Hutchinson Tax Cut Bill Faces Obstacles In House

Gov. Asa Hutchinson’s tax cut proposal faces opposition in the House from some Republicans opposed to the repeal of a capital gains tax cut and some Democrats who want to see the full budget first. A compromise is being considered.

Senate Bill 6 by Sen. Jonathan Dismang, R-Searcy, cuts income tax rates from 6 percent to 5 percent for Arkansans making $21,000 to $35,099 and from 7 percent to 6 percent for those with incomes between $35,100 and $75,000. The tax cut was one of Gov. Asa Hutchinson’s signature campaign themes.

To offset some of the revenue loss, the bill, passed unanimously by the Senate Revenue and Taxation Committee Wednesday, repealed a provision passed in 2013 that increased the capital gains tax exemption from 30 percent to 50 percent effective Jan. 1, 2013. Under the bill, the exemption reverts back to 30 percent. The amendment also repealed a 2013 exemption for all capital gains above $10 million.

Sen. Jake Files, R-Fort Smith, chairman of that committee, said some House Democrats are hesitant to vote for the bill because they haven’t seen the budget, and some Republicans are unhappy because of the capital gains tax cut repeal. A compromise exemption of 40 percent is being considered.

“I do think you’ll see some movement in the House to get the capital gains brought back in some form of what it was, what we had passed in 2013,” he said.

The difference between a 30 percent and 50 percent exemption was projected to average $19.7 million a year over a six-year period, said John Theis, Department of Finance and Administration assistant revenue commissioner. An average was needed because capital gains revenues can fluctuate as much as 300 percent year-to-year. “A 40 percent (exemption) would be roughly half of that $19.7 million,” he said.

Ending the exemption on all capital gains above $10 million would increase state revenues by $1.2 million, Theis said.

Files said a 40 percent exemption would pass his committee, as probably would the previous 50 percent exemption.

“I think most of us would have voted for (the bill) without (the capital gains provision) in there just as long as it was responsible and the numbers worked, so I think if there is a change, I think you’ll see it agreed to in the Senate,” he said.

He said he would vote for the 50 percent exemption “with a caveat. If it comes back with no change in the capital gains, I’d want to see where that money comes from. If the House is going to push that direction, then I think they’re going to have to meet with the governor, and the governor’s going to have to change his budget, because you’re not going to be able to come out and show a negative budget, a negative number at the bottom.”

Files did not believe the 50 percent exemption could simply be absorbed in the budget.

“I think (the governor is) going to have to cut something else,” he said. “It wasn’t just there on a whim. I think it was in there because there was a need to plug another $20 million.”

Hutchinson spokesman J.R. Davis said the governor’s office could not comment at this time.

Files said legislators have been hearing from constituents unhappy about the capital gains tax increase – business owners and others.

“I heard from an accountant this weekend that said that he had a fair amount of clients that were not business owners but that had gains in the stock market from last year that would pay more because of it,” he said.

House Revenue and Taxation Committee Chairman Rep. Joe Jett, D-Success, said Monday that he plans to poll committee members on the House floor today about the possibility of a 40 percent compromise.

The bill is scheduled to run in committee tomorrow. Jett said he had “talked to a couple of people” who were not ready to commit but were “willing to engage and talk.” Democrats who have been concerned because they have not seen Gov. Hutchinson’s budget will have the opportunity to see it this afternoon, he said.

“Some time by later on today, we’re going to have a pretty good handle on it,” he said. “If it looks like we don’t have the votes, then we’ll certainly not run it in the committee. We’re going to just try to work through this and try to ease everybody’s concerns, take care of the members’ concerns and try to work through it in a responsible manner.”