institute for Economic Advancement to serve as a timely proxy for Arkansas retail sales. The series is derived from sales and use tax data, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.  Arkansas Taxable Sales Including Gasoline (ATSIG) incorporates data on the state motor fuel tax and gasoline prices from the Oil Price Information Service.

A spreadsheet of the data is available here: Arkansas Taxable Sales 2013:Q3 (Excel file)

Arkansas Taxable Sales – 2012:Q4 (Preliminary*)

The most recent General Revenue Report  from the Department of Finance and Administration (DF&A) indicated a slight decline in sales and use tax revenue compared to the previous year, but both of the previous months’ reports had shown year-over-year increases.  As a result, preliminary figures for Arkansas Taxable Sales (ATS) for the fourth quarter of 2012 show a rebound after two consecutive quarters of decline.  Fourth quarter taxable sales were up 3% from the previous quarter (seasonally adjusted) and were 0.9% higher than the fourth quarter of 2011.

According to data from the Oil Price Information Service, monthly average gasoline prices in Arkansas declined over the quarter, falling from $3.65 per gallon in September to $3.11 in December.  On a quarterly average basis, , gasoline prices declined from an average of $3.46 in the third quarter to $3.27 in the fourth quarter.  Preliminary information on gasoline sales from DF&A’s Motor Fuels Tax section indicate that fourth quarter sales declined slightly from the third quarter — but less than is typical for that time of year.  So after seasonal adjustment, total gasoline sales were up 2.4%.  Consequently, Arkansas Taxable Sales Including Gasoline (ATSIG) were up 2.9% — nearly the same rate of increase as ATS.

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement
Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

The weakness of taxable sales growth during the second and third quarters of 2012 remains somewhat mysterious.  Available data on income and employment in Arkansas did not show notable weakness over that period, but those measures are subject to future revision.  National retail sales statistics showed a decline in the second quarter, but  rebounded in the third quarter.  Regardless of the cause of the mid-year slump, the fourth quarter recovery suggests positive momentum for consumer and business spending going into 2013.

At this point, the fourth quarter data are incomplete.  Final figures on sales and use tax collections are not yet available, nor are the data for gasoline sales in December (the gasoline component of ATSIG in this preliminary report is includes December figures that are derived from model-based estimates).  The data will be updated here on the pages of the Arkansas Economist when final information becomes available.

# # #

Arkansas Taxable Sales (ATS) is calculated by the Institute for Economic Advancement to serve as a timely proxy for Arkansas retail sales. The series is derived from sales and use tax data, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.  Arkansas Taxable Sales Including Gasoline (ATSIG) incorporates data on the state motor fuel tax and gasoline prices from the Oil Price Information Service.

A spreadsheet of the data is available here: Arkansas Taxable Sales 2012:Q4 (Excel file)

* Data are preliminary until the release of the DFA report, Arkansas Fiscal Notes for January 2013, and will be updated when information becomes available.

Arkansas Taxable Sales – Final Data for 2012:Q2

CORRECTION – 9/6/12:  Due to a data transcription error, the previously-reported final figures for June 2012 (and hence, the second quarter) were incorrect.  The text, tables, chart, and downloadable spreadsheet below have been revised to reflect the corrected data.  The change results in year-over-year increases for ATS and ATSIG that are 0.1% higher than previously reported.

The final pieces of information are now available for calculating second-quarter Arkansas Taxable Sales (ATS).  Due to particularly weak sales and use tax collections in July (corresponding to June sales), ATS declined 0.5% from the first quarter of the year (seasonally adjusted).  The preliminary estimate had shown a decline of only 0.3%.  Gasoline sales were also lower in June than previously estimated, so Arkansas Taxable Sales Including Gasoline (ATSIG) declined even more sharply — down 1.4%.  The quarterly declines represented a slowdown in longer-run growth:  Compared to a year earlier, ATS was up 4.6% and ATSIG was up 3.9%.

