Arkansas advised to widen base for sales taxes

Legislative task force urged to take look at exemptions

The Legislature’s tax-overhaul task force should consider expanding the state’s sales-tax base as part of its review of Arkansas’ tax structure, officials for two groups told lawmakers Monday.

Nicole Kaeding, special projects director for the Washington, D.C.-based Tax Foundation, told the task force it should consider eliminating a number of sales-tax exemptions, extending sales taxes to more services, not levying sales tax on business inputs — such as raw material — and using targeted approaches to mitigate concerns about the regressivity of the sales taxes.

Kaeding said the task force should focus on using increased sales-tax revenue from expanding its sales-tax base to help reduce the individual income and/or corporate income taxes and improve the competitiveness of state’s tax structure.

Lisa Christiansen Gee, a senior policy analyst for the Institute of Taxation and Economic Policy in Washington, D.C., said the task force should consider expanding the sales tax base and not levying sales taxes on business inputs.

But Gee said the state shouldn’t use increased revenue from expanding the sales-tax base to help cut any income taxes. She said there is negligible correlation between income-tax rates of states and their economic growth.

But one task force member, Rep. Mat Pitsch, R-Fort Smith, said he believes there is a “big tie” between a state’s tax structure and economic growth.

Both Kaeding and Gee suggested the state would be better off providing a targeted income-tax credit to low-income families rather than charging a 1.5 percent sales-tax rate on groceries.

At the behest of then-Gov. Mike Beebe, a Democrat, the Legislature enacted laws gradually cutting the sales tax on groceries from 6 percent to 1.5 percent. The half-percentage-point sales-tax increase for highways, enacted by voters in 2012, doesn’t apply to the sales tax on groceries.

A state Department of Finance and Administration report on Monday estimated that the 1.5 percent sales tax rate on groceries reduced total tax collections by $248 million, including $190 million in general revenue, in fiscal 2017.

A 2013 state law is scheduled to further reduce the sales tax on groceries from 1.5 percent to 0.125 percent, starting Jan. 1, 2019. The cut will be covered by the savings of the state, which will no longer be making about $60 million a year in desegregation payments to Pulaski County school districts.

The finance department’s report Monday updated previous estimates from fiscal 2011 and now shows the impact on fiscal 2017. According to the report, the largest sales-tax exemptions included:

Gasoline or motor-vehicle fuels on which the fuel tax has been paid. The exemption was estimated to reduce total revenue by $304 million, including $210 million in general revenue.

Prescription drugs sold by pharmacists, hospitals or physicians or oxygen prescribed by a physician for human use. This exemption was estimated to reduce total revenue by $208 million, including $144 million in general revenue.

Feedstuff used in the commercial production of livestock and poultry, which was estimated to reduce total revenue by $148.7 million, including $102 million in general revenue.

Machinery and equipment used in manufacturing or processing, which was estimated to reduce total revenue by $106 million, including $73 million in general revenue.

Any hospital, sanitarium or not-for-profit nursing home operated for charitable and nonprofit purposes, which was estimated to reduce total revenue by $98 million, including $68 million in general revenue.

A task force co-chairman, Sen. Jim Hendren, R-Sulphur Springs, told the group Monday that he wants them to bring ideas to today’s meeting on what sales-tax exemptions deserve more scrutiny.

“For all those out in the crowd, if somebody says, ‘I want us to consider this exemption or this item,’ that does not mean that that member is proposing that it be eliminated,” Hendren told several dozen people in the audience, including many lobbyists.

“I know you are still going to send out an action letter [stating] the task force is getting ready to eliminate our exemption and we will get a thousand emails,” he said. “But I am just telling you that is not what it means. What it means is we want more information about it and we will consider it at the next meeting [next month].”

Under state law, the task force is required to issue its recommendations by Sept. 1 in advance of the 2019 regular session.

Gov. Asa Hutchinson told lawmakers last month that he plans to propose cutting the state’s top income-tax rate from 6.9 percent to 6 percent, which would reduce revenue by about $180 million, during the 2019 regular session. In 2015 and 2017, the Republican-controlled Legislature enacted the Republican governor’s plans to cut individual income taxes, which reduced revenue by about $150 million.

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