Arkansas House and Senate committees advance identical tax cut bills

GOP says cuts are not just for the wealthy

Senator Bill Sample, R-Hot Springs, asks a question for Senator Jonathan Dismang, R-Beebe, as he introduces a bill to reduce Arkansas income taxes during a meeting of the Senate Committee on Revenue and Taxation on the first day of the special session at the Arkansas State Capitol on Tuesday, Aug. 9, 2022. See more photos at arkansasonline.com/810ledge/

(Arkansas Democrat-Gazette/Stephen Swofford)
Senator Bill Sample, R-Hot Springs, asks a question for Senator Jonathan Dismang, R-Beebe, as he introduces a bill to reduce Arkansas income taxes during a meeting of the Senate Committee on Revenue and Taxation on the first day of the special session at the Arkansas State Capitol on Tuesday, Aug. 9, 2022. See more photos at arkansasonline.com/810ledge/ (Arkansas Democrat-Gazette/Stephen Swofford)

Arkansas House and Senate tax committees on Tuesday advanced identical tax cut bills that would accelerate the implementation of cuts in the state's top individual and corporate income tax rates that are scheduled to be phased in during the next few years under current state law.

The measures also would grant a temporary, nonrefundable income tax credit of $150 for individual taxpayers with net income up to $87,000 and of $300 for married taxpayers filing jointly with net income up to $174,00, and adopt a federal depreciation schedule for businesses.

In a voice vote, with Rep. Denise Garner, D-Fayetteville, dissenting, the House Revenue and Taxation Committee on Tuesday afternoon voted to recommend the House approve House Bill 1002 by committee Chairman Rep. Joe Jett, R-Success. The House will consider the bill today.


Jett told the House committee "this is not just for the wealthy folks."

A taxpayer with net taxable income of $26,526 will get a tax cut of $365 in tax year 2022, and that's significant, he said. The state Department of Finance and Administration estimate factors in the income tax cuts enacted during the Legislature's Dec. 7-9 special session.

Jett said his bill would provide about $500 million in tax relief in fiscal 2023, which started July 1, and still leave the state with a projected general revenue surplus of roughly $400 million in fiscal 2023.

In May, the state Department of Finance and Administration projected a general revenue surplus of $914 million in fiscal 2023. The state's general revenue budget that provides state aid to public schools, colleges and universities, human service programs and correctional programs is $6.02 billion in fiscal 2023.

But Garner said she is concerned about state government having so many underfunded state-supported programs ranging from teachers to developmental disability providers.

"It just seems like the timing is bad," she said.

Jett suggested Garner champion these causes for increased state funding during the 2023 regular session.

Rep. Robin Lundstrum, R-Elm Springs, said she wants to return the taxpayers' money back to taxpayers.

"We are doing the right thing," she said.

In a voice vote, with Sen. Keith Ingram, D-West Memphis, dissenting, the Senate Revenue and Taxation Committee voted earlier Tuesday afternoon to recommend that the Senate approve Senate Bill 1 by Sen. Jonathan Dismang, R-Searcy. The Senate will consider the bill today.

The action in the House and Senate tax committees came in the first day of the special session called by Gov. Asa Hutchinson to consider tax cuts and providing $50 million in state surplus funds to a restricted reserve fund for a school safety grant program. House Speaker Matthew Shepherd, R-El Dorado, and Senate President Pro Tempore Jimmy Hickey, R-Texarkana, said Tuesday they hope to wrap up the special session Thursday morning.

During the Senate tax committee's meeting, Ingram said he's worried about the possibility of the federal government recouping several hundred million dollars of federal American Rescue Plan funds as a result of the state's proposed tax cuts.

Paul Gehring, an assistant revenue commissioner for the state, said states are not to use federal American Rescue Plan funds to either directly or indirectly offset any reduction in tax revenue under the federal American Rescue Plan Act.

"Our reductions in this legislation are coming from the increases in tax revenue," he said. "We are very, very confident that we are not using [American Rescue Plan] funds incorrectly in this tax reduction bill.

