Gov. Hutchinson tax proposal breezes through Senate panel

The first plank of Gov. Asa Hutchinson’s $5.5 billion budget plan that would provide a $50.5 million tax cut to the state’s lowest wage earners breezed through a Senate panel on Wednesday.

GOP Sen. Jim Hendren, sponsor of Senate Bill (SB) 115, told the Senate Revenue and Tax Committee that his legislation would provide tax relief for the “low end of the tax bracket” and set in motion plans for a Blue Ribbon panel that will study ways to overhaul the state’s tax code.

“This really does shift the focus of tax cuts from the middle-class to the low income wage earners,” Hendren testified in his brief 5-minute presentation. “There was a lot of discussion of what tax policy should be in this session. The approach we take here I think is pretty clear. It is a conservative tax cut for folks that we have not addressed at all.”

Both SB 115 and House Bill (HB) 1159, filed by Rep. Mathew Pitsch, R-Fort Smith, mirror the details of Hutchinson’s tax cut proposal that will reduce the tax burden for the bulk of the state’s lowest wage earners making less than $21,000 a year.

In a presentation to the panel, Hendren explained that 657,000 Arkansans who earn between zero and $20,000 annually will get a total tax cut of more than $46 million. Of that total, which is roughly 44% of the state’s population, nearly 120,000 taxpayers in the lowest bracket between $0 and $4,299 will be taken off the tax rolls completely.

Those who make between $4,300 and $8,399 will see their reduction in tax rate from 2.4% to 2%, which will amount to a revenue reduction of $7.5 million. The taxpayer would see annual savings of $34 if taxed at the full rate at the high end of the bracket. Wage earners making between $8,400 and $12,599 will see their earnings cut at a tax rate of 3%, down from the current 3.4%. That would take a $5.6 million piece out of the state’s total tax revenue. The taxpayer would see annual savings of $51 if taxed at the full rate at the high end of the bracket.

The last low-wage tax bracket, those earnings between $12,600 and $20,999, will see their tax rate reduced by one percent from 4.4% to 3.4% if the governor’s plan is approved by the legislature. That will lower the state’s revenue collections by $10.9 million annually. Those taxpayers would see annual savings of $211 if taxed at the full rate at the high end of the bracket.

An additional $4.3 million will go toward bridging the lower income brackets with the middle income brackets to prevent the “cliff effect,” the governor said.

If passed by lawmakers, the governor’s tax cut plan would take effect just ahead of the next General Assembly in January 2019. The task force would include 16 members of the legislature or their designees, and begin holding scheduled meetings within 30 days after sine die adjournment of the 2017 session.

The legislative work group would be tasked to file a preliminary report with the governor, House Speaker and President Pro Tempore on the task force’s activities, findings and recommendations by the end of 2017. A final draft of the task force recommendations must be completed by Sept. 1, 2018.

Hendren said that some lawmakers have expressed concerns that his proposal does not go far enough in addressing the high-wage earnings on the other end of the tax bracket. He said the Blue Ribbon panel will enable the legislature to address those concerns, as well as taking a broader look at overhauling the entire tax code.

Before the Senate tax panel gave a unanimous “do-pass” recommendation to SB 115, Sen. Bruce Maloch, D-Magnolia, posed a question to Hendren if it would be a better “conservative” tax policy to delay action on his bill until later in the session after additional revenue reports for the second half of 2017 are provided to lawmakers.

“You mentioned that this was a conservative tax cut. Do you agree that the conservative thing to do would be to wait later in the session until we saw a little more revenue before we actually voted on (this)?”, Maloch asked his Senate peer.

Hendren quickly replied “No. I don’t.”

He told Maloch that a similar argument was made in 2013 when debate began on the Arkansas Private Option, which is now Arkansas Works. The Northwest Arkansas senator said he believed it was better policy to plan ahead and complete the “due diligence” in committee instead of waiting for new budget numbers.

“I prefer this approach – to establish what the budget is going to look like. I actually like the precedent of establishing tax policy on the front end of the session,” Hendren said. “The goal is to give us some policy direction prior to the 2019 session.”

After Hendren’s testimony, the Senate panel quickly approved the measure, setting up for a possible vote on the Senate floor later in the week. The Gravette lawmaker and nephew of Gov. Hutchinson said he would amend his bill to add additional sponsors and bring it to the Senate floor on Thursday.

Following the committee’s vote, Hendren told reporters that he believed the legislature would be wise to go ahead and approve tax cuts for middle-class and low-income wage earners before tackling the more difficult and expensive issue of providing tax cuts to wealthier taxpayers and possibly dismantling the current tax code.

“Let’s study it in an organized process,” Hendren said. “I know a lot of people think we are ‘task-forced to death’ here, but I guess the point I would say is they have been getting results and there is some value in getting a group of people a clearly defined objective and a deadline.”

Pitsch, who sat in the audience during the Senate meeting, said he expects to introduce HB 1159 to the House Revenue and Taxation Committee on Thursday. Sponsors of HB 1161, an alternative low-wage tax cut bill that would create a state earned income tax credit (EITC) based on a person’s income, also plan to pitch their bill in the House this week.
Sen. Warwick Sabin, D-Little Rock, said HB 1161 is starting to gain some traction as a cheaper alternative to the governor’s tax cut plan. “This bill has bipartisan support and it will put extra money in people’s pockets,” Sabin said. “And it is $10 million cheaper than the governor’s plan.”

Sen Jake Files, R-Fort Smith, chair of the Senate Revenue and Tax Committee that approved Hendren’s proposal on Wednesday, is the co-sponsor with Sabin on the EITC proposal. He said at some point during the session, he will run HB 1161 to gauge support for the bill.