Texarkana Taxes: Two States’ Revenue Laws Divide a Pair of Cities

If you stand with one foot on either side of the middle of State Line Avenue, which divides Texarkana, Texas, from Texarkana, Arkansas, you should be conscious of which side your wallet is on. Due to the way Texarkana taxes are structured on each side of the border, picking one side or the other makes a real difference in how much you pay — and what kind of taxes you pay.

Border Exemption on State Income Taxes

Texas, like only a few other states in the country, boasts no state income tax. Meanwhile, Arkansas reports recently reduced income tax rates. In any other Arkansas community, residents owe the state 5 percent of their income if they make between $21,000 and $35,099, and 6 percent if they make between $35,100 and $75,000. But for the nearly 30,000 residents of Texarkana, Arkansas (and any Texans who work there), the Border City Exemption has made them immune from state income taxes for the past 36 years.

But what makes this city exempt? Essentially, Arkansas lawmakers wanted to balance the attractiveness of their community with that of their neighbor, where 35,000 Texans reside. And it worked. According to a 2011 study by the University of Arkansas at Little Rock’s Institute for Economic Advancement (IEA), population patterns show that 70 percent of Miller County, Arkansas, residents live in Texarkana, while only 38 percent of residents in Bowie County, Texas, settle in Texarkana’s jurisdiction.

Entrepreneurs have learned that running a business in Arkansas outside of Texarkana reduces the available pool of workers, due to the income tax they have to pay. Thus, the IEA study notes, there are “a total of 1,674 businesses in Miller County (Arkansas), with 1,521 (over 90 percent) located within the Texarkana city limits. In contrast, 3,512 of the 4,600 businesses in Bowie County (about 76 percent) are located in the city of Texarkana, Texas.”

Other Texarkana Taxes to Consider

Income taxes aside, these cities differ when it comes to property, sales, and business taxes.

The IEA study says that property taxes in Texarkana, Texas, are more than twice as high as that of Arkansas. As a result, “There is an increasing trend of population growth on the Arkansas side of the border that is disproportionate with job growth,” and “the surge in residential construction in the 1990s and early part of the 2000s suggests that the national building boom during that period was more evident on the Arkansas side of the border than on the Texas side.”

With sales tax for Arkansas (6 percent) and Texas (6.25 percent) closely resembling one another, a customer’s choice of where to shop may seem cut and dry. Though after city and county tax percentages are added, not to mention the 1 percent sales tax added to Texarkana, Arkansas, to make up for the lack of income taxes paid, the numbers become vastly different: Texarkana, Arkansas (10 percent) and Texarkana, Texas (8.25 percent). The IEA study concludes that this is enough of a sales tax margin for retail enterprises and wholesalers to gain customers on the Texas side of the border.

In addition, Arkansas’ corporate income tax is steeply progressive, rising from 1 percent for the first $3,000 of net revenue up to 6.5 percent for net revenue above $100,000. Texas, however, has a special margins tax that puts different weights on different categories of income. The IEA study concludes that because most businesses face lower rates under the margins tax (particularly the small businesses that tend to predominate in the Texarkana economy), the incentive to locate a firm on the Texas side of the border is reinforced.

Thus, growth in the Texarkana metro area will be weighted toward sales and service businesses on the Texas side, and toward manufacturing and residential sectors on the Arkansas side, where industrial firms along with residential and commercial builders are more likely to find greater opportunities for growth.

One name, two cities, and multiple taxes all tell the fascinating story of Texarkana, proving that there are many factors to consider when choosing which side of a state border (or in this case, the street) you choose to shop, live, or set up a business.

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