Gehring said any risk of recoupment of these federal funds from the state as a result of the tax cut bill is "minimal or close to zero."

Bruno Showers, senior policy analyst for the Arkansas Advocates for Children and Families, and Syard Evans, chief executive officer of the the Arkansas Support Network and president of the Arkansas Waiver Association, testified against both SB1 and HB1002 on Tuesday.

Showers said he's concerned about the federal government clawing back hundreds of millions in federal American Rescue Plan funds from the state as a result of the proposed tax cuts. The state doesn't face any risk if it invests these state funds in state programs that help families directly, he said.

He said he's worried about the effect of a potentially looming recession on state tax revenues for programs, and "I just don't see why you need to come back right now and accelerate the tax cuts."

Evans said developmental disability providers "are in dire straits and need support and assistance, and we are not alone.

"Every service industry in Arkansas is struggling right now," she said. "We do not have the resources necessary to provide the quality workforce to care for the Arkansans that we all have an obligation to care for."

Dismang said there is not a sector of the economy that has not been impacted by inflation and "that includes our people back home, and that's why we are bringing this tax cut now.

"There are other considerations in regards to inflation that is happening with our economy, in particular those entities that we fund through the state that we are going to take into consideration next legislative session," he said.

"We'll do that and we'll do that as a whole, not piecemealing it together," said Dismang, who is a co-chairman of the Joint Budget Committee.

The four-pronged tax cut package that Hutchinson and Republican legislative leaders have agreed upon for the special session is projected to reduce state general revenue by $500.1 million in fiscal 2023, $166.6 million more in fiscal 2024, $69.5 million more in fiscal 2025, $18.4 million more in fiscal 2026 and $8.4 million more in fiscal 2027, according to the finance department.

Hutchinson declined to put teacher raises on the call for the special session that he issued Friday, citing the lack of support in the Republican-dominated Legislature for considering teacher pay raises in the special session. This action came after the Republican governor floated proposals to boost teacher salaries in the special session and House and Senate Democrats signaled their support for increasing teacher salaries in the special session.

Republican legislative leaders said lawmakers will consider increasing teacher pay during the 2023 regular session, starting Jan. 9, after the House and Senate education committees complete their biennial educational adequacy review this fall.

Under Senate Bill 1 and House Bill 1002, the tax cut package includes:

• Accelerating the implementation of cutting the state's top individual income tax rate from 5.5% to 4.9%, retroactive to Jan. 1, 2022. The state's top individual income tax rate is scheduled to be cut to 5.3% on Jan. 1, 2023, to 5.1% on Jan. 1, 2024, and to 4.9% on Jan. 1, 2025, under current state law.

The finance department projects that this proposal would reduce state general revenue by $295.9 million in fiscal 2023, $114 million more in fiscal 2024 and $39.15 million more in fiscal 2025, to eventually provide tax relief totaling $449 million a year.

Dismang said accelerating the state's top individual income tax rate is going to benefit taxpayers who make above $24,600 in net income. The chief beneficiaries of the cut in the reduction of the state's top individual income tax rate will be upper-income taxpayers.

• Accelerating the reduction in the state's top corporate income tax rate to 5.3% on Jan. 1, 2023. Arkansas' top corporate income tax rate of 6.2% dropped to 5.9% on Jan. 1, 2022. The rate is scheduled to drop to 5.7% on Jan. 1, 2023, to 5.5% on Jan. 1, 2024, and to 5.3% on Jan. 1, 2025, under current state law.

The finance department projects this proposal would reduce general revenue by $18.5 million in fiscal 2023, $27.8 million more in fiscal 2024, and $9.2 million more in fiscal 2025 to eventually provide $55.6 million a year in total tax relief.

