Property Tax and Multistate Comparison Topics Under Consideration at Tax Reform Task Force

After a lengthy meeting yesterday, today's Arkansas Tax Reform Task Force meeting featured third-party consultant PFM's report on regional tax comparisons, followed by an intensive consideration of property tax issues. The regional comparison was informative but did not raise many questions. The property tax part of the meeting highlighted several questions and issues, most notably regarding the fiscal impact on school districts from property tax appeals by major taxpayers.

PFM went first today, with its multistate comparison presentation that originally had been scheduled for yesterday. It was a high-level overview that compared Arkansas with its benchmark states in the mid-South and central US in terms of sales tax, personal income tax, and corporate income tax rates, rules, and exemptions. The presentation went quickly, with a few questions from Task Force members: For sales taxes on consumers, there seemed to be a general interest and desire that Arkansas provide similar exemptions to benchmark states on categories such as gasoline and prescription drugs. Rep. Jett queried about the impact of the sales tax effective rate given local tax refunds for businesses, to which DFA answered with a $20 million annual refund amount such that it would not significantly reduce the effective rate. On the income/business tax comparison, Rep. Johnson asked about differential and preferential treatment of small businesses, and particularly with respect to the Texas margin tax. 

The Task Force then proceeded to the property tax discussion. PFM continued its testimony with a detailed overview of property taxes. One takeaway is that Arkansas local governments are much more reliant on sales taxes than property taxes in comparison with other states. in particular, in looking at property tax revenue, Arkansas stood out as having a high share of state (versus local) funding of local K-12 education, with relatively low property tax support of education. (Subsequent comments by the Assessment Coordination Department and others, however, raised questions about the statistics involved in this calculation.)

In an interesting line of questions, Co-Chair Senator Hendren and Rep. Dotson asked PFM about the incentive effects of the state's low property taxes, such as whether they were driving investment into the state or encouraging individuals to just hold property for speculation. This may hint that "nothing is off the table" in terms of potentially shifting the state's tax structure to make Arkansas more competitive. 

After looking at the traditional property tax, PFM addressed two of the most problematic business taxes: the franchise tax and the property tax on inventory. Sen. Hester in particular was concerned about the competitive effects of the inventory tax in a world of online commerce and distribution centers. PFM suggested that elimination of these taxes should be considered for tax reform.

Another interesting line of questions and discussion was the interplay of local and state administration in property taxation. Sen. Irvin highlighted concerns about the lack of local expertise in dealing with property tax disputes on complex issues. She also noted concerns about the stability of the tax system in funding local government.

The Arkansas Assessment Coordination Department's Director Bear Chaney, Deputy Director Angela Hill, and Staff Attorney John Nichols testified after PFM in what was largely a Q&A session. A particular topic was valuation and taxation of mineral rights, where the ACD currently is working with an outside consultant in improving and standardizing taxation of such interests. A number of questions also involved appraisal cycles and countywide reappraisals.

The Arkansas Association of Educational Administrators (AAEA), represented by Dr. Richard Abernathy, Robyn Keene, and Mike Mertens, followed the ACD. The AAEA's testimony advocated for property taxes as a stable revenue source for public education. While much of the presentation was in generalities, a very pointed discussion surrounded the fiscal impact of pending property tax appeals upon school district finances. An extreme example where a protesting company had disputed about 30% of the Pangburn School District's total assessment district-wide was used to highlight the issue. Sen. Irvin was particularly concerned about these issues and suggested that they be addressed with legislation in the 2019 session.

Next came testimony from Chris Villenes and Lindsey Bailey of the Association of Arkansas Counties (AAC) and Mark Hayes from the Arkansas Municipal League. Ms. Bailey from AAC provided a concise overview of the property tax structure and how property tax revenue is allocated. One question from Co-Chair Senator Hendren was whether the 5-mil caps on city and county general revenue levies were restricting local government funding. There also was discussion about sources of revenue to support local government in rapidly-growing areas.

Jeff Pitchford from the Arkansas Farm Bureau was the last speaker with testimony on the burden of property tax on agriculture and forestry, and with a focus on use-based valuation. Mr. Pitchford emphasized the importance of use-based valuation and the fairness of ACD's valuation methodologies, which are generally beneficial to landowners. A line of questions from the Task Force queried the property taxation of livestock. Rep. Dotson also asked about how to improve Arkansas agricultural competitiveness, to which Mr. Pitchford suggested extending the sales tax agricultural equipment exemption to repair parts and services.

Comments between the Task Force Co-Chairs and PFM indicate that PFM is preparing an interim Task Force report, which was supposed to have been completed by December 1, 2017, under Acts 78 and 79 of 2017 (which created the Task Force). The next Arkansas Tax Reform Task Force meeting is scheduled for January 8, 2018 and will focus on income taxes.

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