By Michael Parker
The Tax Reform Task Force heard from its tax consultant PFM Group about individual and corporate income tax policy during its meeting today (January 8, 2018), and in a surprise move it voted to terminate PFM's contract following the presentations. With PFM no longer involved, taxpayers should be especially careful as the Task Force heads toward consideration of substantive policy proposals.
Income Tax Studies Highlight an Uncompetitive Income Tax Structure
Both income tax presentations began with historical background and nationwide perspective. The individual income tax discussion centered on rate structure, state comparisons, and specific exemptions. The corporate discussion followed a similar pattern with added focus on multistate apportionment issues.
The individual income tax presentation compared consumption taxes and income-based taxes and pointed out advantages and disadvantages of each, with the volatility of individual income tax revenues during economic contractions a particular concern. Among 12 “benchmark states” the Task Force has designated for comparison purposes, Arkansas has virtually the lowest threshold rate at the lowest bracket level, but the highest top tax rate at 6.9%. Questions from Task Force members include the impact of that relatively high rate on migration patterns into and out of the state.
Several characteristics of individual income tax structure were outlined, including the tax treatment of social security income, pension income, federal tax payments, federal conformity, capital gains and losses, unemployment compensation, military pay and other issues. Task Force members expressed particular interest in the state revenue impact of the latest federal tax changes, and the Department of Finance and Administration was tasked with reporting on this issue at the next Task Force meeting.
The consultants have signaled (and implicitly criticized) Arkansas’ comparatively complex tax rate structures on both the individual and corporate sides. This seems to be particularly the case for corporate taxes, with the corporate income tax materials pointing out that 31 states have a flat rate and most of the remaining states are limited to 2 or 3 brackets, compared to 6 brackets for Arkansas. The consultants also pointed out the inequity associated with Arkansas’ draconian 5-year net operating loss (NOL) carryforward limit, which is much less than the NOL carryforwards permitted by all the benchmark states.
Most of the remainder of the corporate tax session provided background and comparisons related to a number of multi-state apportionment and corporate tax “avoidance” strategies, including the trend toward single sales factor apportionment (compared to Arkansas’ double-weighted sales factor apportionment with a throwback rule) and some loss of momentum associated with states shifting to combined reporting. Seven development incentives representing corporate tax expenditures in excess of $1 million were highlighted in the materials, and the Senate leader commented that he is interested in understanding the return on investment (ROI) associated with each of these programs; and considering whether any or all could be eliminated.
PFM Group's Work Concluded; Task Force to Rely on Internal State Resources
The big surprise of the day was the Task Force’s decision to terminate PFM Group’s consulting engagement, which was scheduled to continue through 2018. The Senate Co-Chairman reviewed the consultants’ work over the past several months, and observed that the information provided so far will allow the Task Force to “change direction” and bring the support function “in house” to rely more on internal resources. These resources apparently include the Bureau of Legislative Research, Department of Finance and Administration, Arkansas Economic Development Commission and “other groups” that will be expected to provide information as the Task Force begins to focus on specific policy changes. While these are certainly capable hands, PFM did provide a national, multistate perspective that may be difficult to replace.
The next Task Force meeting is scheduled for Monday, February 5 beginning at 9:00 a.m., and topics will include the “final education piece” of the Task Force review, including an information session on other revenue sources such as agency fees and telecom tax. The Task Force also expects DFA to provide information on the revenue impacts of the federal tax changes at the February meeting.
Taxpayers and industry groups should consider getting ready to advocate for their preferred tax policies and provisions as the education phase of the Task Force wraps up. At today's meeting, the Senate Task Force Co-Chair commented that the “fireworks will start” as soon as the Task Force begins to consider changes that will impact various taxpayer groups. Stay tuned.