The largest tax cuts in Arkansas history took effect on July 1, the beginning of the state's fiscal year.
Earlier this year the legislature cut in half the state sales tax on groceries, lowering it from 6 percent to 3 percent. That will reduce state revenue by $122.1 million a year, and therefore save taxpayers the same amount every year.
Groceries and retail stores that sell food have been preparing their computers and cash registers for the new rate. State tax officials have held a series of seminars to inform retailers of which items will see a tax cut, and which items will continue to be taxed at the old rate.
Food served in restaurants will continue to be taxed at 6 percent. The grocery tax reduction is for food that is unprepared, or not ready to eat. For example, a frozen pizza will be taxed at the new rate of 3 percent, but a ready-to-eat pizza that you buy from a deli counter will still be taxed at 6 percent.
If you buy packages of ham and cheese you'll pay the new, lower rate. If you buy a sandwich already put together for you by a store employee, it will be taxed at the old rate. Some groceries sell heated rotisserie chicken, salads that are already made and bowls of soup that are ready to eat. They will be taxed at the old rate.
Generally speaking, if you get a napkin or a plastic fork and spoon with your prepared dish, it will be taxed at the old rate.
Numerous elected officials have said they hope to further reduce the sales tax on food during the 2009 regular session. The 1/8 cent sales tax for conservation will not be repealed, however, because it was approved by Arkansas voters in a statewide election.
Also, local option sales taxes will not be reduced on July 1 because many of them were approved by voters, and many of them are committed to paying off bonds for capital projects such as jails and hospitals.
Also taking effect is Act 185, under which the sales tax on utility purchases by manufacturers will fall from 6 percent to 4.5 percent next year. Next year it will go down to 4 percent, saving Arkansas industries about $35 million a year.
Another component of the tax cuts approved this year will raise the threshold at which low-income families must pay state income taxes. Act 195 of 2007 removes people under the federal poverty level from the obligation to pay state personal income taxes.
Whether a taxpayer is under the poverty level depends on the size of his or her family. A family of four now must pay income taxes if their income is more than $16,000 a year. The legislature raised that threshold to $20,700 a year for a family of four.
It will save about 81,000 Arkansans a total of $32 million a year.
Property owners will pay about $22.5 million less in taxes next year under Act 142, which increases the homestead property tax exemption from $300 to $350 a year.
The legislature also enacted other tax relief measures. Act 87 will lower taxes on the purchase of diesel fuel used in off-road vehicles. It eliminates the 6 percent sales tax levied on off-road diesel and replaces it with a fuel tax of 6 cents per gallon.
Act 87 will help farmers, who have seen their fuel costs rise dramatically in the past year. The measure will lower taxes by almost $15 million next year. In addition to the tax reduction, lawmakers approved incentives designed to promote the production of biofuels, thus reducing our dependence on foreign oil while helping protect the environment.