Sources: Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

The figure below illustrates that the second-quarter weakness in sales was primarily concentrated in June.  A single monthly data observation is never enough to establish a trend — it is always possible that the sales decline in June was a statistical anomaly.  Given the concurrent slowdown in national retail sales in the second quarter, however, the latest data on ATS provides some cause for concern about the robustness of Arkansas’ economic growth over the summer months.  We’ll be closely monitoring third quarter data as it emerges.

Sources: Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

# # #

Arkansas Taxable Sales (ATS) is calculated by the Institute for Economic Advancement to serve as a timely proxy for Arkansas retail sales. The series is derived from sales and use tax data, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.  Arkansas Taxable Sales Including Gasoline (ATSIG) incorporates data on the state motor fuel tax and gasoline prices from the Oil Price Information Service.

A spreadsheet of the data is available here: Arkansas Taxable Sales Data 2012:Q2 (Excel file)

Collins vs. Brummett on State Income Taxes: A Comment

Over the past few weeks, columnist John Brummett and state Representative Charlie Collins have been engaging in a public debate about Collins’ suggestions for modifying the personal income tax structure in Arkansas.  Collins’ proposal is to eliminate the second-lowest 2.5% tax rate (lowering it to 1%), to eliminate the highest 7% tax rate (lowering it to 6%), and to raise the threshold at which the new highest rate would kick in.  The threshold would be raised in phases for “higher income levels (six-figure earners) … over time.”  (He has been cited as suggesting that the threshold increase by $20,000 per year.)

Collins argues that his proposal represents “a dramatic tax break for low-income workers (60 percent reduction from 2.5 percent to 1 percent), strong relief for middle-class working families (35 percent cut from 7 percent to 4.5 percent), and a modest drop for high-income workers and job creators (14 percent from 7 percent to 6 percent).”

In a recent column, Brummett called these calculations “superficial and misleading.”  He calculates that for a taxpayer making $7,800 in adjusted taxable income per year (after exclusions and deductions) the tax savings from Collins’ plan would be about $60, and for a taxpayer with $252,600 in taxable income per year the tax reduction would be $2,200.  He cites this comparison as being fundamentally “unfair,” and asks the rhetorical question: “What’s the percentage of the better deal the well-off guy gets with $2,200 than the poor guy gets with $60?”

So who is right?  Actually, that’s a complicated question.  Both Collins and Brummett are factually accurate, but neither tells the whole story.  Each picks particular comparisons to support his case, missing some of the more general and subtle implications of the proposed plan.  And more importantly, they are addressing somewhat different questions.   The Arkansas Economist decided to weigh-in on this debate in an effort to provide a common-denominator, in the hope of clarifying some of the issues that underlie the disagreement.

To begin with, there is an important distinction between marginal tax rates and average tax rates.  In a progressive income tax scheme, marginal tax rates increase in steps.  Under current Arkansas law (2011 tax year), the tax is 1% on the first $3,999 of income, 2.5% on the next $4,000, 3.5% on the next $3,900, 4.5% on the next $8,000, 6% on the next $13,300, and 7% for any adjusted taxable income above $33,200.   The average tax rate (taxes paid as a percentage of income) is therefore a composite of marginal tax rates paid on cumulative levels of income.

Figure 1, below, illustrates marginal and average tax rates for current law, and for three alternative scenarios corresponding to the components of Collins’ plan.  Panel A illustrates current Arkansas tax law, with marginal and average tax rates plotted against adjusted taxable income.  Because the higher levels of income are taxed at progressively higher rates, the average tax rate is lower than the marginal tax rate for all income levels above the lowest bracket.   Average tax rates increase with income in a fairly smooth relationship, converging gradually to the highest marginal rate.  Panel A shows that taxpayers with adjusted taxable income below $4,000 currently pay an average tax rate of 1% (the same as the marginal rate), while those with incomes of $250,000 pay an average tax rate of about 6.6%.

