The Tax Battle Brews

Everybody wants a slice of the pie, and there are no shortages of tax cutting ideas in the 89th General Assembly.

By some estimates, there are more than $2 billion in potential tax cuts already filed in the 45 bills aiming to reduce Arkansas taxes.

The bills range from reducing personal income taxes to targeted tax cuts for businesses and individuals to the broader-based conclusion of reducing the state’s grocery tax – a main policy objective of Gov. Mike Beebe (D).

Clearly, all the bills filed won’t pass, but what has a realistic chance of success and where are the sides lining up?

TAX SILOS OF SUPPORT
Officials in the negotiating process – which includes leaders in the House, Senate and administration – were hesitant to go on the record due to sensitive discussions taking place.

However, there are four major silos of attention coalescing in the tax reform debate. They include:

Income tax bracket reform – This is being pushed by Rep. Charlie Collins (R-Fayetteville), chairman of the House Revenue and Tax Committee but includes other House members and Senators. Collins’ efforts, which will come in HB 1585 or HB 1586, would restructure personal income tax brackets.

There is likely to be an effort to reduce the lower end of the tax bracket in quarterly or third installments from the current rate of 2.5%. Middle brackets would stay the same and the top personal income bracket of 7% would be reduced in quarters or thirds as well to a lower rate for those making above $34,000.

The financial impact of this move could be in the hundreds of millions of dollars.

Capital gains tax cut – House Speaker Davy Carter (R-Cabot) has publicly discussed reducing the capital gains tax in Arkansas. Details are sketchy at this time and a bill has yet to be filed by Carter on the subject.

In announcing his support for the capital gains tax cut, Carter said, “At the end of the day, the folks that are going to be paying for this are the job creators in this state and this country. We’re going to at least give that due consideration.”

Because of that statement, there is a thought that the capital gains tax cut could be used in negotiations on the final dollar figures for Medicaid expansion, which is looking more like a shift to a private insurance option using those public dollars. Projections have not been released publicly.

Targeted tax cuts – There are four bills that could function as a cobbled package of tax relief, primarily for businesses in Arkansas. In the House and Senate, there is substantial support for the package of four.

They include:

HB 1003 – would create a sales and use tax exemption for bale wrap used for cotton. Potential first year fiscal impact: $293,000.
HB 1039 – would create a sales and use tax exemption for utilities used in agriculture, aquaculture and horticulture. Potential first year fiscal impact: $1.57 million
HB 1218 – would reduce the sales and use tax on natural gas and electricity for manufacturers to one-eighth of one percent. Potential first year fiscal impact: $13.1 million.
SB 334 – would reduce the sales and use tax on replacement parts and equipment used in manufacturing. Potential first year fiscal impact: $6.54 million.

Sen. Jake Files referenced support for two of those bills today with reporters. He predicted and SB 334 and HB 1218 would have wide backing.

“Those would be job creating and job stimulating bills,” Files said.

Grocery tax cut and miscellaneous others – Gov. Beebe’s signature policy legacy – the grocery tax reduction – is another factor in the tax cut debate. Beebe has not presented the bill in his balanced budget, other than to reference that if a $70 million windfall to the state came, it would then be triggered.

Beebe is predicating the availability of a grocery tax cut on a federal court release from paying desegregation funding to three Pulaski County school districts.

There are other smaller impact tax cutting measures, like the two that escaped the Senate Revenue and Tax Committee on Wednesday. SB 463 would exempt armed services personnel from Arkansas income taxes. The bill would adversely impact state revenues by an estimated $7.2 million and would apply beginning in the current year.

HB 1399 would add a deduction for state income tax purposes for volunteer firefighters on certain purchases and expenses. Its estimated fiscal impact is around $48,000 annually.

ANOTHER FACTOR
Another factor that will influence the tax cut debate – and it has yet to become a major issue in the Medicaid debate – is how changes to the tax code could affect personal incomes.

A prevailing thought that is being calculated by projections is how changes to personal incomes could impact federal matching funds for Medicaid.

Federal Medicaid dollars roughly fund 70% of the costs of Medicaid. As Arkansas’ personal incomes have been rising in recent years, the percentage of Medicaid funding from the feds has shrunk. It is partially to blame for the current shortfall.

If tax reform impacts personal incomes in a major way – which is the goal – it could have a ripple effect of reducing Medicaid dollars to the state at a time when lawmakers are juggling new calculations and a new approach to Medicaid and health care funding.

The impact of that policy decision could have a billion-dollar price tag and effect future years of funding.

For now, the discussions continue at the capitol.  The final coalition – whatever its make-up – will undoubtedly leave someone out of the mix.  Legislators from both parties and both chambers are certain to push tax cuts further than Beebe’s stated comfort zone.

Said one insider, “We will cut a number of taxes. It will not be enough for some and it will be too much for others… and it will surprise some people that the world won’t come to an end a year from now.”