Identical tax cut measures zipped through the Arkansas House of Representatives and Senate on Wednesday morning.
The action came in the second day of the special session called by Gov. Asa Hutchinson to consider tax cuts and providing $50 million in state funds to a reserve fund for school safety grants.
On Wednesday, the House voted 81-14 to approve House Bill 1002 by Rep. Joe Jett, R-Success, which 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. HB1002 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.
Jett said Tuesday that 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.
Jett told the House that the elephant in the room that he received the most calls about was the Safe Harbor Act and the possible clawback of federal American Rescue Plan funds as result of the proposed tax cuts.
He said from his understanding as long as the federal American Rescue Plan funds are not used to offset tax cuts the state should be in good standing with the federal government.
“No money that has been used from the [American Rescue Plan] Act has been used to offset anything in our budget regardless of what anybody read, heard or said,” Jett said.
But Rep. Andrew Collins, D-Little Rock, said the bill that didn't do enough for the wealthy to cause them to hire new employees and did too little for lower income families to make a difference.
The $150 non refundable tax credit is the only part of the bill that helps the working class, he said.
"A $150 might get you two tanks of gas," Collins said.
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.
On Wednesday, the Senate voted 29-5 to approve Senate Bill 1 by Sen. Jonathan Dismang, R-Searcy, which is identical to HB1002.
Senate Democratic leader Keith Ingram of West Memphis said he is worried that the federal government could clawback several hundred million dollars in federal American Rescue Plan funds from Arkansas as a result of the proposed tax cut.
But Dismang said, "I feel fairly confident that there will be no clawback" because the state is not directly or indirectly using federal American Rescue Plan funds to finance the proposed tax cuts.
Inflation has increased the state's general revenue tax collections and the Legislature should return some of these tax collections to taxpayers," he said.
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.
House Bill 1002 and Senate Bill 1 represent the four-pronged tax cut package that Hutchinson and Republican legislative leaders agreed upon for the special session.
The measures 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 House Bill 1002 and Senate Bill 1, 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.
• 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.
• 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.
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.
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.
CORRECTION: The House voted 81-14 to approve House Bill 1002. An earlier version of this story incorrectly described the vote tally.