Source: Arkansas Department of Finance and Administration, and author’s calculations

Panel B shows the effect of eliminating the 2.5% and 7% marginal tax brackets, without adjusting the threshold levels of income.  This lowers average tax rates for all taxpayers with incomes over $4,000, reducing the “steepness” of the average tax rate curve. Taxpayers with incomes of $250,000 now pay an average tax of 5.75%.  Panel C shows an estimate of the first phase-in of Collins’ increase in the threshold at which the 6% rate kicks in — an increase from 19,899 to 39,999.  This change lowers average tax rates for all incomes above $19,899, particularly for those with incomes between $20,000 and $40,000.  The average tax rate for an income of $250,000 falls from 5.75% in Panel B to 5.63% in Panel C.  Similarly, Panel D — which shows an increase in the highest tax-bracket threshold to the “six-digit” figure of $100,000 — shows a further flattening of the average tax curve (particularly for adjusted taxable incomes between $40,000 and $100,000), with the average tax rate for $250,000 incomes declining to 5.27%.

Having made the distinction between marginal tax rates and average tax rates, which one matters?  Collins’ main argument is that lowering tax rates will boost economic growth, and in this regard his focus on marginal rates is appropriate.  Economists generally consider decisions are made on the margin:  when considering an action that would change a taxpayer’s income, the question is “how will taxes affect my net income from one additional dollar earned in gross income?”

But for comparing the magnitude of tax cuts for different income levels, the average tax rate is a more appropriate measure. Collins’ calculations using marginal tax rate changes amount to making comparisons at very specific points along the income distribution, with the changes in marginal tax rates serving as an approximation of the impact on taxes paid (since the total tax bill is actually a composite of marginal rates).

Brummett is even more explicit about comparing a limited number of cases.  In particular, he considers two extremes:  One taxpayer with income of $7,800 and another with an income of just over $250,000.  Figure 2, below, generalizes Brummett’s argument.  Figure 2 shows the total tax reduction (in dollars) as a function of taxable income.  At the lowest income levels, the tax reduction amounts to $60 (as Brummett calculates).  This figure applies to all incomes in a range from $8,000 up to $19,900, the current 3.5% and 4.5% marginal tax brackets.  These marginal tax rates are unchanged by Collins’ proposal, but the elimination of the 2.5% tax bracket lowers total (and average) taxes.  Brummett’s other extreme is a taxpayer making over $250,000 in adjusted taxable income.  After the elimination of the two tax brackets, a taxpayer with this income receives a tax cut of about $2,200.  Note that by ignoring the proposed increase in tax-rate thresholds, Brummett actually underestimates the savings for these taxpayers would enjoy under Collins’ complete plan.  After the threshold for the new highest rate has reached six figures, the total tax savings for a taxpayer with $250,000 in taxable income is about $3,400.

Source: Author’s calculations.

So does this mean that Brummett is correct about the innate unfairness of the plan?  No, not really.  His comparison of two extreme cases, generalized in Figure 2, amounts to nothing more than an observation that any across-the-board tax cut results in larger tax reductions (in absolute dollar terms) for those who pay the most taxes in the first place.

Typically, those who emphasize “fairness” in the tax structure are focusing on progressivity.  For example, no one expects that Warren Buffet has a lower total tax bill than his secretary, but the controversy about fairness focuses on whether or not he pays a lower average tax rate (there’s that average tax rate again!).  An across-the-board tax cut proposal like Collins’ could conceivably result in a universally more progressive tax structure, but it would still display the pattern shown in Figure 2.

Economists have no special insight on whether a tax structure is “fair” or not, but we can describe objectively whether one tax structure is more progressive than another.  To do so, we need to consider the pattern of tax reductions in percentage terms.  This is precisely equivalent to looking at the percentage change in average tax rates.  One tax regime is considered more progressive than another if larger proportionate tax cuts go to lower income tax payers and vice versa.

Figure 3 shows how these percentage changes work out under the Collins plan.  Under each of the modified scenarios, the largest tax cuts in percentage terms are for taxpayers with adjusted taxable incomes of around $8,000.  So, Brummet’s hypothetical low-income taxpayer with his $60 tax cut receives the largest proportionate reduction of any income category — around 42%.  Note that this is somewhat less than the 60% reduction calculated by Collins using changes in marginal tax rates.

