Senate leader’s bipartisan bill offsets income tax cuts with cigarette, e-cigarette tax hikes (UPDATED)

Editor’s note: This story is updated to include Gov. Hutchinson’s comments on the bill.

A bipartisan group of legislators introduced a bill Thursday (March 14) that would provide $100 million in tax cuts, mostly for lower- and middle-income taxpayers, that would be offset by increased taxes on cigarettes and e-cigarettes.

The bill, which was to be filed Thursday afternoon, was announced in a press conference by its sponsor, Senate President Pro Tempore Jim Hendren, R-Sulphur Springs, along with Republican and Democratic legislators from both the House and Senate.

The bill would reduce taxes in three ways.

First, in the tax table for individuals making less than $22,000, it would reduce from 2% to zero the tax rate for incomes between $4,500 and $8,890. That would reduce revenues by $16.8 million, Hendren said.

Second, the bill would increase the standard deduction from $2,000 to $3,300, reducing revenues by $41.3 million.

Hendren said the Institute on Taxation & Economic Policy had said those two changes would focus 84% of the tax relief on the bottom 80% of income earners.

Finally, the bill would create a refundable earned income tax credit (EITC) of at least 5% that would be supported by a trust fund. The credit could be adjusted up if revenues rise or down if the economy falls. Hendren said 98% of the provision’s benefits would go to the bottom 80% of taxpayers.

“So this is really an effort to focus the tax relief on low- and middle-income earners in Arkansas,” he said.

The tax cuts would be offset by $100 million in cigarette and e-cigarette taxes. The bill would levy a 20% special excise tax at the retail level on cigarettes, or 80 cents a pack.

E-cigarettes would be subject to the same taxes as traditional tobacco products, amounting to a 67% tax. Those products currently are subject only to the state’s sales and use tax.

Hendren pointed to a study by the Arkansas Center for Health Improvement that found the state’s Medicaid program spends $795 million annually to treat tobacco-related illnesses in adults ages 30-65, but tobacco taxes raised only $230 million.

“People who choose not to smoke are paying a tremendous bill in taxes for those who do, from the bottom of the scale to the top of the scale,” he said. “This is particularly unfair to low-income families who must pay higher taxes because tobacco is not carrying a fair share of the burden they place on taxpayers.”

Meanwhile, he said the use of e-cigarettes is “exploding in our state.” At forums, school superintendents and principals tell him it’s a growing problem. Hendren said use of the products could lead to massive health care costs.

The bill must pass with a simple majority in both the House and Senate because it is a new tax. Its first stop will be the Senate Revenue and Taxation Committee.

Gov. Hutchinson issued a late afternoon comment on the bill, stating that he was open to the measure in its current form.

“I appreciate the effort by Sen. Hendren and the sponsors for seeking additional ways to provide tax relief to those with lower incomes, as we did in 2017 with the low-income tax cut of $50 million. It is important that any additional tax relief be offset on the revenue side, which this bill seems to accomplish through a new tax on tobacco and related products. However, I will continue to study this bill and its revenue impact as it moves through the legislative process,” he said.

Hendren said the bill has about 15 co-sponsors in the Senate and about three dozen in the House, but passing the bill will not be easy. He said the House would be harder, and that he expects a lot of pushback.

“We’re going to give it our best try, but again, we’re not kidding ourselves that this is going to be an easy lift,” he said.

However, he said, “The fact that many people are willing to put their names on the bill I think indicates there’s more willingness than there has been in the past to look at things like this.”

Those sponsors do not include Speaker of the House Matthew Shepherd, R-El Dorado, of whom Hendren said, “Clearly, he’s not on board, at least not at this point, but hopefully we can get him and many others to come support it.”

Sen. Jonathan Dismang, R-Searcy, co-sponsored House Bill 1565 by Rep. Andy Davis, R-Little Rock, which would raise the minimum age for purchasing tobacco and e-cigarette products to 21. That bill has passed the House and a Senate committee.

However, he said he opposes Hendren’s bill.

“Where we are in the session, I don’t think we need anything else to be controversial, and this is obviously going to be highly controversial,” he said.

Dismang said tax reform should be accomplished by consolidating tax tables. Of the cigarette and e-cigarette taxes, he said, “I know that we’ve had a tax task force that looked at a number of these items, and these were not items that were recommended by the task force.”