Arkansas Legislators Begin to Focus on Tax Reform

With summer coming to an end, two legislative committees met today on Arkansas tax reform. The Committee on Economic and Tax Policy met in the morning to hear testimony on tax policy, and particularly the Texarkana income tax exemption. The afternoon featured the Tax Reform Tax Force reviewing proposals from potential outside consultants to the Task Force.

The Committee on Economic and Tax Policy is a longstanding joint committee of the General Assembly that may be shifting into something of a shadow tax reform committee. It heard testimony today from several experts. Much of the discussion surrounded the exemption from Arkansas income tax for residents of Texarkana.

Leading off was Professor Jeremy Horpedahl, from the University of Central Arkansas and the Arkansas Center for Research in Economics (ACRE). He testified on Arkansas sales tax and income tax exemptions, generally calling for expansion of the tax base to capture more consumption—particularly taxation of consumer services—and for reducing available exemptions. His testimony was in part a reprise of his testimony last fall in conjunction with the joint ACRE / Tax Foundation publication of “Arkansas: The Road Map to Tax Reform.” Toward the end of his testimony, Prof. Horpedahl faced intensive questioning from Senator Hickey about his editorial last month criticizing the Texarkana exemption. Following Prof. Horpedahl, the committee then heard some brief testimony from DFA legal counsel about the history and rationale for the Texarkana exemption and also about the reason for the exemption for sales of motor vehicles to rental businesses (which prevents double taxation).

On the Texarkana exemption, Dr. Michael Pakko, the Chief Economist of the Arkansas Economic Development Institute, testified as well. His testimony was generally supportive of the exemption as longstanding and yielding a relatively prosperous Arkansas side of Texarkana. He expected that removing the exemption would result in a flight of jobs and residents to the Texas side of the city.

The Committee on Economic and Tax Policy heard testimony from Marjorie Greenberg of the Advance Arkansas Institute about procedural best practices for managing exemptions and other tax expenditures, based in part on the ideas expounded in her recent Advance Arkansas Institute publication “How to Bring Tax Reform and Relief to Arkansas.” She advocated for a tax expenditure budget to evaluate the costs and benefits of exemptions. She also called for sunset provisions to force the legislature to periodically reevaluate exemptions.

In the afternoon, the Tax Reform Task Force convened to review the proposals from potential third-party consultants. Bureau of Legislative Research staff walked them through the proposals. One proposal was rejected for failing to meet the specifications of the request for proposals. The other four will be invited back to interview at the September 7 Task Force meeting. The proposals are from BKD, David Brunori of Quarles & Brady, PFM Group Consulting, and WC Mitchell & Associates. Proposal materials are available on the General Assembly website. The selection of the consultant will play a critical role in determining the direction of the Task Force.


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