• Granting a temporary nonrefundable income tax credit of $150 for individual taxpayers with net income up to $87,000 -- with a phase-out of the credit for filers having net income of up to $101,000 for tax year 2022 -- and of $300 for married taxpayers filing jointly with net income up to $174,000 -- with a phase-out of the credit for filers having net income up to $202,000 for tax year 2022. These taxpayers will be required to be full-time residents of Arkansas to receive the tax credit.

The finance department projects this proposal, dubbed an inflationary relief income tax credit, will reduce general revenue by $156.3 million in fiscal 2023.

Dismang said this income tax credit will be retroactive to Jan. 1, 2022, to trigger an automatic change in the withholding tables, so these taxpayers will receive an increase in their take-home pay during the last two or three months of the calendar year.

• Adopting the 2022 federal Section 179 depreciation schedule as it existed Jan. 1, 2022, which provides an income tax reduction for the expensing of certain property.

Jett said state Rep. Howard Beaty, R-Crossett, championed adopting the 2022 federal Section 179 depreciation schedule.

"It is going to help every businessman and businesswoman in the state of Arkansas," Beaty said.

The federal Section 179 depreciation schedule allows businesses to deduct the entire purchase price of new or used equipment up to $1.08 million in 2022 rather than capitalizing and depreciating the asset over the designated useful life of the asset, according to finance department spokesman Scott Hardin. The $1.08 million deduction is reduced dollar for dollar if asset purchases exceed $2.7 million for 2022, he said.

Arkansas previously adopted Section 179 as it existed Jan. 1, 2009, and the dollar limitation on the deduction is $25,000 and the dollar-for-dollar phase-out starts at $200,000, according to Hardin. The federal limitation is adjusted for inflation each year.

The finance department projects this proposal would reduce general revenue by $29.4 million in fiscal 2023, $24.8 million more in fiscal year 2024, $21.1 million more in fiscal 2025, $18.4 million more in fiscal 2026 and $8.4 million in fiscal 2027.

After the House and Senate tax committees recommended House and Senate approval of the identical tax cut bills, Sylvester Smith, the state director of the National Federation of Independent Businesses, said in a news release that, "This is exactly the kind of commonsense tax reform that Arkansas needs right now.

"If passed and signed into law, it would reduce the corporate tax rate from 5.9% to 5.3% and lower the individual tax rate from 5.5% to 4.9%," he said, referring to HB1002. "That's important because most small businesses are organized as pass-through entities, meaning owners pay taxes at the individual rather than the corporate rate. Cutting taxes on Main Street businesses would help owners get through the current economic slump and enable them to reinvest in their businesses."

The bill also would raise the cap on income tax deductions on existing property from an unreasonably small $25,000 to a more realistic $1 million, Smith said.

"All told, HB1002 would save Arkansas taxpayers half a billion dollars in fiscal 2023 alone. That's why NFIB's small business members are urging their legislators to vote 'yes' on this important legislation," he said in a news release.

The state collected a record general revenue surplus of $1.628 billion in fiscal year 2022 that ended June 30. The state's general revenue allotment reserve balance is $1.37 billion, and the state's catastrophic reserve fund balance is $1.21 billion, according to the finance department. The state's restricted reserve fund balance is $187.3 million, and the state's rainy-day fund balance is $6.1 million.

Earlier Tuesday, House Speaker Matthew Shepherd, R-El Dorado, ruled that House Bill 1001 by Rep. Andrew Collins, D-Little Rock, which Collins described as an alternative to the Republican tax cut bill, was not properly introduced.

Collins' bill would have doubled the inflationary relief tax credit and made it refundable and made the same change to Section 179 depreciation for businesses that House Bill 1002 does, but would have left the top tax rates unchanged, he said, "because we believe giving teachers a raise should be a higher priority than another tax cut for top earners." He projected it would have reduced state general revenue by $367 million in fiscal 2023.

Shepherd said he ruled Collins' bill was not properly introduced for the special session because Collins' bill made the income tax credits refundable and provided income tax credits larger than the income tax credits Hutchinson allowed for in his call for the special session.

Collins said he accepts Shepherd's ruling.



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