Tax reform panel sends findings, key recommendations to Gov. Hutchinson

The state Tax Reform and Relief Task Force quietly sent its 20-page findings to Gov. Asa Hutchinson last week on how to restructure the Arkansas tax code. The full report includes 22 specific recommendations on how the state can basically dismantle and then reinvent Arkansas’ unwieldy tax system.

The panel  began its work in March, with a goal of a $200 million net tax cut. Their work divided the tax code into smaller categories that allowed committee members to drill down into specific details and then submit proposals on tax regulation that can be further refined. The final step was voting on whether to include those proposals in the final report. (Link here for a PDF of the report.)

Some of the notable recommendations include lowering the individual and corporate income tax rates, getting rid of several sales tax exemptions, reviewing how remote sellers are taxed, and conducting regular reviews of all sales tax exemptions and spending. DFA estimates these reforms will cost nearly $400 million in tax cuts, with about $50 million in revenue increases. The panel will now begin proposing and discussing bill drafts for the 2019 legislative session that begins in January.

When the report was sent to the governor’s desk on Wednesday, Hutchinson expressed his gratitude for the work of the bicameral 16-person panel headed by his nephew, Sen. Jim Hendren, R-Sulphur Springs, and Rep. Lane Jean, R-Magnolia. He also signaled, as expected, there may be further tax cuts for higher earners ahead in the upcoming 92nd General Assembly.

“Over the last several months, legislators expressed their views and provided significant guidance that played a key role in the development of this proposal,” said Gov. Hutchinson. “I look forward to working closely with the legislature and DF&A in order to fine tune this tax relief and reform package to be presented next January in bill form. Through our previous cuts, we’ve positively impacted approximately 90 percent of taxpayers in the state and have the opportunity to continue to lessen Arkansans’ tax burden through this plan.”

In the 91st General Assembly that ended May 2017, Hutchinson kept his promise and pushed a $50.5 million break on income taxes to Arkansas wage-earners making less than $21,000 a year. During that same session, the popular Republican governor got overwhelming support for a $13 million income tax exemption for military retirees and their families.

Earlier in 2015, Gov. Hutchinson offered the first plank of his broader income tax plan with a $100 million income tax cut for middle-class Arkansans. The centerpiece of the task force’s recommendation is a widely-debated proposal to cut the individual income tax rate for the state’s highest earners that would result in a decline of $125.8 million annually if approved by the legislature in the 2019 regular session.

As it continues its work of formulating a tax reform and relief package, the task force will meet regularly through the remainder of 2018. The panel’s next step is to review the list of recommendations regarding revenue impacts and the possibilities of any offsets that repeal exemptions or tax credits or create new fees or excise taxes. The special legislative group will also examine the feasibility of tax triggers or other phase-in options for its plan to minimize the impact to the state’s budget due to revenue loss resulting from proposed tax cuts.

Following are some of the key recommendations:
• Amending and simplifying the Arkansas individual income tax rates and brackets under three possible options recommended by the task force.
— “Option A” would reduce the number of individual income tax tables from three to one and reduce the top marginal rate for individuals from 6.9% to 6.5%.
— “Option B” combined with an Earned Income Tax Credit would reduce the number of individual income tax tables from three to one and reduce the top marginal rate for individuals from 6.9% to 6.5%.
— The final option would reduce the top personal income tax rate from 6.9% to 6.0% but would not affect the rate in any of the other brackets. Option A, the costlier option, would have a revenue impact of $276.5 million.

• Conduct a review of all Arkansas sales and use tax exemptions, individual and corporate income tax deductions and credits, and at regular intervals to determine the feasibility of continuing each exemption based on a cost-benefit analysis of the impact on state revenues.

• Designate revenue resulting from a repeal of a sales tax exemption towards offsetting income tax cuts included in its tax reform and relief package.

• Establish a maximum rate total aggregate amount of sales and use tax that may be levied by a county or municipality, effective for tax years beginning Jan. 1, 2019.

• Repeal the sales tax exemption on all purchases of four-wheelers and ATVs used as farm equipment and machinery and replace with a tax rebate, effective for tax years beginning Jan. 1, 2019.

• Repeal the sales tax exemption on the sale of any publication, other than newspapers, through regular subscriptions. This recommendation is contingent on the passage of a law in the State of Arkansas that requires the collection of sales tax by remote sellers.

• Require all out-of-state sellers who do not have a physical presence in the state and who have more than $100,000  in sales or at least 200 separate sales transactions in Arkansas to collect and remit Arkansas sales and use taxes. The estimated impact of such legislation would be $35.3 million, with $25.5 million boost to general revenue.

• Repeal the “throwback rule” for multistate business income that ensures corporations pay states taxes on all their profits. This would result in a $24.5 million reduction in state revenues.

• Reduce the corporate income tax rates and create a tax trigger for further reductions to the top marginal rate for tax years beginning Jan. 1, 2019. This recommendation would cut the rate of tax on corporate income between $25,001 and $100,000 from 6% to 5.9%.

• Repeal the capital gains tax exemption for profits over $10 million to reduce the top income tax rate on individual earners or to reduce the income tax rate for all individual earners.

• Create a nonrefundable income tax credit equal to the amount of property tax the taxpayer paid on business inventory, with a carry-forward period of 10 years. The income tax credit created under this recommendation and the tax deduction would be mutually exclusive. Business inventory that is exempt from property tax would not be subject to the income tax credit.

• Change the filing date for the franchise tax, transferring the administration and collection authority for the franchise tax to DFA, and eliminating the franchise tax penalty on closed businesses.

• Index motor fuel and distillate special fuel tax rates based on the inflation rate of construction costs, with the minimum tax rate set at the current tax rate and the maximum tax rate set at 3% over the tax rate of the previous year.

• Create a road user fee for electric and hybrid vehicles at the point of registration and using the resulting revenue for highway funding.