Arkansas has made notable strides in modernizing its state tax code over the past decade. From simplifying its once-complicated individual income tax structure to reducing the top corporate and individual tax rates, the state has demonstrated its commitment to reform. However, these improvements primarily benefit Arkansas residents and certain nonresidents, leaving significant room for growth in addressing the tax filing and withholding complexities faced by remote and nonresident workers.
As the remote work revolution reshapes talent acquisition, Arkansas faces mounting pressure to update its outdated policies. Currently, the state lags behind others in handling nonresident income tax filing and withholding thresholds, presenting a barrier for businesses looking to attract top-tier talent. Recognizing this, Representative David Ray (R) has introduced the Remote and Mobile Work Modernization and Competitiveness Act (HB 1116) to address these challenges.
Key Provisions of the Remote Work Bill
The proposed legislation introduces three major changes aimed at streamlining tax policies for nonresident workers:
1. Reciprocity Agreements
The bill enables Arkansas to establish reciprocity agreements with other states. Under these agreements, states mutually agree not to tax each other’s residents for work performed within their borders. This approach simplifies tax compliance by ensuring that workers are only responsible for income taxes in their state of residence, eliminating the need for complex offsetting credits. If enacted, Arkansas would join the ranks of 17 states that already benefit from such agreements, significantly easing administrative burdens for both employers and employees.
2. Income Exemption Threshold
The bill proposes exempting the first $2,500 of Arkansas-sourced income earned by nonresident workers from taxation. This reform addresses the current system, where even a single day of work in Arkansas can trigger tax liability. While the proposed threshold is a step forward, it falls below the national median. Adopting a days-based exemption threshold—rather than a fixed dollar amount—could provide greater clarity and simplicity for workers and employers alike.
3. Withholding Exemption for Short-Term Work
Employers would no longer need to withhold Arkansas taxes for remote workers spending fewer than 15 days in the state. This provision, paired with the income exemption threshold, alleviates compliance costs for both parties. However, most states with similar exemptions use a 30-day threshold. Aligning Arkansas’s policy with this national norm would enhance its competitiveness and provide additional relief to businesses.
Why This Reform Matters
Simplifying Compliance
Currently, Arkansas requires all nonresident workers—even those spending just one day in the state—to file and remit taxes. This creates significant compliance burdens where the costs often outweigh the taxes owed. By adopting the proposed changes, Arkansas would alleviate these challenges, making it easier for businesses to hire remote talent and for nonresidents to navigate tax obligations.
Improving Arkansas’s Rankings
According to the Tax Foundation’s State Tax Competitiveness Index, Arkansas ranks 39th in the individual income tax component. Implementing HB 1116’s provisions would move the state up two places to 37th, signaling progress toward a more business-friendly environment.
Attracting Top Talent
In a competitive hiring landscape, streamlined tax policies can make a significant difference. By reducing administrative hurdles and aligning with national trends, Arkansas could position itself as an attractive destination for both employers and employees.
Opportunities for Enhancement
While the Remote and Mobile Work Modernization and Competitiveness Act marks a significant step forward, there is room for further refinement:
- Increase the Income Exemption Threshold: Raising the $2,500 exemption to match or exceed the national median would provide greater relief to nonresident workers.
- Adopt a 30-Day Withholding Threshold: Extending the exemption period from 15 to 30 days would align Arkansas with best practices and simplify compliance for short-term workers.
Embracing Modernization
The Remote and Mobile Work Modernization and Competitiveness Act is more than a policy update—it’s a necessary step toward modernizing Arkansas’s tax code. By reducing burdens for remote and nonresident workers, the state can embrace the opportunities of the evolving remote work landscape, attract top talent, and enhance its reputation as a forward-thinking, competitive jurisdiction.
By making additional adjustments to align with national standards, Arkansas could further cement its position as a leader in tax reform and workforce modernization.