Source: Author’s calculations.

Without any change in the threshold level for the highest marginal tax rate, the proportionate tax saving falls off sharply over the income range of $8,000 to $33,000.  The smallest tax cut, 4.2%,  goes to a taxpayer with adjusted taxable income of $33,200 (the current level at which the 7% rate kicks in).   From that point, the proportionate tax savings is increasing in income.

Over the range from $8000 to $33,200, we can state unambiguously that the elimination of the two tax brackets increases the progressivity of the tax structure.  More generally, one can select any two or three points along the income distribution to show that progressivity has increased or decreased.  The important point is that such comparisons are specific to the particular points chosen.  A tax reform plan is universally more (less) progressive if the percentage tax savings are decreasing (increasing) in income over all income ranges.

Note that increasing the threshold where the maximum tax rate takes effect introduces a much different pattern of progressivity over higher income levels.  With no change in the threshold, the tax cuts become proportionately larger for higher incomes.  But increasing the threshold leads to a boost for those with incomes between $19,900 and the new higher cut-off level.  Raising the threshold to $40,000 increases the percentage tax cut for someone at that level of income by 22.5%.  Raising it to $100,000 implies a tax cut of 31.6% for taxpayers with adjusted taxable income of $100,000.  In either case, the percentage change in taxes is decreasing for incomes above the new threshold.  That is, raising the threshold has the effect of introducing greater progressivity into the upper end of the tax structure.

Of course, the issue of fairness and progressivity reflects only one dimension of a complex issue.  Collins emphasizes the positive effect his proposal would have for economic growth.  Brummett points out that lower income tax revenues for the state have to be made up for by increasing other taxes or cutting government spending.  Both points are valid, but the key question in each case is “how much?”  In the end, these questions are arguably more important than the progressivity issue — but are beyond the scope of this brief comment on the recent debate.

Arkansas Taxable Sales – 2012:Q2 (Preliminary*)

Weakness in sales and use tax collections in July suggests a downturn in Arkansas Taxable Sales (ATS) in the second quarter.  According to the data from the July general revenue report — which roughly correspond to sales during the month of June — sales tax receipts were down 0.6% from the same month a year earlier.  On a quarterly average basis, this implies that ATS declined by 0.3 from the first quarter to the second quarter of 2012.

Declining gasoline prices drove a sharp decline in gasoline sales as well.  The average price of gallon of regular unleaded gasoline in Arkansas was $3.22 in June, down from a peak of $3.74 in April.  Total sales of gasoline are estimated to have fallen 9.9% in the second quarter.  Consequently, Arkansas Taxable Sales Including Gasoline (ATSIG) fell even more sharply than ATS:  down 1.2% for the quarter.

Despite the weakness in the most recent data, relatively strong growth in the previous three quarters imply that both ATS and ATSIG are well above their year-ago levels.  From 2011:Q2 through 2012:Q2, ATS expanded by 4.8% and ATSIG was up by 4.2%.

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement
Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

The second quarter weakness in taxable sales was due entirely to an apparent downturn in sales during the final month of the quarter.  Hence, it would be premature to be concerned about ongoing weakness.  Nevertheless, the second quarter downturn parallels a similar slowdown in national retail sales, suggesting that the Arkansas data may not simply be a statistical anomaly.  Preliminary data from the Census Bureau shows that U.S. Retail Sales were down nearly 0.4% in the second quarter, matching the approximate timing and magnitude of the weakness in Arkansas Taxable Sales.

Sources: Arkansas Department of Finance and Administration, Oil Price Information Service, U.S. Census Bureau, Institute for Economic Advancement

At this point, the second quarter data are preliminary.  Final figures on sales and use tax collections in July are not yet available, nor are the data for gasoline sales in June (the gasoline component of ATSIG in this preliminary report is includes June figures that are derived from model-based estimates).   The data will be updated here on the pages of the Arkansas Economist when final information is available.

