Panel backs tax cuts, capital-gains cushion

Senate President Pro Tempore Jonathan Dismang (left) and House Speaker Jeremy Gillam confer Tuesday during a meeting of the Joint Budget Committee.
Senate President Pro Tempore Jonathan Dismang (left) and House Speaker Jeremy Gillam confer Tuesday during a meeting of the Joint Budget Committee.

An Arkansas House committee Tuesday endorsed a bill to cut tax rates for Arkansans with taxable income between $21,000 and $75,000 after it changed provisions of the bill that would have repealed capital-gains tax cuts approved in 2013.




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In a voice vote with a few dissenters, the House Revenue and Taxation Committee recommended the House approve Senate Bill 6 by Senate President Pro Tempore Jonathan Dismang, R-Searcy.

Afterward, Republican Gov. Asa Hutchinson said the bill, as amended, will cost the state $10 million more a year in tax revenue than his proposed fiscal 2016 budget anticipates and possibly lead to cuts in that budget.

If SB6 becomes law, the income-tax rate for Arkansans with taxable incomes of between $21,000 and $75,000 would drop from 6 percent to 5 percent on incomes between $21,000 and $35,099, starting next year. The rate on incomes between $35,100 and $75,000 would fall from 7 percent to 6 percent.

The Senate-approved version of SB6 would repeal Act 1488 of 2013, which increased the net capital-gains exclusion from the state income tax from 30 percent to 50 percent, starting this tax year. Act 1488 also provided an income-tax exemption for that part of capital gains received by a taxpayer in excess of $10 million starting last tax year. The law would be repealed retroactive to Jan. 1 of this year under the Senate-approved version of SB6.

The House tax committee Tuesday changed the capital-gains provisions of SB6 so the 50 percent exclusion of capital gains from income taxes would remain until the end of this month before dropping to 40 percent, starting Feb. 1.

House Speaker Jeremy Gillam, R-Judsonia, told the House tax committee that he wants to keep the 50 percent exclusion of net capital gains from income taxes for this month because "we made a promise to the citizens of the state that we were going to allow them to conduct business in a particular manner [and] they began this year conducting business in that manner based on the promise that we had from the 89th General Assembly [in 2013].

"We did not feel that it was proper and responsible to yank the rug from under them and go back on our word," said Gillam, who is the House sponsor of SB6.

Starting Sunday, 40 percent of capital gains will be excluded from income taxes rather than 50 percent, Gillam said.

Rep. Jady Ladyman, R-Jonesboro, said he worried about increasing taxes on capital gains because the beneficiaries of the tax cut approved in 2013 "are the people who generate jobs."

Gillam said the state Department of Finance and Administration estimates that 100,000 to 150,000 taxpayers would have benefited from those capital-gains tax cuts.

"The important thing to keep in mind with what we are doing here is we still are raising that exemption. We are still offering tax relief to that group of people," he said.

About 597,000 Arkansans earning $21,000 to $75,000 will benefit from the reduced income-tax rates under SB6, according to John Theis, an assistant revenue commissioner for the state.

An Arkansan with taxable income of $75,000 will save $540, while a taxpayer with $50,000 of taxable income will save $290; someone with taxable income of $35,000 will save $140, Theis estimated.

Committee Chairman Joe Jett, D-Success, asked Gillam how the proposed amendment would affect Hutchinson's proposed budget for fiscal 2016.

Hutchinson's proposal factors in a $12.8 million reduction in state general revenue in fiscal 2016 and an $80.6 million decline in fiscal 2017 from the Senate-approved version of SB6.

Gillam said his amendment to SB6 would reduce state general revenue by an additional $9 million to $12 million a year.

"Revenues are looking up and, at the end of the day, I think we'll be able to make sure that there is no services cut with this whatsoever," he said.

"Based on the forecasting figures and the numbers that we are looking at, I do not foresee that this will not [have] a negative impact on the proposed budget as well because I think the collections are actually going to be over and above what the proposed budget [forecasts]," Gillam said.

But Committee Vice Chairman Kim Hendren, R-Gravette, who dissented along with Rep. Vivian Flowers, D-Pine Bluff, said that "if we are sure of [sufficient tax revenue to cover the amendment to SB6], then why don't we just defer this change until the end of this fiscal year and then if the money is there, let's take care of it then?"

"If there is a possibility ... that the funds are not there, then the guy that is building a fence for me today at $11 an hour is not going to get his taxes reduced as much, but we ... in fact are going to reduce my [capital-gains] taxes because I am about to sell some cows and make $1,000 a head on them," Hendren asked.

Gillam said there's always the possibility that the state tax revenue will fall short of any governor's projections and any governor's proposed budget won't be fully funded, but that's unlikely.

"At the end of the day, [Senate President Pro Tempore] Dismang, myself, the governor have looked at this, we feel like it is responsible and prudent to take this course of action at this time to fulfill both our predetermined obligations that we made to the voters and the promises we made to them and also moving forward in a responsible manner.

"Keep in mind, too, the overall vision of what we are trying to do here to lower the effective tax rate for the middle class on their incomes and I feel like this amendment is a proper addition to SB6," Gillam said.

Hutchinson told reporters that he wants to make the state's tax structure competitive with other states in the region to grow the economy.

"Our capital-gains tax is competitive, and so that is not as big [an] issue as the income tax and so this [repeal of the capital-gains tax cuts approved in 2013] was the means of making sure we can fund our income-tax cut for middle-class [Arkansans] this time," he said.

"I believe that lower capital gains helps us grow our economy and I have advocated for that in Congress. I haven't abandoned that fundamental belief," Hutchinson said.

The amendment added by the House tax committee to SB6 will reduce state tax revenue by about $10 million a year and "that is something that we are going to have to cut back the budget more," Hutchinson said.

The "compromise at the 40 percent exclusion" of capital gains from income taxes "lowers the effective capital-gains tax, so I can live with that. I am happy with that," he said.

"I just want to urge the Legislature that any further adjustments in that really jeopardizes a good voting coalition, but also it really makes it difficult on the budget and so if you make any changes, come to me and say where [you] want those cuts to be made," Hutchinson said.

Afterward, Gillam said the 100-member House will likely vote on SB6 on Thursday and he believes the measure has enough support to win at least the 75 votes required for approval.

But House Republican leader Ken Bragg of Sheridian said he's not sure it'll pass.

"I think even with that amendment, people are still concerned it's a tax increase inside of a bigger package," he said.

Dismang said he expects SB6 to get at least the 27 votes required in the 34-member Senate for approval.

Asked how lawmakers would fund the additional tax cut, Dismang said "that's what we are talking about with the governor now."

Information for this article was contributed by Claudia Lauer of the Arkansas Democrat-Gazette.

A section on 01/28/2015

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