undefined method 'arity' for an instance of Hash when upgrading rails 8.0.3 => 8.1.0

It seems this is an issue with library compatibility. acts-as-taggable-on version 12 supports ActiveRecord up to < 8.1 (Source)

gem.add_runtime_dependency 'activerecord', '>= 7.1', '< 8.1'

The reason it rolled all the way back to. 5.0 is because of bad gem specifications.

In version 5.0.0 the gemspec is

gem.required_ruby_version = '>= 2.2.7' gem.add_runtime_dependency 'activerecord', ['>= 4.2.8']

Which is satisfied by 3.4.4 and 8.1.0 but that does not mean it is functional at all. Starting with version 6.0.0 the library was much more specific about the rails versions required.

Your current options include:

Downgrading rails to < 8.1

As of about 11 hours ago it does appear they are testing master against 8.1 so maybe check with the maintainers as to when this will be available as a release.