Several state legislators who had been critical of Governor Hutchinson’s $50 million tax cut for Arkansas’s lowest earners now say they will support the plan.
Tipping the scale for many lawmakers is Hutchinson’s proposal to create a legislative tax reform task force, said Rep. Charlie Collins (R-Fayetteville), who had called the governor’s proposed tax cuts for Arkansans earning less than $21,000 a year a “bad policy” and unfair when it was first announced in December.
Collins, who sits on the House Revenue and Taxation Committee, wanted to further reduce the tax burden on upper income earners. But he said he was on board with the governor’s proposal and excited about the task force.
“What I really want to do is reform our tax system in Arkansas, so we broaden the base, lower the rates,” he said.
Sen. Bart Hester (R-Cave Springs) had floated a $105 million income tax cut plan, but he said he’s going along with what the governor’s proposing “in order to get more in the future.”
“I don’t want this to come out wrong, but I don’t know a lot of poor people who are hiring right now,” Hester said. “You’ve got to encourage people that are doing well to continue hiring people if you ever want a chance for upward mobility.”
Rep. Matthew Pitsch (R-Fort Smith) and Sen. Jim Hendren (R-Gravette) are the House and Senate sponsors of the governor’s bill. The bill would set the members of the task force at 16 and require it to make its recommendations in the 2019 regular legislative session. Both House and Senate revenue and taxation committees are expected to consider the legislation this week.
The governor has said the $50 million tax cut will be paid for with projected revenue growth and increased efficiencies on the state level. It is projected to benefit the 657,000 low-income earners who were not part of a $100 million tax cut passed in 2015.
“When you look at the governor’s budget right now there is no margin for error,” said Rep. Joe Jett (R-Success), who chairs the House Revenue and Taxation Committee. Jett expressed concerns that the state could come up short for one-time expenses not included in the Revenue Stabilization Act.
“If we flat-line our budget and we don’t meet revenue growth projections … then not only can we not fund our budget, we’re not funding the one-time money we’ve got out there promised,” Jett said. “That’s what keeps me awake at nighttime.”
Revenue collections for the 2017 fiscal year are currently $8.8 million below projections, but Richard Wilson, assistant director of research services for the Bureau of Legislative Research, told the House revenue committee that “growth is steady and slow, and we should not collect less money than last year.” He said he expects the budget will be funded with “perhaps a small surplus,” but he added that the refund season could derail this projection.
Last week, Rep. Warwick Sabin (D-Little Rock) filed alternative low-income tax relief legislation that would establish an earned income tax credit based on an individual’s income.
“I strongly believe that the earned income tax credit is a more effective way to deliver tax relief to lower income Arkansans,” Sabin said. “It really helps move people out of poverty. It helps remove dependence on social services.” Low- to moderate-income working people and families may be eligible for a federal EITC.
Sen. Jake Files (R-Fort Smith), who chairs the Senate Revenue and Taxation Committee, is sponsoring the EITC bill in the Senate.
Jett told the House revenue committee that the governor’s tax cut proposal would be considered in the near future and other tax cut bills would be shelved until the end of the session.
Hutchinson has also proposed a tax exemption for military retirement pay and survivor benefits. Sen. Jane English (R-North Little Rock) and Rep. Charlene Fite (R-Van Buren) are sponsors. Retired military personnel are already entitled to a $6,000 exemption under state law. The new bills would increase that amount through an exemption trade: The exemptions for the military would be funded by taxing unemployment compensation benefits, removing a partial exemption on the sale of manufactured homes, and taxing candy and soft drinks at the full sales-tax rate, while reducing the rate of tax on syrups.
“We have a lot of military who are abroad or looking for a place to come back to and we want them to choose Arkansas,” said J.R. Davis, the governor’s spokesman. “This is a game changer.”
The governor’s proposal is projected to affect 29,000 military retirees, while reducing general revenue by $13.4 million annually. The reduction of the tax rate on syrups is projected to further reduce general revenue by $6.3 million a year,* according to Jake Bleed, director of communications for the Arkansas Department of Finance and Administration.
Taxing unemployment benefits is projected to increase general revenue by $3.1 million. Increasing the tax on manufactured homes is projected to raise $2.5 million. The raised candy and soft drink tax should bring in $13.8 million, Bleed said.
The new taxes have their detractors. “I would think that unemployment benefits are the last place we ought to look for removing tax exemptions,” Sabin said. “These are people who are looking for work, who are on the ropes, and to give them an additional tax burden to me makes absolutely no sense.”
The Arkansas Manufactured Housing Association is not on board with an increase in taxes on mobile homes. The proposed legislation would add $1,800 in sales tax to the purchase price of a $65,000 manufactured home, J.D. Harper, executive director of the association, said.
The sales tax applied to a manufactured home is on 62 percent of the purchase price. The proposed legislation would apply sales tax to 100 percent of the purchase.
“We say houses ought to be taxed like houses,” Harper said. “The reason the formula is the way it is currently is to tax houses like houses, not like washing machines and TVs and other consumer goods.”
In Arkansas, when a house is built, only the materials are subject to sales tax — not the labor, transportation and other nontaxable services, said Harper. “All of these are included in the purchase price of a manufactured home, and would be taxed unfairly under this tax proposal,” Harper wrote in a policy statement submitted to the governor on Jan. 4.
“We’re open to other alternatives, but we haven’t been presented with any that make sense and would work,” Davis said. Arkansas is a small state with a small budget relative to surrounding states, so there have to be offsets, he said.
“It’s not just to say you’re robbing Peter to pay Paul. You are talking about specific tax exemptions … going towards paying for this exemption that really could be an economic boon in this state,” Davis said.
The horse-trading of exemptions is a topic some lawmakers hope will be considered by the tax reform tax force.
“Our budget is larded with tax exemptions for very narrow special interests that have been passed individually for many, many years,” Sabin said. “I think it would be a good exercise for the state to go through all of those and see how many of those are really justified and why we are giving some certain interests tax exemptions and not others.”
“An exemption here is really valuable, and that’s a bad situation,” Collins said. “What you really want is somebody to say, ‘Hey, I don't feel so bad about my taxes. I'm not going to invest a lot of effort trying to avoid them, trying to — God forbid — evade them, trying to lobby for exemptions, trying to manage my affairs so that my income does not occur in Arkansas, all the things up to and including leaving the state.”
The goal is to have an income tax rate that everyone feels decent about, he said.
Hester said he would prefer the legislature do away with exemptions in the next General Assembly.
“Every exemption on face value is worthy and should be there,” Hester said. “But, at the end of the day, we have to look at them and say, rather than … carve-outs and exemptions for special people that had good lobbyists, we need to lobby for everyone in Arkansas and to allow all the tax base to come down … whether that be just on income or sales tax or both.”
Hester filed legislation on the fourth day of the regular session calling for an exemption on the purchase of firearms: a tax-free weekend for gun sales. However, he said, “I’m good with stepping back from that” if the legislature decides to eliminate exemptions.
* All revenues derived from taxes levied on soft drinks in Arkansas are used exclusively for the state match of federal funds participation under the Arkansas Medicaid Program. The reduction of the tax rate on syrups would therefore reduce revenues into the Medicaid trust fund.