A bill that would exempt military retirement pay and survivor benefits from state income taxes passed on a voice vote with no dissent in the House Revenue and Tax Committee Thursday.
State law already exempts $6,000 of veterans' retirement income from state income taxes. This bill would exempt all military retirement income and pay for it by taxing candy and soft drinks at the full sales tax rate. It also would tax unemployment compensation benefits, levy a sales tax on certain digital products, reduce the tax rate on soft drink powder and syrup and transfer general revenue to the state Medicaid trust fund.
An earlier version of the bill included the removal of a partial exemption on the sale of manufactured homes, but when it was amended, the tax on manufactured homes was replaced by a tax on digital downloads, including music and books.
The military retirement tax exemption would affect 29,000 military retirees, while reducing general revenue by $6.7 million in FY2018 and by $13.4 million in FY2019. This would be offset by an increase in the tax on candy and soft drinks, which would increase general revenue by $6.9 million in FY2018 and $13.8 million in FY2019, according to the Department of Finance and Administration's Legislative Impact Statement. Fiscal year 2018 begins July 1, 2017.
The bill also contains a reduction of the tax on syrups and powders used to make soft drinks, which would reduce revenue earmarked for Medicaid by $3 million in FY2018 and $5.9 million in FY2019. General revenue funds would be transferred to Medicaid to offset the reduction. To make up for the loss in general revenue, unemployment benefits and digital downloads would be taxed. Taxing unemployment benefits would increase general revenue by $1.6 million in FY2018 and $3.1 million in FY2019, while levying a sales tax on digital downloads would increase general revenue by $1.2 million in FY2018 and $2.4 million in FY2019, according to a legislative impact statement.
Despite the unanimous support for the retirement exemption, for nearly an hour preceding the vote, committee members voiced concern about how the exemption would be paid for and questioned other elements in the bill.
Rep. Kim Hendren (R-Gravette) said he supported the military retirement exemption, but in light of the $50 million tax cut that passed in the House and Senate on Monday, other fiscal responsibilities required consideration as well.
"How are we going to pay for the foster kids' care in this state?" Hendren asked. "How are we going to pay for prisons? How are we going to take care of highways?"
House Minority Leader Michael John Gray (D-Augusta) questioned why the bill contained a reduction in the corporate tax on the syrups and powders used to make soft drinks.
"It seems like this is another tax cut that's riding the coattails ... of the military retiree benefits," Gray said. "We are lowering the cost of the tax to the corporate interests and raising the tax on the consumer."
Paul Gehring with the Department of Finance and Administration, who answered some of the committee members questions about the bill, said, "In order to be revenue-neutral, we had to combine several elements of taxes." He said that when the bill was put together there was a decision to shift "a tax that's collected at the wholesale level and instead have it collected at the retail level."
Sen. Jake Files (R-Fort Smith), who also testified for the bill, said he would not have paid for the exemption in the same way. "I don't disagree that it seems like it's riding the coattails," said Files. "I think this was a way to achieve probably two goals at one time, and to make it revenue-neutral."
Rep. Les Eaves (R-Searcy) said he also supports the bill, but doesn't like how it would be paid for. "Not really sure what all these digital downloads are going to be all about," Eaves said. "Are they going to be students downloading digital books at college? Are those exempt?"
Gehring explained that according to Arkansas law, books purchased by public schools are exempt from state tax, but textbooks purchased by college students are subject to tax, and they would also be subject to tax under this bill.
"I'm for the bill, because I'm for the veteran's exemption," said Lt. Governor Tim Griffin, who was the first to testify for the bill after it was introduced.
"Every bill that we pass ... usually has a part you like and a part you don't like. But you still vote for them because you think the positive outweighs the negative."
Governor Hutchinson defended the syrup tax reduction when talking with reporters later in the day. "There was sufficient revenue to offset the syrup tax that was imposed years ago as a temporary measure to shore up Medicaid,"Hutchinson said. "That temporary tax, as usual, is just continuing forever, so it gave us an opportunity to reduce that -- not completely -- but to reduce it, and I think that's a good balance."
Speaker of the House Jeremy Gillam (R-Judsonia) said he expected the House to take up the bill early next week. Sen. Jane English (R-North Little Rock), lead sponsor of the Senate version of bill, said in an email that she expected the bill would be considered by the Senate Revenue and Tax Committee on Monday.
If the bill becomes law, military retirement and survivor benefits would become tax-exempt starting with the 2018 tax year.