Tax Reform and Relief Task Force Tries to Prioritize But Hits a Snag

The Tax Reform and Relief Task Force met on Tuesday, June 26, and two days of scheduled meetings were reduced to a short two-hour morning session. Mid-way through the agenda the co-chairs announced that the Department of Finance and Administration had discovered a major error in the projected cost of income tax reforms that is sure to have an impact on Task Force recommendations.   

The meeting began with an information session covering 15 excise and miscellaneous Tax proposals identified earlier in June. The proposals included the following.

  1. Three e-cigarette tax proposals projected to raise from $1.5M to $12M in new revenues;
  2. Two cigarette tax increases projected to raise from $26M to $77M and strongly supported by local representatives of the American Cancer Society;
  3. Three alcoholic beverage tax increases or new taxes variously covering wine, beer, other spirits and in one case tobacco products;
  4. Five fuel tax proposals that would use various approaches for indexing fuel taxes to address problems with the per-gallon fuel tax rates in effect now; and
  5. Two miscellaneous tax proposals, one to levy a user fee on electric/hybrid vehicles, and the other to increase soft drink taxes.

Additional details of each proposal are available as Agenda Attachments on the General Assembly website. The Task Force voted to keep all of the proposals under consideration, with the exception of the proposal to increase soft drink taxes, which seems to be off the table for the time being.

The Task Force then turned its attention to priorities for tax reform. During the previous Task Force meeting on June 21, members were polled about prioritizing several income tax reform proposals that seem to be generating the most interest. The survey included several approaches to individual income tax rate reforms including bracket adjustments, increases in the standard deduction and adoption of an earned income tax credit; as well as several business tax reform options, including reducing the top corporate tax rate, extending the net operating loss carryforward period, and changes to apportionment of income of multistate companies for Arkansas tax purposes (technically referred to as eliminating the throwback rule and adopting single sales factor apportionment). The Assistant Director of the Bureau of Legislative Research reported that eliminating throwback plus single sales factor apportionment, two of the suggestions for changing individual income tax brackets, extending the net operating loss carryover period and reducing the top corporate income tax rate were generally assigned the highest priorities among the Task Force members.

The last item on the agenda was listed as a discussion of dynamic scoring of the proposals assigned the highest priorities in the member poll. But before moving on to that discussion, Co-Chair Hendren announced the late-breaking news that DFA had discovered the previous afternoon that the projected revenue impacts for two leading individual bracket reform proposals, as discussed at the most recent Task Force meeting, were $80 million too low. This “bombshell” (Chairman’s words) was so new that DFA was not able to provide much additional information, except that a class of taxpayers had been inadvertently omitted from the projections. The Task Force members were assured that DFA staff were working diligently on the revised projections, and no additional information has been posted or circulated outside of the members since the meeting.  

Dynamic scoring requires that the static impacts of various proposals first be accurate. Consequently, the discussion of dynamic scoring was very abbreviated. In general, the Co-Chairs were authorized to make the final selection of proposals for submission to the Task Force’s dynamic scoring consultants, REMI. It is anticipated that this will include the business tax proposals receiving the most support, as well as several approaches to individual rate reforms. The balance of the 2-day meeting scheduled for the week as well as upcoming meetings scheduled for early July were cancelled and have been rescheduled for July 26 and 27.

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