Gov. Hutchinson unveils modified $97 million tax cut proposal, lowers state’s top tax rate to 5.9%

Gov. Asa Hutchinson and top House and Senate leaders unveiled a modified version of his $97 million “2-4-5.9” tax cut package, declaring at the state Capitol on Wednesday (Jan. 30) that his new proposal will cost $100 million less than an earlier plan.

In a packed press conference at the Governor’s Conference Room after the House and Senate recessed for the day, Hutchinson told reporters that his abridged “5.9” plan would achieve the same results to cut Arkansas marginal tax rate from 6.9% to 5.9% but in half the time than earlier thought.

“The 5.9 plan works better for the budget, allows us to get a 5.9% (marginal tax rate) in two years instead of four years,” Hutchinson explained. “As you know, this is not a standalone tax bill. This is the third phase of a three-part program to get competitive tax rates in Arkansas.”

Under the enabling legislation filed by Sen. Jonathan Dismang, R-Searcy, who chairs the Senate Tax and Revenue Committee that will carry the governor’s tax proposal, Arkansas top marginal rate would drop to 6.6% in the first year of the biennium and down to the preferred 5.9% in the second year.

The first year, beginning on Jan. 1, 2020, would see the traditional six-rate upper income tax bracket eliminated and replaced with a four-rate bracket of 2%, 4%, 5.9% and 6.6%. According to state Department of Finance & Administration officials (DFA), the fiscal impact to the state’s revenue collections in the first year would be $51.2 million. That cost, however, would be split across the biennium in fiscal years 2020 and 2021.

In the second year, beginning on Jan. 1, 2020, when the top marginal tax rate would then drop to 5.9%, the cost to the state’s budget would be $45.8 million. The expense of the second phase of the two-tiered tax cut would be split between fiscal years 2021 and 2022.

In a side-by-side comparison, Hutchinson’s proposal is substantially different than a 2-4-5.9 proposal that was laid out ahead of the 92nd General Assembly. In November, Hutchinson’s $5.75 billion budget request for fiscal 2020 called for an increase of 2.3%, or $125 million above the fiscal 2019 budget of $5.6 billion, which ends June 30, 2019. The 2021 fiscal budget request would rise another 2.3% to nearly $5.88 billion.

ORIGINAL PLAN OFF THE TABLE
Originally, the largest request for the state budget was for the $192 million tax relief package that would have been enacted in two phases over four years. The earlier proposal would have implemented major recommendations developed by the Arkansas Tax Reform and Relief Task Force that would cut the top marginal tax rate eventually to 5.9% over a four-year span.

Under the plan adopted by the tax reform panel this summer, the Arkansas standard deduction would rise to $6,800 and $13,600 for individual and joint taxpayers, respectively. Afterward, the new rate schedule in “Phase 1” would be 2% for the first $8,000, 4% through $18,000, 5.9% through $65,000, and 6.5% for anything in excess of $65,000.

In “Phase 2,” the 6.5% bracket would be eliminated leaving the state with a top 5.9% marginal rate. The net effect would simplify and flatten Arkansas’ income tax bracket schedules, DFA officials have said, with the initially higher rates for lower income levels helping to reduce the revenue impact.

Under the new proposal, the three existing tax tables that DFA now uses would be retained, but the upper income tax table would be restructured with three rates instead of six. No taxpayer, the governor promised, will receive a tax hike, and all taxpayers making more than $38,200 annually would get a tax cut.

For example, those making around $50,000 and $75,000 a year would get a tax cut of $12 and $37, respectively. In the upper tax brackets, or for those making over $80,501 annually, the tax cut would range between $253 and $753 for those at $150,000 or above. According to DFA officials, there are more than 200,000 Arkansans in that upper income bracket.

Hutchinson credited House Speaker Matthew Shepherd, R-El Dorado, Senate President Jim Hendren, R-Sulphur Springs, Dismang, and Rep. Joe Jett, R-Success, who chairs the House Revenue and Taxation Committee, for working with his staff and DFA to craft the new plan.

The popular Republican governor, who was recently elected to his second term in November, said this $97 million tax package is the final step to flatten the state’s cumbersome tax code and give tax relief to all Arkansans. As his first act in the 2015 session, 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.

“What we are doing today, in the 5.9 plan, gives us the final phase of the three-part program to lower taxes in Arkansas,” Hutchinson said proudly. “Already, we’ve provided tax relief for 90% of Arkansans and this will complete the work … on tax reform here in the state of Arkansas.”

