Gov. Hutchinson outlines details of $50.5 million tax cut plan, includes retired military member exemption (Updated)

Gov. Asa Hutchinson on Tuesday (Dec. 13) outlined details of his $50.5 million tax cut plan for the upcoming 90th General Assembly that he says will focus on reducing the tax burden for the bulk of the state’s lowest wage earners making less than $21,000 a year.

The tax cut plan fully outlines a measure first unveiled by Hutchinson to state lawmakers a day after the presidential election on Nov. 9, when the governor introduced his proposed balanced budget for the 91st General Assembly of nearly $5.5 billion.

In making his case Tuesday before a standing-room crowd of lawmakers, state officials and media at the Governor’s Conference Room at the State Capitol, Hutchinson in his 30-minute presentation laid out details to substantially reduce taxes for lower income Arkansans that make between zero and $20,999 annually.

The popular Republican governor said he hopes to continue the effort he began in 2015 to reduce the tax rate for wage earners in all income tax brackets, along with a well-liked proposal to exempt all retirement benefits for the state’s retirement military from being taxed.

“I know that members of the General assembly, both senators and representatives, have worked hard on this topic,” the governor said. “I’ve listened to them, many of them are here in this room, and so their decision points and ideas have been very important to me as I shaped the proposal that I wanted to present to (you).”

Hutchinson continued: “I recognize the governor has a leadership role, and I wanted to exercise that today and present my plan as to how this state should move in terms of fairness in their tax policy. But ultimately the General Assembly plays a key role, and obviously it can’t be done without their help, support and guidance.”

According to a detailed, five-page summary of his tax cut plan, an estimated 657,000 Arkansans who earn between zero and $20,000 annually will get a total tax cut of more than $46 million. Of that total, which is roughly 44% of the state’s population, nearly 120,000 taxpayers in the lowest bracket between $0 and $4,299 will be taken off the tax rolls completely.

Those who make between $4,300 and $8,399 will see their reduction in their tax rate from 2.4% to 2%, which will amount to a revenue reduction of $7.5 million. The taxpayer would see annual savings of $34 if taxed at the full rate at the high end of the bracket. Wage earners making between $8,400 and $12,599 will see their earnings cut at a tax rate of 3%, down from the current 3.4%. That would take a $5.6 million piece out of the state’s total tax revenue. The taxpayer would see annual savings of $51 if taxed at the full rate at the high end of the bracket.

The last low-wage tax bracket, those earnings between $12,600 and $20,999, will see their tax rate reduced by one percent from 4.4% to 3.4% if the governor’s plan is approved by the legislature. That will lower the state’s revenue collections by $10.9 million annually. The taxpayer would see annual savings of $211 if taxed at the full rate at the high end of the bracket.

An additional $4.3 million will go toward bridging the lower income brackets with the middle income brackets to prevent the “cliff effect,” the governor said.

In addition to his tax cut proposal, Hutchinson also announced his support for exempting all retirement benefits of retired military service members from state income tax – which would cut state general revenues by $13 million. This exemption, Hutchinson said, would have to be offset with the repeal of other tax exemptions.

UPDATED INFO: To pay for the tax cut to military veterans, the governor’s proposal would remove the exclusion from income on unemployment benefits, which he said would create $3.1 million in additional generation revenue. The plan also calls for applying the sales tax on the full cost of manufactured housing and candy and soft drinks, which would raise an extra $2.4 million and $13.8 million, respectively. Altogether, the proposals add $19.3 million to state tax coffers from closing those exemptions, the governor said.

The military-friendly plan also would reduce the state’s so-called “syrup tax” by 40%, and apply the extra $6.3 million to the Medicaid Trust Fund. Hutchinson said the tax was originally passed as a temporary measure.

“I believe that reducing the tax burden on our veterans is the right thing to do, provided that we can make up for the loss of revenue,” the governor said. “That is why I am asking the legislature to take action to make the necessary offsets so that these cuts are budget neutral. I am confident that this conservative approach to tax cuts will increase fairness and spur economic development by keeping more money in the pockets of the everyday Arkansans who need it the most.”

As part of his presentation, Hutchinson also offered his conservative approach to making tax cuts a major part of his overall economic development efforts. He said the state’s tax policy must be fair and easy to understand, competitive with surrounding states, and growing Arkansas’ revenue base.

