With the fiscal and special sessions concluded, the Tax Reform and Relief Legislative Task Force convened yesterday and today. Yesterday's program consisted of testimony on sales tax policy from the Tax Foundation, the Institute for Tax and Economic Policy, the Arkansas Bureau of Legislative Research (BLR), and the Department of Finance and Administration (DFA). The highlight of today's proceedings was an initial list of specific sales tax exemptions and other policies for further study. Taxpayers should review the list of exemptions under scrutiny and consider how to respond.
Task Force Identifies Sales Tax Exemptions to Scrutinize
Recall that at the last meeting Co-Chair Senator Hendren announced that the process going forward would consist of meetings for each tax type (sales/use, income, and property). Today and yesterday were the sales tax meeting. After hearing sales tax policy testimony yesterday (summarized below), Task Force members had the chance today to identify specific sales tax exemptions or other policies for consideration by the Task Force. This was done on a no-name basis, with proposals being written down by Task Force members and then compiled and announced by Co-Chair Representative Jean.
The following is our understanding of the issues identified. Please contact me with any additions or corrections, as the reading of the issues was not always clear. (See our unofficial transcript.) I have added detail and statutory citations based on DFA's presentation, and I have grouped the exemptions by category. The BLR will post an official list about two weeks before the next Task Force meeting, scheduled for April 25-26. That official list should be watched closely. In addition, stakeholders may have a chance to weigh in at that April meeting.
- Consumer exemptions:
- Raise sales tax on groceries back to the ordinary rate instead of the current low rate. Presumably this would be tied to some sort of income tax credit for low-income taxpayers to ameliorate the increased sales tax burden.
- Sales of new or used motor vehicles or trailers of less than $4,000.00. Ark. Code Ann. § 26-52-510(b)(1)(B) and 26-53-126(b)(2).
- The reduced tax base of 62% of sales price for manufactured homes. Ark. Code Ann. § 26-52-802.
- Coin-operated car washes that are self-serve or automatic. Ark. Code Ann. § 26-52-301(3)(B)(ii).
- The first 500 kilowatt hours of electricity per month for residential customers with household income less than $12,000. Ark. Code Ann. § 26-52-416(a).
- Agricultural exemptions:
- Four-wheelers or ATVs for farm use (presumably under the farm machinery and equipment exemption, Ark. Code Ann. § 26-52-403).
- Baling twine or similar supplies for baling or otherwise packaging animal feed. Ark. Code Ann. § 26-52-408(3).
- Packaging materials used by cotton gins. Ark. Code Ann. § 26-52-408(1).
- Cotton, seed cotton, lint cotton or baled cotton. Ark. Code Ann. § 26-52-401(18)(A)(i).
- Seed for use in agriculture. Ark Code Ann. § 26-52-401(18)(A)(ii).
- Dyed (off-road) diesel. Ark. Code Ann. § 26-52-401(11)(A)(iii).
- Raw agricultural products from farms or farmers' markets. Ark. Code Ann. § 26-52-401(18)(A)(iii) and (B)(ii).
- Baby chickens. Ark. Code Ann. § 26-52-401(18)(A)(v).
- Feedstuffs used in commercial production of livestock or poultry. Ark. Code Ann. § 26-52-404(a).
- Manufacturing exemptions:
- Manufacturing machinery and equipment. Ark. Code Ann. § 26-52-402.
- Note the consideration of the manufacturing electricity reduced rate below as an energy exemption that should be scrutinized.
- Perhaps the resale exemption for packaging material? There was mention of "packaging material" although that likely was in reference to the cotton gin or baling agricultural packaging exemptions mentioned above.
- Medical exemptions:
- Sales to not-for-profit, charitable hospitals (and presumably nursing homes as well). Ark. Code Ann. § 26-52-401(21).
- Prescription drugs. Ark. Code Ann. § 26-52-406.
- Durable medical equipment. Ark. Code Ann. § 26-52-433.
- Blood test strips. Ark. Code Ann. § 26-52-419.
- Dental appliances. Ark. Code Ann. § 26-52-448.
- Transportation exemptions:
- Fuel tax (presumably removing the motor fuel exemption, Ark. Code Ann. § 26-52-401(11)(A)(i), or extending an equivalent per-gallon excise tax on fuel that would go to general revenue).
- Fuel for consumption by vessels, barges, other commercial watercraft, and railroads. Ark. Code Ann. § 26-52-401(11)(A)(ii).
