by David Ramsey
Hutchinson’s plan does technically reduce the tax burden for people earning less than $21,000 a year, but that fact is misleading. If you ask any accountant, you’ll find that there is some fantastic breadth in the variations of what “making money” can mean. Hutchinson’s bracket changes are based on “taxable income,” not wages, salary, or even adjusted gross income. That means we would be cutting refund checks based on what your reported income is after subtracting itemized deductions, capital gains exclusions, business losses, etc. There are always going to be taxpayers with a lot of income and little “taxable income” for various reasons. You can “make” quite a lot of money, and still easily come in under $21,000 in taxable income.
Hypothetically, a tax filer with $100,000 in gross income could end up with a “taxable income” of only $15,000 a year after reducing their tax liability with various deductions. Those deductions include things like mortgage interest deductions, business losses from previous years, charitable contributions, IRA contributions, deductions for personal and dependent exemptions and deductions for business expenses and costs associated with working from home. This person could be within the “low-income” range, despite earning a gross income well above the median in Arkansas.
The flip side of this “taxable income” flaw is that it leaves out a lot of people who actually do earn very low wages. Many truly low-income families making minimum wage or living below the poverty line will gain nothing because they already have zero income tax liability. This is due to 2011 tax code changes that amended the “low-income tax tables” and eliminated or greatly reduced income tax liability for most taxpayers in this income group. That doesn’t mean they aren’t paying a large share of their income to taxes, though. The lowest income pay twice the rate in state and local taxes as compared to the top one percent in Arkansas (as a share of income). That is because, although their income taxes are low, they spend a much higher share of their paycheck on other state and local taxes like the sales tax, property tax, the fuel tax etc. In short, it is hard to help people earning less than $21,000 a year by reducing their income tax. To efficiently reduce their tax burden we need to use a tax credit.Because of these two factors, Hutchinson's tax cut isn't very well targeted if the goal is to help low-income workers. The Arkansas Advocates report notes that about half of the savings go to the top 40 percent of earners in the state. Meanwhile, only 5 percent of the savings go to those making less than $18,000. So much for a low-income tax cut!