Tax Reform Task Force Charts Road Ahead and Hears Policy Testimony on Wayfair Response and Tax Regressivity

The Arkansas Tax Reform and Relief Legislative Task Force met on Friday, July 27.  At this meeting Task Force Co-Chair Senator Jim Hendren explained the Task Force's next steps to get to the final report.  The Task Force also heard policy testimony on the Wayfair decision and the Arkansas response as well as on more general issues of tax triggers, regressivity, and marriage penalty.

The Road to the Final Report

To begin with the most important piece first: The Task Force is going to meet again August 6-7 to discuss revenue impacts and what reforms to include in the final report.  Co-Chair Hendren asked all Task Force members to be sure to be in attendance.  He also commented that he personally was still grappling with issues surrounding how best to make the state more competitive and where to prioritize tax cuts between high- and middle- or low-earners.

The Task Force has not yet received the results of the dynamic modeling that it has commissioned.  It is anticipated that the modeling contractor will testify on August 6.  The voting on recommendations seems likely to be on August 7.  After the meetings, the Bureau of Legislative Research (BLR) will compile the results and then present them to the Task Force for the August 22-23 meeting for approval or modification.  The final report is due September 1.  The Task Force co-chairs have previously announced their intention to continue convening in the fall in order to craft legislation for the 2019 legislative session.

What to Do About Wayfair

The Task Force heard testimony about how Arkansas should take advantage of Wayfair and implement economic nexus rules.  Joi Leonard from BLR provided an analysis of the Wayfair decision and its implications for Arkansas.  She believes that legislation is needed to adopt economic nexus provisions similar to those of South Dakota.

Representatives from the Department of Finance and Administration (DFA) testified as well.  They provided a fiscal impact estimate totaling $43 million: $24 million general revenue, $11 million special revenue, and $8 million local revenue.  These revenue estimates are on the low end compared to what some speculation has been.  

Nicole Kaeding from the Tax Foundation observed that the state is well positioned to take advantage of the recent U.S. Supreme Court Wayfair decision given its Streamlined membership.  She suggested two changes to help the state take advantage of Wayfair: provide some sort of de minimis exemption at South Dakota's level or greater; and clearly provide that Arkansas economic nexus is not retroactive.

Certain tax triggers are also a significant issue for Arkansas, as noted in the presentations.  The special low-rate sales tax on groceries is scheduled to go down to a zero rate now that federal law allows remote seller collection, so long as net available general revenues from such remote sellers exceed 150% of the revenue from groceries.  See Ark. Code Ann. § 26-52-317.  There is also the hardwired potential cut to one of the rates in the "middle class" individual income tax bracket schedule, as covered in our prior post.  DFA Assistant Commissioner Paul Gehring again noted the difficulty in identifying which out-of-state vendors should be considered remote sellers without a physical presence for purposes of identifying new revenue.  This is a difficulty that may be exacerbated by many no-physical-presence sellers deciding to voluntarily register and begin collecting post-Wayfair and before Arkansas puts an official economic nexus law or rule into place.

Policy Testimony on Regressivity, Tax Triggers, and Marriage Penalty

In connection with questions about regressivity, volatility, and tax triggers, the Task Force heard highly technical economic analysis from the Tax Foundation and the Institute for Tax and Economic Policy (ITEP).  The Tax Foundation's Nicole Kaeding testified to the Task Force about designing a tax code and how to address regressivity.  Her testimony was principally a technical critique of ITEP's prior testimony.  One interesting point in her testimony was a give-and-take with Co-Chair Hendren about whether the higher priority should be bracket simplification, reducing the top marginal individual 6.9% rate, or perhaps some of the corporate income tax reforms.

On tax triggers, Ms. Kaeding testified in support of them but cautioned that the triggers should be based on actual receipts rather than projections or shifting baselines.  Task Force members were particularly concerned with how best to design a trigger without inadvertently undermining Arkansas's fiscal stability.  

Carl Davis from ITEP testified as well, explaining his organization's modeling and its basis in IRS taxpayer data.  The discussion became quite technical, as Task Force members struggled with ITEP's model, which showed much of the benefit of the low- and middle-income tax cuts went to high-earning households.  It seems that most of the issue was a fair and accurate picture of the combination of Arkansas's 3-bracket-schedule system with the permissive approach to allowing married individuals to file separately, such that an individual may be in the middle- or even low-income bracket schedule despite being part of an overall high-income household.  Task Force members' questions tended to delineate the tension between competitiveness in attracting high-earners versus the fairness concerns surrounding progressivity.

Mr. Davis's testimony also covered tax triggers, which ITEP generally opposes.  A notable point by Mr. Davis was the potential lock-in effects of triggered income tax cuts that then would require a 75% supermajority to reverse if the state needed revenue.  Discussion also included potential triggered tax cut repeals or tax increases in case of revenue shortfalls.

The end of the session also included a discussion with DFA and BLR surrounding marriage filing policies: On the one hand, there is no marriage penalty in Arkansas, because the state freely permits married filing separately status.  On the other hand, there is no marriage bonus of income averaging between spouses, because there is no special joint filing brackets schedule with higher brackets.  The Task Force may well be content with this explanation and not recommend any further changes to how the Arkansas tax code approaches joint filing.

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