“The priority I have as governor is to increase and expand in a sustainable way, the economic forces of our state,” he said. “To do this, you have to have a competitive tax system and we want to have tax policy that is growth-oriented.”

In his first official act as governor in 2015, Hutchinson was able to enact a $102 million tax cut that lowered the state’s middle income tax bracket from 6% to 5%. Hutchinson said extending tax cuts to lower wage earners is the second part of his overall strategy, and the next step would be to provide tax relief for the state’s wealthiest citizens before he leaves office.

Long-term, the governor said he hopes to “flatten” the state’s overall tax to 5%. “I think we can be competitive at that level,” he said. “But we only (want) do a piece at a time and still balance the budget and provide the needed services of our state.”

Several lawmakers offered Hutchinson congratulations and said his plan would be a good starting point to begin the debate on tax policy in the upcoming session in January. Immediately after the governor ended his appeal, Sen. Bart Hester, R-Cave Springs, approached the podium and shook the governor’s hand.

Hester has proposed a $105 million income tax relief plan that would expand the 5% income tax bracket to all taxpayers with annual incomes between $25,000 to $50,000. Hester’s tax plan would benefit people with incomes of $21,000 to $35,000, or add another 187,000 to the 5% income tax bracket, he said.

In response to a question about his views on Hutchinson’s plan, Sen. Jim Hendren, R-Gravette, said: “I think it is a responsible plan in line with the budget restraints we have, and I am excited that we are going to get the military pension income tax relief.”

Still, Hendren said, he believes legislators will have a strong debate on Arkansas tax policy and make some changes to the governor’s plan.

“I think there will be some tweaking (because) the legislature also likes to have its input …, but it is a great start,” said the Republican senator, a member of the Joint Budget Committee.

On the House side, Rep. Joe Jett, R-Success, said he believes the Hutchinson proposal and other similar tax bills will see vigorous debate in committee hearings. Jett, who has been chairman of the House Revenue and Taxation Committee, switched from the Democratic to the Republican Party last week, which leaves the lower chamber’s tax panel with a 50-50 split between the two major parties.

“I think there is going to be a debate, I know … some of my colleagues in the House and Senate both want to go to the upper (bracket) of commerce,” said Jett, the third Democrat to switch parties since the election, following Rep. Jeff Wardlaw, R-Hermitage, and Rep. David Hillman, R-Almyra. “I will just say I like what the governor has put out on the lower side. Everybody’s had a tax cut, right now, but the lower side and everybody lives in this state – and I think they deserve it.”

Democrat Rep. Warwick Sabin of Little Rock, who also sits on the House Tax and Revenue Committee, also applauded the governor’s plan to address the disparity in tax relief for the poor and low-wage earners. Like others, Sabin applauded Hutchinson’s plan as a good start, but said he prefers his own plan to extend the federal Earned Income Tax Credit, which has been expanded in other states. In the last general session, Sabin attempted to enact an EITC state-level bill. His measure would have provided tax relief to approximately 279,000 Arkansans who receive the federal Earned Income Tax Credit (EITC) each year with an additional 1.25% of their federal credit amount in 2016, 2.5% in 2017, and 5% by 2018.

Sabin said he wants to continue pressing the issue in the upcoming session during the debate on state tax policy.

”You might remember two years ago in 2015, I was one of the strongest voices urging an EITC because the one group of people left out of the last round of tax cuts were the lower income earners,” Sabin told reporters. “To the extent that this tax plan addresses those lower income earners, I think it is a step in the right direction. I still favor a EITC and will be introducing one in the session, mainly … because it does more to bring people out of poverty and stimulate the economy.”

Washington, D.C.-based Tax Foundation said the governor’s plan shows a willingness to identify several ways to broaden the state’s sales tax, which economist Nicole Kaeding said is littered with exemptions.

“But more reforms are needed. Many aspects of Arkansas’s tax code need reform, and individual income taxes are just one piece of that,” Kaeding said in a statement. “Arkansas’s use of three rate schedules for the individual income tax is unique among the 50 states and adds immense complexity to the state’s tax code. The governor’s plan doesn’t address this issue.”