Arkansas tax task force OKs broad study of overhaul ideas

Republicans Sen. Jim Hendren of Sulphur Springs and Rep. Lane Jean of Magnolia listen to speakers Wednesday during a meeting of the task force that’s reviewing the state tax code.
Republicans Sen. Jim Hendren of Sulphur Springs and Rep. Lane Jean of Magnolia listen to speakers Wednesday during a meeting of the task force that’s reviewing the state tax code.

The Legislature's tax overhaul task force voted Wednesday to study a wide range of proposals to change the state's individual income and corporate income tax laws.

The panel decided to study most of 31 proposals submitted individually by task force members two weeks ago.

One proposal would change individual income tax rates and brackets and cut the state's top individual income tax rate from 6.9 percent to 5.9 percent, which the state Department of Finance and Administration estimated would reduce revenue by about $224.7 million a year.

Another proposal would cut that rate from 6.9 percent to 5 percent, which the department projected would reduce revenue by $486.4 million a year.

"We have got to get our [individual income tax] tables sorted out first and then we can make the decision about how much we can afford to drop the top rate or combine it with an [earned income tax credit] or whatever," a task force co-chairman, Sen. Jim Hendren, R-Sulphur Springs, told the group Wednesday.

Gov. Asa Hutchinson told lawmakers in February that he wants the 2019 Legislature to cut the top individual income tax rate from 6.9 percent to 6 percent, effective Jan. 1, 2020, which he projects would cut revenue by about $180 million a year. The Republican governor has said he plans to finance the cut through economic growth and savings through budget constraints.

"We know that the governor has recommended a tax cut of $180 million, so what we would like you to come prepared to do in the June meeting is to state your priorities," said Hendren, whose uncle is Hutchinson.

"If there is going to be in the area of a $200 million tax cut, we're going to ask you to prioritize where that tax cut should be," he told the task force. "What I mean by that, should it be just reducing that top rate? Should it be an earned income tax credit or a combination of the two? Should it be changing the sales tax top rate or some of the things ... on property tax rates?"

In 2017, the Legislature created the task force under state law to placate some lawmakers, who favor individual income tax cuts for people with taxable income exceeding $75,000 a year.

The Legislature in 2015 and 2017 enacted Hutchinson's plans to cut individual income tax rates for people with up to $75,000 a year in taxable income. The state projected the two plans will reduce revenue by about $150 million a year.

The task force decided, among other things, to study two proposals to create an earned income tax credit; two proposals to change corporate income tax brackets and rates; and four proposals to expand the five-year period in which net operating losses can be carried forward for tax purposes and used against future earned income.

One proposal to create an earned income tax credit would establish a state credit equal to 5 percent of the federal earned income tax credit. This is projected to reduce state revenue by $40 million a year.

The other proposal would create a state credit equal to 10 percent of the federal credit, which is projected to reduce state revenue by $77.6 million a year.

The other task force co-chairman, Rep. Lane Jean, R-Magnolia, said in an interview that the task force, based on his consultation with members, is dropping its study of the possibility of raising the reduced sales tax on groceries. That study would be coupled with creating a refundable tax credit for low- to moderate-income people to offset the increased taxes.

Three weeks ago, Hutchinson made it clear in a letter to the task force that he opposes raising the sales tax on groceries.

The sales tax on groceries is now 1.5 percent and is expected to drop to 0.125 percent, effective Jan. 1, under a 2013 law that allows the state to use the savings from ending desegregation payments to three Pulaski County school districts. The savings from the end of the payments is about $65 million a year.

The task force decided Wednesday to study repealing a tax exemption for capital gains of more than $10 million, which the finance department estimated about a dozen taxpayers used in tax year 2016 and reduced revenue by about $4.6 million. The panel also voted to study repealing the income tax exemptions for windmill blade manufacturers and windmill component manufacturers, which the department reported one taxpayer has used.

A proposal to study increasing the state's gambling winnings tax from 3 percent to 3.5 percent died in the task force, after none of its members made a motion to authorize that study.

The state's 3 percent tax on net wagering receipts of electronic games of skill raises $60.1 million a year. An increase to 3.5 percent would increase that by $10 million a year, assuming no decline in the use of the electronic games of skill, the finance department said. Electronic games of skill are permitted at Oaklawn Racing and Gaming in Hot Springs and Southland Gaming and Racing in West Memphis.

Task force recommendations are due Sept. 1 to Hutchinson and the Legislature.

Metro on 05/24/2018

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