- Exemption for that part of the selling price exceeding $9,150 for a truck tractor (Class Five – Class Eight trucks). Ark. Code Ann. §26-52-436. Presumably this request also includes that section's exemptions of semi-trailers and Class 6 and 7 trucks registered with the International Registration Plan.
- Aircraft held for resale and used in a charter service. Ark. Code Ann. § 26-52-409.
- The fly-away exemption for aircraft purchased for use outside of the state. Ark. Code Ann. § 26-52-505(c).
- Parking charges by state institutions. Ark. Code Ann. §25-17-307(a)(2)(B).
- Exemptions for media/communications:
- Billboard advertising. Ark. Code Ann. § 26-52-401(13).
- Newspaper and publication advertising. Ark. Code Ann. § 26-52-401(13).
- Newspaper sales. Ark. Code Ann. § 26-52-401(4).
- Services purchased by radio and television companies for use in providing their services. Ark. Code Ann. § 26-52-301(3)(C)(ii).
- Magazines and other non-newspaper publications sold through regular subscription. Ark. Code Ann. § 26-52-401(14).
- Energy exemptions. While this was only a general request, presumably it refers to all of the energy exemptions identified yesterday in DFA's report:
- Natural gas used in glass manufacturing. Ark. Code Ann. § 26-52-423.
- Natural gas and electricity sold to qualified manufacturers of steel. Ark. Code Ann. § 26-52-903.
- Sales of wastes for use as fuel in manufacturing operations. Ark. Code Ann. § 26-52-425.
- Sales of gas from biomass for purpose of generating energy sold back to the seller. Ark. Code Ann. § 26-52-429(a).
- Special low rate (currently 0.625%) on manufacturers' use of natural gas and electricity used in manufacturing. Ark. Code Ann. § 26-52-319.
- Special low rate on natural gas and electricity used by electric power generators using combined-cycle turbine technology. Ark. Code Ann. § 26-52-319. (This one was also a specific request.)
- Sales of electricity, natural gas and liquefied petroleum gas used by a qualifying agricultural structure used for a commercial purpose, and qualifying aquaculture and horticulture equipment operated for a commercial purpose. Ark. Code Ann. § 26-52-450.
- Sales of electricity, natural gas, and liquefied petroleum gas used by a grain drying and storage. Ark. Code Ann. § 26-52-446.
- Entertainment exemptions:
- Municipal or county ticket sales. Ark. Code Ann. § 26-52-411.
- Elementary and secondary school tickets to athletic events and interscholastic events. Ark. Code Ann. § 26-52-412(a).
- College and university athletic tickets. Ark. Code Ann. § 26-52-412(b).
- Admissions to state and county fairs. Ark. Code Ann. § 26-52-401(15).
- Nonprofit or charitable exemptions:
- Sales to federally chartered credit unions. Ark. Code Ann. § 23-35-103.
- Nonprofit exemptions with a tax expenditure of less than $10,000. (E.g., the Poets Roundtable of Arkansas. Ark. Code Ann. § 26-52-401(9).)
- Exemptions for nonprofits generally, which include:
- A number of specific entities or classes of entities have exemptions, e.g. Boy Scouts and Girl Scouts, 4H, etc.
- Sales of food for distribution to the poor. Ark. Code Ann. § 26-52-401(19).
- Sales by churches and charities not engaged in business for profit. Ark. Code Ann. § 26-52-401(1) & § 26-52-401(2).
- Sales to charitable or church-operated children's homes. Ark. Code Ann. § 26-52-413.
- Sales to Humane Societies. Ark. Code Ann. § 26-52-414.
- Miscellaneous: any exemption that has not been used in the past 6 years.
- Other sales tax policy issues:
- Provide an exemption for the value of trade-in items.
- Sales tax holiday (presumably reconsidering whether Arkansas should have a sales tax holiday).
- Anticipated revenue from online/remote seller sales tax collection.
- Impose tax on medical services? (It is unclear if the legislator intended to tax medical services as an enumerated service or if the intent was to target some sort of medical exemption.)
- "General sales tax": While this is unclear, perhaps it is the idea of taxing all sales, or all consumer sales.
This is a lengthy list, and clearly some of the identified exemptions are unlikely to be repealed. Taxpayers should evaluate their own interests carefully and should prepare for the April meeting.