# # #

Arkansas Taxable Sales (ATS) is calculated by the Institute for Economic Advancement to serve as a timely proxy for Arkansas retail sales. The series is derived from sales and use tax data, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.  Arkansas Taxable Sales Including Gasoline (ATSIG) incorporates data on the state motor fuel tax and gasoline prices from the Oil Price Information Service.

A spreadsheet of the data is available here: Arkansas Taxable Sales Data 2012:Q2 (Excel file)

* Data are preliminary until the release of the DFA report, Arkansas Fiscal Notes for July 2012, and will be updated when information becomes available.

Revised Data on Arkansas Taxable Sales

Final data on Arkansas Taxable Sales (ATS) for 2011:Q4 are now available, but there is little news to report.  Based on new information from the Department of Finance and Administration on sales tax and gasoline tax receipts, the data on both ATS and the broader measure — Arkansas Taxable Sales Including Gasoline (ATSIG) — were nearly identical to our preliminary estimates.  Growth rates for both measures are summarized in the table below.

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

Preliminary data for January are now available as well.  Taxable sales in January were up 0.55% from the previous month (a 6.7% annual rate).  Compared to the previous January, ATS was up 6.0%.  With gasoline prices rising, ATSIG rose even more sharply in January.  Compared to the previous month, ATSIG was up by over a full percentage point (approximately a 12.6% annual rate).  From the previous year, ATSIG was up by 6.4%.

Sources: Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

#  #  #

The Arkansas Taxable Sales (ATS) series is calculated by the Institute for Economic Advancement to serve as a timely proxy for Arkansas retail sales.  The series is derived from sales and use tax data, adjusting for the relative timing of tax collections and underlying sales, changes in tax laws, and seasonal patterns in the data.  Arkansas Taxable Sales Including Gasoline (ATSIG) incorporates data on the state motor fuel tax and gasoline prices from the Oil Price Information Service.

A spreadsheet of the data is available here:  Arkansas Taxable Sales Data 2011:Q4 (Excel file)

 

Arkansas Taxable Sales (Including Gasoline) – 2011:Q1

High Gasoline Prices Divert Spending

Preliminary data indicated that Arkansas Taxable Sales (ATS) increased only modestly in the first quarter of 2011 (+0.7%), and had shown little net growth over the past three quarters (+0.6%).  Based on information released last week from the Arkansas Department of Finance and Administration (DF&A),  revised statistics show an even smaller increase in the first quarter, +0.6%.  As shown in Figure 1, the sluggish growth in ATS since mid-2010 contrasts with national retail sales statistics, which have shown steady recovery from the recession. 

Sources:  U.S. Census Bureau, Arkansas Department of Finance and Administration, Institute for Economic Advancement
Sources: U.S. Census Bureau, Arkansas Department of Finance and Administration, Institute for Economic Advancement

In the Arkansas Economist report on the preliminary figures we speculated that the difference might be related to the recent spike in gasoline prices.  (This factor was also mentioned in the most recent General Revenue Report from DF&A.) National retail sales statistics from the Census Bureau include expenditures on gasoline.  But because gas is not subject to sales tax in Arkansas, it is not included in ATS. 

As shown in Figure 2, the share of total U.S. retail sales reported at gasoline stations varies directly with the price of gasoline.  In the short run, the demand for gasoline tends to be price inelastic — that is, the quantity of gasoline purchased remains fairly stable when prices change.  Consequently, an increase in gasoline prices raises the share of total spending devoted to gasoline.

Sources:  U.S. Census Bureau and U.S. Department of Energy
Sources: U.S. Census Bureau and U.S. Department of Energy

Arkansas Taxable Sales includes the non-gasoline items that are sold at gas stations, but it doesn’t include the gasoline iteslf.  When gas prices increase dramatically, this means that ATS is missing a component that is of growing importance.  Although gasoline is not subject to sales tax in Arkansas, it is subject to a motor fuel tax that is assessed per gallon sold.  Therefore, the Department of Finance and Administration has monthly records of the quantity of gasoline sold in the state.  Multiplying the quantity sold by the average price for gasoline in Arkansas (obtained from the Oil Price Information Service), we can construct aggregate gasoline sales to be included in an expanded measure of ATS — Arkansas Taxable Sales Including Gasoline (ATSIG).  Figure 3 compares ATS with and without this newly-constructed measure of gasoline expenditures.

