Legislative task force begins review of 43 sales tax exemptions

A legislative task force on Wednesday (April 25) began the difficult and long task of studying whether 43 sales tax exemptions in the state’s unwieldy tax code are justified or need to be changed or eliminated altogether.

After an all-day meeting at the State Capitol on Wednesday, the bicameral Arkansas Legislative Tax Reform and Relief Task Force had whittled through nearly half of the tax exemptions now on the books that landed on the recommendation list for further consideration by the legislature heading into the 2019 regular session.

During the 2017 legislative session, Arkansas lawmakers approved Gov. Asa Hutchinson’s tax reform package, which cut Arkansas’ income tax by $50 million and created the tax reform task force consisting of 16 legislators from the House and Senate.

Since their first meeting May 22, 2017, the task force has taken on the huge legislative mandate of identifying areas of potential tax reform and recommending further legislation. The panel is expected to provide a final report to Gov. Hutchinson by Sept. 1, which will be used for tax reform in the regular legislative session in January 2019.

Rep. Lane Jean, R-Magnolia, co-chair of the legislative task force, said he was pleased with the progress the panel made during the all-day meeting where Department of Finance and Administration (DFA) and Bureau of Legislative Research (BLR) staff provided detailed legal and fiscal summaries and so-called “revenue impact” analyses for each of the sales tax proposals.

“We trying to get through the process and let everyone have a say. It’s not easy to watch when you haven’t rehearsed this stuff,” Jean said jokingly after the nearly eight-hour meeting.

Earlier in the day, Jean’s co-chair on the task force, Sen. Jim Hendren, R-Gravette, began the meeting by defining the parameters of the panel’s duties before whittling down the list of 43 recommendations and 17 task force meetings since late May.

“This is the time, particularly in regard to sales tax, that you could and should make recommendations for us to take action on,” Hendren said. “In fact, I have a couple right now before we start going down this list that I would like to consider – based on the presentations we’ve had over the past few months.”

Under Hendren’s guidance, the panel approved guidelines that any sales exemptions removed from the tax code would go toward tax relief and undergo a systematic review during the 2019 regular session by the full legislature. The 16-member committee also agreed to define sales tax authority at the local level amid legislative concerns that some counties and cities in Arkansas can charge an additional local sales tax on top of the Arkansas state sales tax.

In debating those committee rules, Rep. Bob Johnson, D-Jacksonville, and Sen. Missy Irvin, R-Mountain View, expressed caution in reviewing the 43 sales tax exemptions and then later following the same process for further study of excise taxes, corporate and individual income tax, and property tax.

“We are talking about a lot of moving parts in here,” said Johnson, owner of a Central Arkansas accounting firm. “We are looking at the sales tax and (comparing) with other states like Texas and Tennessee, but we don’t know exactly what that is going to cost yet. Revenue neutral would be OK, but are we creating jobs … or doing things that benefit the state of Arkansas?”

Johnson added: “Locking ourselves down and saying we are going to lower income taxes because we raised sales taxes might be a little bit of a challenge. I’m not here to raise taxes.”

Irvin reminded fellow lawmakers they should not only study tax reform, but tax relief too.

“Our job is to really look in-depth at the (tax code) and to be thoughtful and to look and research and be knowledgeable about every policy that’s on the books in the state of Arkansas,” Irvin said. “I would hope that the media and folks out there would report on that honestly and truthfully because it’s really important citizens in the state of Arkansas experience tax (relief) in some form or fashion – and that is my aim.”

Over the next several hours, the panel reviewed half of the sales tax exemptions on the recommendation list, setting aside some for further study and allowing the remainder to move forward for more in-depth debate and consideration ahead of the 2019 regular session. During the first few hours of the meeting, lawmakers heard testimony from the DF&A staff, the legislative bureau, and the public on sales tax exclusions in the Arkansas tax code ranging from billboards, newspapers and used cars to manufactured homes, radio and TV services, federal credit unions and all-terrain farm vehicles.

In the afternoon, lawmakers set aside much of the meeting to discuss a proposal to reduce the state’s food tax and subject food items to the full amount of the state sales tax, which DF&A officials concluded would negatively impact state revenue by $248.9 million with $190.7 million of that amount representing a loss to state budget coffers.

In the same discussion, lawmakers also debated the possibility of creating a refundable income tax credit or state earned income tax credit to offset the food tax.

Earlier this year during the fiscal session, Gov. Hutchinson called for a reduction of the state’s top income tax bracket from 6.9% to 6%. The proposal, made during his address to the Arkansas General Assembly to begin the fiscal session, did not include an estimated reduction in state revenue, but members of the Joint Budget Committee said it would be roughly $180 million if done all at once.

Last week, during a Tax Freedom Day rally at the capitol, Gov. Hutchinson reiterated his priority to reduce the income tax rate to bring Arkansas closer in line with surrounding states. He also lauded the work of the tax reform panel and the study and elimination of unnecessary exemptions.

“An exemption is an exemption to the rule that taxes are to be equal and fair,” Hutchinson said. “Everybody’s got their favorite tax to reduce. I’ve got mine – reducing the income tax rate and (having a) competitive income tax rate in the state of Arkansas.”

During Wednesday’s meeting, the legislative panel also heard testimony from executives with McKee Foods Corp. on how the tax environment in Arkansas compares to surrounding states and negatively impacts business conditions. McKee, headquartered in Collegedale, Tenn., makes Little Debbie snacks at its manufacturing plant in Gentry and has nearly 1,600 employees in Arkansas, officials said.

On Thursday, the legislative task force will take up the remainder of the 43 sales tax proposals and get an overview of state income taxes from BLR and DF&A staff. Officials from the Tax Foundation and Institution on Taxation and Economic Policy in Washington, D.C., will also make presentations on tax policy.