There are two basic principles of an efficient tax system. First, it must raise enough money to fund government operations. Second, it should require minimum effort and cost for taxpayer compliance and government administration.
These basic principles often compete with the need for the state to enact special tax laws for economic and social policy.
Members appointed to the governor’s Tax Reform and Relief Tax Force may soon discover when these basic principles conflict with policy decisions. Tax reform, like beauty, is in the eye of the beholder.
In 2015, in his first legislative session Gov. Asa Hutchinson proposed tax changes that resulted in a record $105 million income tax cut for middle- and upper-income Arkansans. This tax cut was approved by the Legislature and built into the state’s balanced budget without an offsetting decrease in government services.
Gov. Hutchinson’s newly enacted legislation provides an additional $50 million income tax reduction targeted to lower income taxpayers. The “Tax Reform and Relief Act of 2017” is included in his proposed balanced budget.
Gov. Hutchinson has stated he is committed to more tax decreases. In particular, he wants to continue to reduce the top 6.9% individual income tax rate, which was reduced from 7% in 2015, to bring the Arkansas in line with economically competing states.
Arkansas tax law contains hundreds of exemptions and taxpayer benefits, which some believe should be reduced or eliminated to lower tax rates for all. There has been discussion about sunsetting all tax exemption and requiring legislative approval to continue all exemptions. Arkansas tax law has become complicated by incorporation of piecemeal changes for social and economic policy and financial needs over several decades.
The Arkansas Tax Reform and Relief Task Force, created by the Arkansas Tax Reform and Relief Act of 2017, identifies areas of potential reform and recommend legislation for consideration in the 2019 regular session. The goal of the legislation is to:
• modernize and simplify the Arkansas tax code;
• make tax laws competitive with other states to attract business;
• create jobs; and
• ensure fairness to all individuals and entities affected by the tax laws.
The Task Force will consist of 16 legislators. The Speaker of the House of Representatives and the President Pro Tempore of the Senate will both serve and will each appoint five members from the House and Senate. The House and Senate majority and minority leaders will also serve.
The charge of the task force is ambitious. It is not limited to corporate income tax, individual income tax or sales tax, which generate the bulk of the state’s revenue and are usually the focus of tax reform discourse. The charge also includes the dozens of taxes that fund state and local government: property tax, motor fuel tax, alcoholic beverage tax, tobacco tax, severance tax, and racing and games of skill taxes.
In the past, tax reform efforts have been hampered by the Arkansas Constitution, which limits options for reform. The task force will likely encounter those limitations and recommend constitutional amendments to change them.
For example, Amendment 19 of the Arkansas Constitution requires a 75% vote of the legislature to increase the rate of some state taxes. By Arkansas Supreme Court interpretation, that only applies to state taxes in effect when the amendment was passed and only to rate increases. The main taxes affected are income tax and tobacco taxes.
Rates of other taxes, new taxes and changes of how the tax is administered, only require a majority vote. This limitation has contributed to enactment of tax provisions, which require a simple majority vote, rather than more efficient taxes that required a super majority.
The Arkansas Constitution prohibits the legislature from delegating its authority to enact legislation. These separation of powers provisions have been interpreted strictly by the Arkansas courts. The Arkansas Legislature cannot adopt federal income tax laws as Congress might change them prospectively. This has resulted in a lack of uniformity of Arkansas income tax law with the federal income tax law, which further complicates compliance for taxpayers.
The task force will have a unique opportunity to analyze the state’s tax system during the off-season. They will not deliberate during a legislative session, constrained by the time limits of the Legislative Revenue and Tax Committees. They can also review taxes without addressing immediate needs to fund a new budget.
The task force must call a meeting within 30 days of final adjournment of the 2017 legislative session and meet at least once every two months. A preliminary report must be filed by Dec. 1, 2017 with a final report due by Sept. 1, 2018. The task force will disband on Dec. 31, 2018.
The work of the Task Force should draw the careful observance of taxpayers. It will benefit taxpayers to discover and address potential undesirable changes before the Task Force makes final recommendations and they are adopted in legislation.
Since the task force will only exist for about 18 months, they will be extremely busy learning the intricacies of the current tax system and determining which changes to recommend. Taxpayers should expect the process to be fast paced and complicated. All the “beholders” with tax interests potentially at stake, which includes every Arkansas business and citizen, should pay careful attention.
Editor’s note: Tim Leathers served as the Arkansas Department of Finance & Administration’s deputy director and commissioner of revenues between 1994 and 2017 where he was responsible for oversight of the office of budget, personnel management, accounting, and purchasing and revenue division.