Davy’s Daunting Task

Davy Carter, the Republican Arkansas Representative from Cabot, has undertaken a daunting task that may have a pretty predictable end result.

As chairman of the House Revenue and Tax Committee, Carter has called for a full-scale review of every exemption and exclusion regarding sales and use taxes on the books in Arkansas. He's expanded the call to include a review of all corporate, personal, severance, and property taxes, too.

As if that wasn't enough, Carter wants to provide an opportunity for lawmakers with ideas for tax reform the chance to vet the proposals in his committee during the interim in advance of the 2013 regular legislative session.

Hearings will start in April when special interest groups and representatives of industries, businesses and individuals will seek to justify their exemptions to Carter's committee and state senators on a companion panel. Those same vested interests will also be advocating for improvements to a variety of tax policies currently on the books that they want altered.

They'll all be pretty good ideas. The trick to any meaningful tax reform will be in the politics of the equations.

Take for instance, sales and use tax exemptions.

Currently, there are 121 exemptions or exclusions for paying sales taxes in Arkansas. Those loopholes total about $1.2 billion in annual lost tax revenue for the state.

Carter wants to eye the exemptions to see if any should or can be removed. If the slice of pie is large enough, he wants to transfer that revenue into an income tax break for citizens, particularly lower income Arkansans.

His argument?

Today, Arkansans making $32,700 or more per year are in Arkansas' highest personal income tax bracket — 7%. An annual salary of $19,600 will put a state taxpayer in the second highest personal income tax bracket of 6%.

Carter, understandably and rightfully, thinks that is unfair.

With so many Arkansans easily qualifying for those categories, it's no wonder that individual income taxes generate about 45% of the state's $4.6 billion in annual general revenue.

To close sales tax loopholes, you'd think $1.2 billion offers a lot to tighten, but in reality the constituencies and lobbyists for those constituencies may suggest Carter is fighting a battle of Don Quixote proportions.

For instance of the $1.2 billion in exclusions, $800 million — that's two-thirds — fit comfortably into these three categories:
The food tax exemption, which legislators and Gov. Mike Beebe have spent the past 5 years whittling it away.
Motor fuels and used vehicles. Cars, trucks, boats, buses, barges, and trains all get a tax break on their fuel as does the little guy who buys a used car or truck.
Agricultural and manufacturing exemptions. Farmers who raise anything from cotton to chickens get excluded from a variety of sales taxes as do manufacturers of just about any kind of widget.

You can bet your bottom dollar the sales tax exemption for food won't be repealed, not after the decades-long battle to do away with it. If anything, Gov. Beebe and lawmakers are dedicated to its total removal with the exception of the fraction that must remain because of a constitutionally-approved conservation tax.

Good luck abolishing a repeal or reduction of sales taxes on fuel and vehicles. In the age of $4 a gallon gas and the fact that the used car tax was just altered to cover more vehicles, there will be little appetite for changes in this realm. Would any lawmaker vote to raise gas or vehicle taxes at this juncture?

Finally, agricultural and manufacturing interests are among the most powerful at the state legislature and among the most important to the state's business climate. With both sectors dealing with immense hardships in an ever-changing world economy, it will be a pretty predictable argument as to why exemptions and exclusions should remain for their benefit.

That leaves Carter and his crew with about $400 million of tax breaks to determine if they are justified. Those remaining tax breaks cover school districts and local governments, non-profit organizations such as the Boy Scouts and Girl Scouts, and newspaper and agency advertising, just to name a few.

It is certain that a number of these causes will present justifiable cases for the status quo.

There will be fine cases made for reducing the corporate income tax, cutting capital gains taxes, even providing more property tax relief in an effort to lower taxes on everyday Arkansans and to compete with tax reform proposals in neighboring states.

With so much invested in the status quo and with solid arguments for making radical changes to cut taxes, the prospects for finding ways to shift tax burdens in a way that comes halfway close to being revenue-neutral will be a Herculean task.

Lawmakers are more likely to find ways to nibble around the edges, but seminal reform will be elusive.