Tax Reform Task Force Hears from Other States’ Experiences

The Arkansas Tax Reform Task Force met on Tuesday, December 5, 2017, with a lengthy agenda to hear tax reform best practices with legislators and other leaders from North Carolina, Indiana, Oklahoma, and Kansas. Key themes included income tax rate reductions for both corporate and individual taxpayers, elimination of taxes or policies that penalize in-state business activity, incrementalism instead of making radical changes, the importance of spending control in tandem with tax reform, and the role of tax policy as but one key factor among several (education, workforce, infrastructure, etc.) for economic development.

The testimony from other states’ legislators began and ended with a large delegation from North Carolina. At the outset, the Speaker of the North Carolina House of Representatives, Tim Moore, provided high-level thoughts of his state’s experience with tax reform. He emphasized simplifying the code, getting rid of tax credits, and lowering income tax rates. Speaker Moore also put tax reform and tax cuts into the context of a broader pro-business economic development agenda that includes education, technology, and workforce development. Regarding corporate income tax versus individual income tax, he believes that individual income tax cuts were likely more important in spurring growth and encouraging business executives to move their businesses to the state. Discussions also touched on the structure of the individual income tax and potentially simplifying the structure with flatter rates and a higher standard deduction. 

In the afternoon, the committee heard from the rest of the North Carolina delegation: House Majority Leader John Bell, House Finance Committee Senior Chairman Bill Brawley, and House Finance Committee Co-Chairman John Szoka, as well as Joe Colletti from the John Locke Foundation. It began with wide-ranging discussion of tax and non-tax policy. Rep. Szoka then walked through the presentation detailing the North Carolina tax reforms. This included personal income tax cuts and an increased standard deduction to provide middle-class tax relief. Corporate income tax saw larger cuts, seeing incremental rate reductions from 6.9% in 2011 to 2.5% in 2019. The sales tax side was minor rate cuts and base broadening, including commentary on the difficulty in expanding the sales tax base. To a question about the equity of sales tax base expansion, it was noted that the income tax relief could help offset the additional burden. Later in the North Carolina segment, Rep. Brawley explained the importance of moving to single sales factor apportionment in enhancing competitiveness, and he also noted the potential for decoupling from or capping federal tax benefits such as section 179 expensing. His narrative then broadened to emphasizing the benefits that tax policy could bring in terms of long-term economic development from business location decisions drawn in by a favorable tax climate.

From Indiana, the Task Force heard from Senator Brandt Hershman, the Majority Leader and Chair of the Tax and Fiscal Policy Committee, and Representative Todd Huston from the House Ways and Means Committee. They explained that Indiana had come a long way and trumpeted the state's regular appearances in the top 10 in various business competitiveness rankings. In explaining the state’s tax structure, they noted an intentional shift in local funding from property tax to local income taxes. At the state level, they also commented on the importance of income tax cuts in attracting businesses to the state, and particularly in outcompeting neighboring Illinois. They also mentioned the elimination of the inventory property tax, the elimination of the income tax throwback rule, and adding a de minimis exclusion from business personal property tax as being instrumental in improving competitiveness. Indiana also has taken a systematic approach to evaluating credits and eliminating underperforming incentives. The delegation from Indiana explained the importance of incremental change and revenue stability: the Indiana corporate income tax rate reductions are being phased in with revenue triggers to preserve fiscal stability, and corporate income tax receipts actually have remained stable despite the cuts.  They also discussed how economic development must be viewed holistically and that tax policy is just one piece of the puzzle. Education, workforce, and qualify-of-life are also important.

From Oklahoma, State Tax Commissioner and former legislator Clark Jolley testified. He explained the history of the state's tax reforms and tax cuts over the past two decades. In addition to systematic tax rate cuts, the state also targeted for exemption the income streams for retirees and other potentially mobile individuals. Much of Mr. Jolley's discussion then focused on how Oklahoma has managed the fiscal problems that began with the recession and were exacerbated by the tax cuts. One aspect of fiscal management which captured the Task Force's attention was tax amnesty or voluntary disclosure programs as a potential revenue raiser. Mr. Jolly placed much of the blame for the state's fiscal difficulties on failure to implement spending cuts rather than the tax cuts themselves. In particular, guaranteed funding "apportionment" for various purposes had prevented necessary spending cuts.

The Kansas experience was covered by Representative Steven Johnson, House Tax Chair. He provided the story of Kansas's tax cuts and reforms, with discussion of the taxpayer planning that led to the pass-through exemption having a higher revenue impact than anticipated. Rep. Johnson compared the 2012 tax cut reforms with the 2017 legislation to restore fiscal balance. He emphasized that while the initial Kansas reforms had many good ideas, Arkansas would be well served to make more cautious, incremental changes so as to preserve fiscal stability and have more flexibility to change policy as circumstances dictate.

The Task Force will meet again tomorrow. The state tax system comparison from consultant PFM was postponed until tomorrow. The rest of the agenda will focus on Arkansas property taxes.

Update: Also check out the Tax Foundation's summary of this meeting.

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