Sources:  Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement
Sources: Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

The data that include gasoline sales show considerably greater strength in recent quarters than the original version of ATS:  In the past three quarters, ATSIG has grown by 2.8%, compared to the meager 0.6% growth without including gasoline expenditures.  The difference is particularly marked in the first quarter of this year, with ATSIG expanding by 1.9%.  In the most recent two quarters, ATSIG shows that total sales growth in Arkansas expanded more than 1% per quarter faster than ATS (without gasoline) suggests.

ATSIG_Growth_Rates

With gasoline included, the recent growth of taxable sales in Arkansas more closely mirrors the statistics on national retail sales, as shown in Figure 5.

Sources:  U.S. Census Bureau, Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement
Sources: U.S. Census Bureau, Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

So how should we interpret the surge in recent spending on gasoline?  From a strictly utilitarian standpoint, it is appropriate to include gasoline in total sales so that it more closely matches the U.S. Retail Sales statistics.  But the economic significance of an increasing gasoline share in total spending is trickier to evaluate.  To the extent that a gasoline price increase is considered permanent, it should have a negative wealth effect that reduces overall spending.  On the other hand, a temporary price spike should have negligible wealth effects, but might induce households to borrow more and/or save less in order to maintain planned spending on non-gasoline items.  This is likely to be a factor in explaining the sharp surge in ATSIG in response to the surge in gasoline prices in early 2008.  But, if households are effectively credit constrained, the increased spending on gasoline is likely to crowd out other spending — leaving total spending at about the same rate as it would be without the gasoline price spike.  The reaction of non-gasoline spending to the 2011 price spike suggests this scenario might be relevant for interpreting recent data.  The difference between 2008 and 2011 is illustrated in Figure 6, which shows the gasoline expenditure share in ATSIG alongside Arkansas average gasoline prices.  In 2011, the rise in gasoline prices was slightly smaller than the 2008 spike, but the share of spending on gasoline has exceeded the 2008 peak.  This indicates that the 2011 price surge has resulted in a larger cut-back in non-gasoline expenditures.

Sources:  Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement
Sources: Arkansas Department of Finance and Administration, Oil Price Information Service, Institute for Economic Advancement

Gasoline prices have fallen considerably in recent weeks.  According to the AAA Fuel Guage Report, gasoline prices in Arkansas have declined by nearly 23 cents over the past month.  This is likely to reverse the substitutions we’ve seen in the early-2011 data, with non-gasoline items again constituting a larger share of total spending.  For state general revenues, which depend heavily on sales taxes, this should result in more rapid growth for the remainder of 2011.

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A spreadsheet with data for ATS and ATSIG is available here.

Arkansas Capital Gains Tax Cut

HB1002 has become a controversial proposal before the state’s legislature.  As reported by Talk Business, the sponsor of the bill — Rep. Ed Garner (R-Maumelle) — has cited “a UALR study” that shows the revenue impact of the proposed tax cut will be smaller than estimated by the Department of Finance and Administration.

The UALR report cited was written by yours truly.  Representative Garner approached me with a request to take a look at the numbers and see if I had any additional insights to provide.  I went through the numbers and came up with an alternative approach to estimating the revenue impact, using data from a simliar law that is on the books in Oklahoma.

In line with the mission of Arkansas Economist–providing information and analysis about the Arkansas economy–the report can be viewed here:  HB1002 (PDF).

Which set of estimates is correct?  Neither.  There is a great deal of uncertainty associated with forecasting the impact of hypothetical policy changes.  The estimates provided in my report should be viewed as an alternative that helps establish a plausible range of likely outcomes.  I neither endorse nor oppose HB1002, but provide this analysis in the public interest.