After Hutchison took pains to explain his legislative proposal to reporters, Shepherd and Hendren both said they supported the newly drafted plan and will seek to smoothly steer enacting legislation through the Senate first, and then the House.

“I appreciate the governor’s effort to work with the legislature, along with Sens. Hendren and Dismang in their efforts in working with the House,” said Shepherd. “What we have here is a very manageable and very measured tax cut that provides significant relief and overall will make Arkansas more competitive.”

NO OKLAHOMA OR KANSAS
Hendren reiterated his prior concerns that he did not want to enact omnibus tax legislation that was fiscally irresponsible, citing Republican-sponsored tax cuts that led to crippling budget disasters in Oklahoma and Kansas. 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 his goals as co-chair of the Tax Reform task force was to restructure the state’s tax code sensibly.

“There were two things when I set out, and I think all of us on the task force agreed upon, we had to look very carefully upon, and one was don’t get ourselves in budget distress,” said Hendren, who chaired the bicameral task force with Rep. Lane Jean, R-Magnolia. “We had legislators from Oklahoma and Kansas come and tell us about the perils of not putting thought into how you do tax reform.”

His other goal, Hendren said, was to make Arkansas’ marginal tax rate competitive with surrounding states. Under the 5.9 proposal, Arkansas’ top tax bracket would be lower than Louisiana, South Carolina and Georgia, equal to Missouri and in line with surrounding states, DFA officials said.

“What we have today accomplishes both those goals,” he said.

Late Wednesday afternoon, Dismang has already filed Senate Bill 211, the five-page enabling bill that lays out the governor’s 5.9 plan. Dismang said he expects to begin hearings on the proposal next week in the Senate Revenue and Taxation Committee. If the bill gets a do-pass recommendation by the panel and is eventually approved by the full Senate, Shepherd said the House Revenue and Tax Committee will take up Dismang’s bill instead of sponsoring a House version.

Because the current tax rates are related to individual income, SB211 can only be enacted into law by a supermajority, or three-fourths vote of the 100-member House and 35-seat Senate. Gov. Hutchinson said his tax reform package will not include a recommendation by the task force to also enact legislation to require out-of-state remote sellers that do not have a physical presence in the state to collect and remit Arkansas sales and use taxes.

During the task force meetings, Rep. Jim Dotson, R-Bentonville, floated a proposal that would require out-of-state remote sellers with more than $100,000 in annual sales that do not have a physical presence in the state to collect and remit Arkansas sales and use taxes.

Dotson’s plan also states that any revenue collected because of this proposal would be dedicated to reducing taxes, including a repeal of the state’s 4.5% income tax rate for middle-income earners. That measure would add $35.4 million to state budget coffers, including a $24.5 million spike in general revenue, DFA analysis shows.

At the end of the 2017 session, similar legislation was rejected after fierce debate on the Arkansas House floor by a vote of 43-50, with seven members not voting. However, the U.S. Supreme Court issued a ruling in late June in the case South Dakota v. Wayfair Inc., upholding that state’s requirement that large-scale online sellers without a physical “nexus” in the state must collect and remit sales and use taxes.

Since the high court’s ruling, by a thin 5-4 margin, several states have announced plans to begin collecting sales taxes from online retailers. Rep. Dan Douglas, R-Bentonville, has filed House Bill 1002, which mirrors much of Dotson’s proposal. That bill was referred to the House Revenue and Tax Committee on the first day of the session, but does not include a revenue impact statement or have a set date for a committee hearing.

As news of the 5.9 plan filtered down to legislators and policymakers, initial impressions were mostly positive of one of the top priorities of the governor’s legislative agenda. Jeremy Horpedahl, a University of Central Arkansas economist, called the proposal a “big step” towards a more competitive tax environment in Arkansas.

“Combined with the tax cuts of 2015 and 2017, almost all Arkansans will now see a decrease in their income tax bill if a plan like this becomes law,” he said.

Randy Zook, president and CEO of the Arkansas State Chamber of Commerce, was more succinct. “This is a good deal,” he said.

Reed Brewer, communications director for the Democratic Party of Arkansas, tweeted that the governor’s “revised ‘tax cut’ plan” was a “$97 million giveaway to the rich.” Brewer said the governor did not give a sound answer to “how many Arkansans would see tax hikes” despite being asked four times.