Incoming Senate President Sen. Jim Hendren, R-Gravette, said Tuesday (Nov. 27) that state legislators are studying “safety measures” for the upcoming legislative session to protect Arkansas from budget shortfalls that beset surrounding and nearby states that enacted large tax cuts.
“We have refined our work and what you are going to see in all these reform bills is long-range reform and relief plans. There will be a series of about eight or nine bills that deal with reform and about two or three bills that have to do with tax cuts,” said Hendren, co-chairman of the 16-member state Tax Reform and Relief Task Force that was created during the 2017 legislative session to study the state’s cumbersome tax code.
Two weeks ago, Gov. Hutchinson unveiled his $5.75 billion budget for the upcoming 92nd General Assembly that includes an average $4,000 annual raise for Arkansas teachers and a sizable $111 million tax cut reducing the top income bracket from 6.9% to 5.9% by 2023. The original blueprint of the governor’s proposal, now known as the “2-4-5-9 plan,” was first floated by Hendren and his task force co-chair, Rep. Lane Jean, R-Magnolia, earlier this summer.
Speaking at a tax policy luncheon sponsored by the Arkansas Policy Foundation, Hendren told a small audience of about 35 people gathered at Heifer International in Little Rock that Arkansas lawmakers are very cognizant of what happened in Kansas and Oklahoma when Republican-sponsored tax cuts led to crippling budget disasters.
For example, after the Kansas legislature in 2013 enacted the largest tax cut in that state’s history to spur job growth, the preceding drop in revenue led to drastic reductions in government services and programs, including a massive decline in school and health care funding.
In Oklahoma, that state’s top income tax rate has been slashed by almost a fourth, from 6.65% before 2004 to 5% beginning in 2016. The annual revenue loss from these cuts has now reached $1.022 billion, according to a study by the Oklahoma Policy Institute.
Hendren said one of the prudent things that the legislative tax reform panel did was to seek advice on tax policy from legislators and policymakers in other states and learn what would work best in Arkansas.
“As we looked at tax policy, we found there were some states who did it right and several who did it wrong … and really screwed it up,” Hendren recalled. “Some of the states that did it wrong were Kansas and Oklahoma. Some of the states that did it right were Indiana and North Carolina.”
Hendren cited budget woes that Oklahoma is now experiencing due to an economic downturn in 2015 and 2016, precipitated by that state’s dependence on plunging energy prices. The Arkansas lawmaker said the Oklahoma legislature did not contemplate steep revenue declines when they enacted tax cuts to lower that state’s top rate to 5%.
“That’s why they had problems paying teachers, keeping schools open, and paying for roads and everything else,” said Hendren. ”So, we are putting in place a lot of safety measures to make sure that any tax cuts that go into effect aren’t going to put the state in a fiscal bind.”
TAX CUT DEBATE
Hendren also said early debate in the upcoming legislative session that convenes on Jan. 14 will likely center around how to phase in the tax cuts over the next four years. The Arkansas senator said the first step in overhauling the state’s tax code would deal with Gov. Hutchinson’s $111 million biennial income tax cut proposal, which he called the “big ticket item.”
Among the options recommended by the task force in August, “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%, he said. That option would have a revenue impact of $276.5 million, according to the state Department of Finance and Administration.
The other option, preferred by Gov. Hutchinson, would reduce the top personal income tax rate from 6.9% to 5.9% but would not affect the rate in any of the other brackets. Hendren said the cost to that plan would amount to about $190 million but would need a “super majority” vote in the House and Senate for approval.
“So, to get 75 out of 100 House members to agree on anything, or 27 out of 35 (senators) is a pretty high hurdle and is not an easy task, especially on something as big as a $190 million tax cut,” said Hendren. “So, that is the debate that we will have starting in January, which one of those (options) makes better policy sense for Arkansas. One of those two paths will likely become the income tax bill that passes, I would project.”
The second phase of the legislature tax reform overhaul would include all the other recommendations that the tax reform panel studied over the past 18 months. That long list includes a repeal of several business tax exemptions, a review of the state’s corporate income tax structure, and enabling legislation to require remote online retailers to collect and remit Arkansas sales taxes.
“There are about $200 million in tax cuts in phase two,” Hendren said.
Overall, Hendren said tax cuts enacted by the Hutchinson administration since 2015 will likely cost the state between $400 million and $500 million over five to six years. Nearly four years ago, Hutchinson pushed the legislature to enact a $102 million tax cut that lowered the state’s middle-income tax bracket from 6% to 5%. That was followed in the 2017 session by a smaller $50.5 million tax cut for the working poor.
The Senate leader, who was elected as the incoming President Pro Tempore in March, said the tax reform committee will hold its final meeting on Dec. 12 where lawmakers will put the finishing touches on recommendations and draft bills for the upcoming session.
Earlier at the Arkansas Policy Foundation meeting, Arkansas Department of Transportation Director Scott Bennett and Arkansas Good Roads Foundation Executive Director Joe Quinn discussed possible legislation in the upcoming session to pay for the state’s ongoing and future highway improvements, including taking another look at the more than $430 million in Arkansas “road funding” from taxes on new and used cars that is now being diverted into the state’s general revenue pot.
Although Gov. Hutchinson has said in the past that he opposes tapping general revenue funds to pay for state highway needs, Bennett said he hopes there will be debate in the upcoming session on that issue again after a tax hike to pay for state highway needs failed in the 2017 session. Hutchinson has said a plan to extend a half-cent sales tax due to expire in 2023 could be included in a highway plan presented to Arkansas voters.