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A legislative task force's favorite plan to cut individual income taxes is a proposal to reduce the state's tax tables from three to one and lower the tax rate from 6.9 percent to 6.5 percent for people making more than $80,000 a year.

This plan -- dubbed Option A -- is projected by the state Department of Finance and Administration to reduce revenue by about $276 million a year, a deeper cut than two other income tax proposals considered by the task force Tuesday.

A task force co-chairman -- state Rep. Lane Jean, R-Magnolia -- said Option A has the most support among the group's 16 members because it would simplify the individual income tax code, provide broad-based tax relief and wouldn't repeal pending cuts for people who make less than $21,000 a year.

"It helps everybody," Jean said.

The Tax Reform and Relief Legislative Task Force prioritized the three proposals on written sheets submitted to legislative staff members with a 1 for the top priority, a 2 for the second priority and a 3 for the third priority.

The recommendations aren't final. Under state law, the task force is required to make a final report of recommendations by Sept. 1. The proposals could be considered in the regular legislative session that starts Jan. 14.

The task force's second choice was Republican Gov. Asa Hutchinson's plan to cut the top rate from 6.9 percent to 6 percent. The state projects that Hutchinson's plan would reduce revenue by about $180 million a year. The top rate reduction would apply to people with taxable incomes exceeding $77,401 a year, finance department spokesman Scott Hardin said. The governor's proposal also would keep previously approved cuts for people who make less money.

The task force's third priority, called Option B, would trim the number of tax tables to one and reduce the top tax rate from 6.9 percent to 6.5 percent for people with taxable incomes above $80,000 a year. But it also would repeal tax cuts scheduled to go into effect Jan. 1 for people making below $21,000 a year. The plan would instead provide some of them with earned income tax credits.

The state projects that Option B would reduce revenue by about $205 million a year. But this plan would be more difficult to enact because it would require a three-fourths vote rather a simple majority in the 100-member House of Representatives and 35-member Senate for approval, according to Bureau of Legislative Research officials.

"The task force is engaged in a healthy debate on how much we can lower the individual income tax rate in Arkansas," Hutchinson said in a statement after the task force's meeting that lasted more than four hours. "This is my top priority in terms of tax reform, and their support of this priority is gratifying. I look forward to studying the specifics more carefully and working with them to lower the tax rate."

The other task force co-chairman, Sen. Jim Hendren, R-Sulphur Springs, said Option A received a total tally of 16 from its members, while the governor's plan got 29 and Option B received a total score of 33.

Earlier, the divided task force voted for a plan that would require out-of-state retailers that don't have physical presences in Arkansas and have more than $100,000 in sales or at least 200 separate sales tax transactions in the state to collect and remit Arkansas sales and use taxes. The proposal would devote any revenue collected toward reducing taxes.

The proposal also would repeal a 2015 state law that would reduce the 4.5 percent individual income tax rate for middle-income people based on future tax collections from sellers that have no physical presences in Arkansas.

The finance department estimated that the proposal would increase revenue by $35.3 million a year, but indicated that that estimate could change in the next few months after the U.S. Supreme Court on June 21 upheld a South Dakota law that's similar to this proposal.

The most contentious debate came after Rep. Jim Dotson, R-Bentonville, proposed earmarking the increased revenue from these out-of-state sellers to pay for income tax cuts and Sen. Joyce Elliott, D-Little Rock, proposed not earmarking that revenue.

The task force voted 9-4 against Elliott's proposal with nine Republicans against it and four Democrats for it. Then it voted 10-4 to approve Dotson's proposal with Rep. Bob Johnson, D-Jacksonville, joining nine Republicans to approve it and four Democrats dissenting, according to Bureau of Legislative Research records.

Dotson said his proposal would broaden the sales tax base.

But Sen. Larry Teague, D-Nashville, said, "I don't think that is responsible as we move forward to automatically say we are going to spend it all on tax reductions.

"I think the right thing to do is spend some of it in the [surplus reserve funds] and build that up and keep bondholders happy for whatever reason and for really good business sense to have surplus in our account," he said. "I am not opposed to tax reductions, but I don't think it makes sense ... to devote all to tax reduction."

"We are looking at $180 million of income tax cuts or more," Dotson said. "This would be a component of that so this should all go toward the net goal of reducing overall taxes."

The task force later voted 9-4 to reject a proposal to create a state earned income tax credit. The finance department said a state earned income tax credit equal to 15 percent of the federal earned income tax credit would reduce revenue by $116.5 million a year. The average credit would be $383 per filer.

The task force also rejected a proposal to tax e-cigarettes at the same rate as other tobacco products to raise a projected $12 million a year. Legislators also rejected a proposal to raise the tax on cigarettes by an amount to be determined later.

In other action Tuesday, the task force decided to approve proposals to:

• Repeal the exemption for capital gains over $10 million. Johnson said he doesn't believe this is needed to help seven or eight people a year. Repeal of this exemption may raise $4.65 million a year, the finance department estimated.

The action prompted Republican Lt. Gov. Tim Griffin to issue a written statement stating that capital gains taxes "are a bad idea because they are a tax on capital and a form of double taxation. We should work toward eliminating the tax -- not the exemption -- and pursue policies that attract investors to Arkansas to grow jobs, not run them off."

• Create a nonrefundable income tax credit equal to the amount of property taxes that taxpayers paid on business inventory with a carry-forward period of 10 years. The finance department estimated that the proposed credit may reduce revenue up to $72 million a year.

• Reduce the tax rate on corporate income between $25,001 and $100,000 from 6 percent to 5.9 percent. The proposal also would create a tax trigger to be determined later for reducing the top corporate income tax rate from 6.5 percent to 5.9 percent on income more than $100,000. The finance department projected the proposal would lead to an initial reduction of $6.5 million a year in revenue and $38.7 million a year if the top rate is reduced to 5.9 percent.

• Gradually increase the carry-forward period on net operating losses for all businesses from five years to 20 years by Jan. 1, 2023. The finance department projected that the proposal would reduce revenue starting in fiscal 2026 by $16.8 million and gradually increase to $159.4 million by fiscal 2044.

• Index motor fuel and diesel tax rates based on the inflation rate of construction costs with the minimum tax rate set at current rates and the maximum rate set at 3 percent of the tax rate of the previous year. The finance department said it's unable to provide a fiscal impact analysis without specific guidance on construction costs and how to adjust the motor fuel taxes.

Hendren said the task force's next meeting will be Aug. 22 and possibly Aug. 23 to vote on a draft report. He said the task force will review proposed bills this fall.

The task force was created under a 2017 state law to placate some lawmakers who favored larger income tax cuts in the 2017 session, particularly for people with more than $75,000 a year in taxable incomes. In 2015 and 2017, the Republican-controlled Legislature enacted Hutchinson's plans to cut individual income taxes for people with up to $75,000 a year in taxable incomes. The cuts collectively will reduce revenue by about $150 million a year.

Hutchinson has said he would finance his $180 million-a-year plan to cut the top individual income tax rate through "a combination of economic growth and savings through our budget constraints."

Hendren told task force members that "we may very likely end up with $300 million worth of tax cuts recommended, but we are going to have to decide how and when. Certainly that is not going to happen in one fiscal year."

Asked if the task force's recommendations are going to be a wish list, the other co-chairman, Jean, said in an interview that "something that will be in the final report on Aug. 31 may not be a bill come Dec. 31."

"It's not a wish list. It's a long-term plan," said Hendren, whose uncle is the governor.

A Section on 08/08/2018

Print Headline: Task force rates tax-cut plans, picks a favorite, 2 runners-up

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