A notable absence in the Task Force's list was potential additional enumerated services to tax. Perhaps this was intentional given the political difficulties of taxing new services, or perhaps this was a consequence of the Task Force having a menu of exemptions to eliminate thanks to the DFA report while not having a similar menu of potentially revenue-raising additional services to tax. Focusing almost solely on exemptions will put additional pressure on the Task Force to target sales tax exemptions to raise revenue for the desired income tax cuts.
The Task Force Approves a Contract for Dynamic Scoring
Today the Task Force also approved a proposal for dynamic scoring. It will give the state the ability to take into account the pro- or anti-growth effects of policy proposals. The state will be able to dynamically score up to 16 proposals between the Task Force process and the 2019 legislative session. This is good news for pro-growth tax reform proposals that should have less of a revenue cost using dynamic scoring.
Yesterday's Sales Tax Policy Speakers
Yesterday's agenda consisted of testimony from outside policy groups on sales tax policy, followed by testimony by BLR comparing Arkansas's tax system with other states and the much-awaited DFA report on estimated revenue losses associated with various sales and use tax exemptions.
Nicole Kaeding from the Tax Foundation testified first. Her testimony initially focused of the basics of tax policy: have a broad base that taxes as much final consumption as possible and avoid taxing business inputs. This would mean reducing consumer sales tax exemptions, expanding business-to-business exemptions, and taxing more services. She faced questions from skeptical task force members about taxing professional services and about whether taxation of business inputs really leads to tax pyramiding. She also criticized sales tax exemptions where an excise tax is imposed, because the sales tax represents general consumption whereas the excise tax represents a specific user fee or charge associated with the taxed item. Ms. Kaeding addressed regressivity concerns with sales tax base exemption by advocating for targeted income tax relief rather than exemptions that significantly benefit luxury consumption by the wealthy (e.g., applying the special low food rate to filet and caviar). Ms. Kaeding also went on to provide an overview of current remote sales tax collection policy, legislation, and litigation.
Ms. Kaeding then turned to a comparison of Arkansas with other states. She noted that the state has a high sales tax rate but that it is in line with its neighbors and did not reccommend cutting it. She noted that Arkansas has a relatively high level of total state and local tax burden. She also criticized the state's taxation of its business inputs and also its sales tax holiday. The legislators pushed back about the cross-border competitive issues with neighboring states also having sales tax holidays. On sales tax exemptions, she also defended business input exemptions and structural exemptions and suggested that the Task Force focus on elimination of social policy exemptions.
Next was Lisa Christensen Gee from the liberal-leaning Institute on Taxation and Economic Policy (ITEP). Her testimony focused on the distributive impacts of tax policy. She also questioned whether tax policy is associated with state competitiveness and economic growth. This brought significant interest from legislators both as to the basis of the assertion and as to potential implications. Structurally, she also noted the state's heavy reliance on the sales tax as leading to inequity. Ms. Christensen Gee's views overlapped with Ms. Kaeding's on the merits of a refundable "groceries" income tax credit over the sales tax groceries low rate exemption. Perhaps there is an emerging consensus to raise the tax rate on groceries back to the ordinary rate, use some of the revenue to make low-income households whole with a refundable income tax credit, and use the net revenue increase for other tax reform priorities. There was some concern from Rep. Pitsch about potential abuse of refundable tax credits, however.
After lunch, Richard Wilson from the Bureau of Legislative Research presented on benchmarking Arkansas taxes versus those of other states. He looked back on some highlights of PFM's prior reports. He touched on Arkansas local city and county tax rates. And much of his presentation focused on a Pennsylvania report comparing state tax burdens by tax type as a percentage of individual income. The bottom line was that Arkansas has an about average income tax burden, a very high sales tax burden, and a very low property tax burden. That report failed to distinguish, however, between high-rate states with a lot of exemptions (like Arkansas income tax or sales tax) versus lower-rate state taxes with broader bases.
DFA presented next with the most-anticipated part of the day: dollar-cost estimates for sales tax exemptions. DFA was represented by Revenue Commissioner Walter Anger, Assistant Commissioner Paul Gehring, and Economic Analysis and Tax Research Administrator Dr. John Shelnutt. Their presentation walked through the dollar-costs of various sales tax exemptions, and Assistant Commissioner Gehring truly walked through the costs exemption-by-exemption. They also submitted a summary report of exemption costs, which likely will be referenced heavily in the tax reform process going forward. There was some interest on the part of the Task Force co-chairs about whether they could change the revenue distribution instead of having only having an effective 4.5% rate going into state general revenue. DFA also followed up today with answers to some additional questions left open in yesterday's discussion.