Legislative Task Force Pares List of Sales/Use Tax Reform Proposals from 43 to 7

Arkansas’ Tax Reform and Relief Legislative Task Force met on April 25 and 26 to review 43 possible changes to state sales and use tax laws. After several months of preliminaries and presentations, this meeting was the first opportunity Task Force members have had to begin seriously identifying and refining recommendations for the Task Force Report due to the Governor on September 1. The meeting saw only 7 proposals retained for further study, among which the proposed elimination of the partial grocery tax exemption would have by far the biggest impact.

Taxes under review by the Task Force have been divided into three groups: Sales/Use Taxes; Individual/Corporate Income Taxes; and Property/Excise Taxes. The process of focusing on sales and use tax reforms began in the March Task Force meeting, with presentations by the Bureau of Legislative Research (BLR) and Department of Finance and Administration (DFA) that included an overview of consultant recommendations and the revenue impacts of each of scores of various sales/use tax exemptions. Prior to adjournment of the March meetings, Task Force members submitted proposals for eliminate various exemptions, which were then teed up for consideration in April.  

The process that has been followed with this first group of issues has created two primary difficulties.  First, the proposals were submitted quickly and informally at the close of the March meetings, without much opportunity for digesting the information that had been presented; and second, the members were permitted to submit their proposals anonymously. As a result, the co-Chairs and legislative staff had difficulty determining what was actually being proposed, with little or no opportunity to contact the proposing member for clarification. In other cases, it was not clear if the proposals were entirely serious.

BLR staff ultimately compiled 43 proposals to eliminate various sales/use tax breaks and exemptions for consideration at the April meeting. Sectors that were potentially affected included agriculture and poultry, manufacturing, electric power generation, aeronautics, advertising, newspapers/publications, radio/television, medical/dental, hospitals and nursing homes, state and local institutions, non-profits, and individual consumers. In the run-up to the meeting, BLR prepared written summaries of each of the proposals, which included potential revenue impacts where available and information on tax treatment of the transactions in surrounding states.

During the recent April meeting, BLR Staff orally presented the summary of each proposal, potential revenue impact where available, and comparative tax treatment. Following discussion, the Chair would ask for a motion either to eliminate the exemption or to, in essence, keep the exemption before the Task Force for further consideration. More than half of the Proposals were passed over without a motion for further consideration or action. Six motions were made but died for lack of a second or failed to pass. The seven Proposals that the Task Force agreed to study further (with estimated revenue impacts) are as follows:

  • Services Provided by Coin-Operated Car Washes ($100,800)
  • Sales of 4-Wheelers and ATVs for Farm Use (Undetermined)
  • Back to School Tax Holiday ($1,800,000)
  • Sales Tax Exemptions Saving Taxpayers Less than $10,000 ($41,679)
  • Sales Tax Exemptions for Specific Non-Profit Entities (BLR suggests may be unconstitutional) ($720,000)
  • Sales of Magazines and Publications Sold Through Subscriptions ($1,556,000)
  • Sales Tax on Food and Food Ingredients ($249M Total Revenues/$191M General Revenues)

Obviously, the revenues produced by restoring the tax rate on food and food ingredients from the present 1.5% (scheduled to drop to .125% on 1/1/2019) to 6.5%, would produce substantially all of the revenues that would be available for tax restructuring if all 7 tax breaks remaining on the table were repealed.

It has been interesting to watch this process unfold. Last fall the Task Force’s original consultants strongly advocated expanding the sales/use tax base and taxing additional services to produce revenues for reforms in other areas. This input was not warmly received and may have contributed to termination of the consultants’ service contract in January. In any event, the initial proposals for sales/use tax reforms submitted by Task Force members have not followed this advice. On the other hand, a majority of Task Force members have taken note that the economists providing input to the Task Force from both sides of the advocacy spectrum have been uniform in pointing out that the grocery tax structure that is presently in place is extremely inefficient insofar as providing relief to low- and moderate-income households; and much of the relief goes to higher income taxpayers who tend to purchase more expensive grocery products. 

Governor Hutchinson has announced a legislative goal of reducing the top personal income tax rate from 6.9% to 6% in the 2019 legislative session. This would require approximately $180M in additional state general revenues. The Co-Chairs of the Task Force have stated more general objectives of making the state more competitive with other states, encouraging job growth and promoting a strong state economy through tax reform. Grocery tax reform is emerging as a leading opportunity for redirecting tax revenues to make this happen.

However, it is not clear if this can be made politically palatable. Two alternatives for relief are being considered and were a part of the Motion for further study of this issue. One is a targeted food tax credit with a structure yet to be determined. The other is a state earned income tax credit (EITC) following the structure of the Federal EITC. Information was provided that Kansas and Oklahoma have a targeted food tax credit in lieu of a general exemption; while Iowa and Louisiana have EITC provisions in place. Significant additional study will be required.

The second day of the April meeting shifted focus from Sales/Use Tax to developing Individual/Corporate Income Tax proposals for consideration at the May 23-24 meeting. This process will continue with an interim Task Force meeting scheduled for May 10. We will address these shortly in a separate, upcoming post.

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