Arkansas treasurer budget fails in vote; House 1 short on bill to fund office

House Republicans raised the spectre of a state government shutdown for the second day in a row Wednesday, but their warnings failed to persuade any in the minority Democratic caucus to sign on to a controversial budget bill for the treasurer's office.

Democrats -- and until Wednesday many Republicans -- have withheld their support from the otherwise mundane appropriation, raising concerns that it includes significant policy changes to 529 college savings plans managed by the treasurer's office.

Special language added to the bill would give state tax breaks to Arkansans who use the plans for kindergarten-through-12-grade education expenses, including private and religious school tuition.

On Wednesday, the chamber fell a single vote short, 74-15, of the three-quarters majority needed to pass the spending bill, House Bill 1122. One Republican voted against it.

Even supporters, however, conceded that they were confused about what the impact to taxpayers would be if they voted for HB1122 without including special language related to the 529 plans.

Lawmakers also were asked to vote for the bill without a clear idea of how much it would cost the state in lost tax revenue. The official estimate by the Department of Finance and Administration pegged the cost at $5.2 million a year, but critics have noted that estimate only counted current private school students and could be much higher.

"There's no IRS guidance on this, that's why it's confusing," said Rep. Jana Della Rosa, R-Rogers, who otherwise spoke for the appropriation.

Last year, Congress adopted federal changes to those plans that would allow individuals and families to make federal tax-free withdrawals from their state-managed accounts to pay expenses related to kindergarten-through-12-grade education, including private school tuition, tutoring and test prep.

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Under Arkansas law, taxpayers still owe state taxes on such withdrawals. Supporters of the measure defended it Wednesday by saying it is needed to bring the Arkansas tax code in line with federal law so that a state tax break would be given, too.

Other argued that Arkansas did not have to toe the same line as Republicans in Congress.

"We are the second-poorest state in the country," said Rep. Vivian Flowers, D-Pine Bluff, who said the revenue cuts "would take away resources from our public schools."

The only Republican to vote against the measure, Rep. Kim Hendren, R-Gravette, said he was concerned that the language would help only wealthy people -- though he invited members to convince him otherwise.

The House can pass the appropriation by getting one additional vote, and then it would go to the Senate for further consideration. The other option floated by lawmakers Wednesday was attempting to pass a clean bill without the changes to the 529 plans, and then consider the policy change at a later special session. However, House Speaker Jeremy Gillam, R-Judsonia, warned lawmakers that plan could have its own challenges.

"You're going to be in this pendulum swing back and forth for the next several days where you can't pass it with the language in it, you can't pass it without it," Gillam said. "So what are you going to do?"

Lawmakers hope to wrap up their work in the fiscal session by Friday. They have much longer -- until July 1 -- to pass funding for the treasurer's office before risking a shutdown, said Grant Wallace, the deputy chief treasurer.

The treasurer's office is in charge of disbursing funds throughout state government. In a statement Wednesday, Treasurer Dennis Milligan said the effect of closing the office could be "debilitating."

"It's up to the Legislature to decide if they want to align our state statute with recent changes in federal tax reform law," Milligan, a Republican, said. "I'm confident the Legislature can come to an agreement on the special language regarding 529s."

Speaking to reporters after the vote, Gillam said the members appeared set in their positions, and he did not plan to call for another vote unless asked by those who changed their minds.

Asked if that meant he planned to end the fiscal session without passing an appropriation for the treasurer's office, Gillam responded, "As of right now."

Metro on 03/08/2018