Proposed Arkansas tax cut bills create possible showdown

Editor’s note: Roby Brock, with our content partner Talk Business, wrote this report. He can be reached at [email protected]

Arkansas House members passed three tax cutting measures out of committee on Tuesday paving the way for a contentious showdown in the Senate and with Gov. Mike Beebe.

The three proposals, which sailed through the House Revenue and Tax Committee, could affect state revenues by more than $75 million.

HB 1002 by Rep. Ed Garner, R-Maumelle, would eliminate the capital gains tax on Arkansans. Garner has contended the revenue hit to the state would not be anywhere near the eventual $68 million suggested by Arkansas revenue officials.

Citing a University of Arkansas at Little Rock study, Garner said the tax cut would eventually have a negative revenue impact on the state of $18.4 million by Year 3. In earlier years, the impact would be less, he said. He also argued that the elimination of the tax would eventually lead to tax revenue growth.

HB 1052 by Rep. Lane Jean, R-Magnolia, would lop an additional half-cent off the sales tax on utilities paid by manufacturers. Revenue estimates peg the bill impacting Arkansas finances by about $3.8 million annually.

The third bill, HB 1056, passed the House committee. HB 1056 by Rep. Uvalde Lindsey, D-Fayetteville, makes technical corrections and provides tax relief for low-income heads of household. The Arkansas Department of Finance and Administration estimates Lindsey’s bill will dent state revenues by roughly $3.7 million per year.

More than likely, the two Republican-sponsored bills will be voted on as early as Wednesday by the full House. Each bill has more than a majority of co-sponsors in the House, which would ensure passage.

So what happens next?

Gov. Mike Beebe voiced his concerns about the bills and stuck to his script that the only tax cut that is affordable in his balanced budget plan is a half-cent reduction in the grocery tax.

Beebe reiterated Tuesday that lawmakers are charged with finding spending cuts in the state budget to balance their tax cutting proposals.

Many legislators are citing Beebe’s projected $130 million in growth revenue for the budget as an area for funding cuts. While most admit that increases to K-12 education and prisons will remain, they could still have roughly $70 million in growth money earmarked for their tax cut plans.

The Governor is likely to negotiate and discuss the bills in private with legislators, but another dynamic will be introduced on the Senate end that should lead to more intense negotiations.

Sen. Larry Teague, D-Nashville, tells Talk Business it is his intention to run the Governor’s half-cent grocery tax reduction bill, SB 276, in the Senate Revenue and Tax Committee on Monday. All but one Senator is a sponsor on the bill, including all members of the Senate tax panel except Sen. Jerry Taylor, D-Pine Bluff.

The grocery tax cut is expected to cost $15 million annually in lost state tax revenue.

SB 274 by Sen. Gilbert Baker, R-Conway, would raise the threshold for the application of the used car tax. Baker tells Talk Business that he expects to run his bill on Monday. It would have a revenue impact of roughly $7.4 million per year.

Another bill, SB 275 by Sen. Bill Sample, R-Hot Springs, also has broad support in the State Senate. As it addresses a similar part of the tax code as Rep. Jean’s tax cut for manufacturers, it too could be passed out of committee or amended to include language similar to Jean’s HB 1052.

Sample’s bill includes independent power producers in the definition of "manufacturer" for purposes of receiving a tax break. A cost analysis of the bill’s revenue impact has not been determined.

All of these scenarios will create an environment where the House-passed and Senate-passed tax cut bills will create too much expected revenue loss for leadership in either chamber and obviously the Governor. Expect a meeting of the minds to eventually unfold that will lead to a compromise agreement on tax cuts.