Tax Reform Task Force Names Income Tax Proposals for Further Study

The Arkansas Tax Reform and Relief Legislative Task Force convened today. The main purpose was to make income tax proposals for further study. The Task Force also heard from the Department of Finance and Administration about certain questions posed at the prior meeting, including significant clarifications and revenue estimates on income tax policy proposals. Next steps for the Task Force process as it heads toward sales tax recommendations were also discussed.

The Task Force members submitted proposals in writing during the meeting. (The process has something of a "Final Jeopardy" feel to it.) Co-Chair Senator Hendren then read through the proposals, some of which were duplicative. The Bureau of Legislative Research is to provide a definitive list by May 16. (UPDATE: Here is the official list.) These proposals will be up for consideration at the full Task Force meeting May 23-24.  In the meantime, here is a list based on what I heard, and with efforts to consolidate, clarify, and organize by topic:

  1. Bracket Simplification: For the individual income tax, to move away from the 3 separate bracket schedules and move to a single progressive income tax bracket schedule (maybe 5 or less rate brackets).
  2. Depreciation and Expensing: There were a number of proposals surrounding questions of adopting some or all of the federal accelerated depreciation and section 179 expensing benefits.
  3. Pass-Through Income Tax: It is unclear what this proposal means. I suspect that it means adopting the new federal pass-through income deduction.
  4. Worker (Mis)Classification: There was a request to consider "1099 status for payroll tax." Presumably this means looking at whether independent contractors are properly classified--and the attendant employee wage withholding consequences.
  5. Apportionment Reforms:
    1. Elimination of the throwback rule: This would eliminate the tax penalty on Arkansas manufacturers and wholesalers selling into states where they are not subject to income tax. Under current law, these sales get "thrown back" to Arkansas for apportionment sales factor purposes, thus increasing the state's tax burden.
    2. "Weighted sales apportionment": Presumably this means looking at single sales factor apportionment instead of the current 3-factor, double-weighted sales formula. (Or perhaps wanting to go back to equal-weighted formula?)
  6. Net Operating Loss (NOL) extension: There were two options proposed.
    1. Extend from 5 to 20 years with unlimited utilization.
    2. Conform to federal NOL rules (no carryforward time limit and 80% limitation).
  7. Combined Reporting: Potentially moving from separate entity reporting to mandatory unitary combined reporting.
  8. Rate Reductions:
    1. Reduce the top corporate rate from 6.5% to 5.9%
    2. Reduce the top individual top marginal rate from 6.9% to 5.9%, or even 5.0%
  9. Standard Deduction: Adjust the standard deduction to mirror the change in federal law.
  10. Capital Gains Exemption: Study the state's exemption for capital gains in excess of $10 million, presumably for potential elimination.
  11. Earned Income Tax Credit: Adoption of an earned income tax credit (EITC) or perhaps a low-income tax credit (LITC).
  12. ABLE Accounts: Providing for deductibility of contributions to ABLE accounts, or perhaps some sort of exemption.
  13. Tax Treatment of Specific Items:
    1. Political contributions.
    2. Electronic games of skill.
    3. Deductibility of gambling losses.
    4. Windmill blade manufacturer exemption
    5. Organ donation deduction.
    6. Parsonage allowance.
    7. Passive investment income for churches.
    8. Telephone companies (?).
    9. Capital development operations (?).
  14. Revenue Stabilization Act and Tax Triggers: Presumably this aims at having triggered tax cuts that would be integrated with the Revenue Stabilization Act (RSA). There also was a request for consideration of income tax triggers generally.
  15. Inflation Indexing: Adjusting various Arkansas tax items for inflation, as is the case for the federal Internal Revenue Code.
  16. Incentives vs. Income Tax Reductions: This is a broad policy question about whether the better economic development policy is broad-based income tax reductions or more targeted economic development incentives.
  17. Review Income Tax Exemptions: This would be a general review of all income tax exemptions. Co-Chair Hendren advised the nominator to be more specific.

DFA also testified in response to questions from the Task Force from the prior meeting, going over the information contained in a letter from DFA to the Task Force as well as a supporting slide deck. The letter provided estimates of the revenue cost from conformity to federal bonus depreciation and I.R.C. section 179 expensing. Depending on the approach, the revenue cost could be as high as $137 million in the first year. Another important aspect of presentation was the slide deck explaining income tax apportionment and the notable policy choices involved. Shifting to single sales factor was actually projected to be a slight revenue gain of about $8 million, which was a notable development given the prior sense that single sales factor would reduce revenues. DFA Senior Counsel DiPippa also testified about the impacts of market-based sourcing versus costs-of-performance sourcing for service businesses. The DFA addressed a number of other technical issues as well.

Task Force Co-Chair Senator Hendren also discussed next steps in the recommendations process. In June, the Task Force is planning to consider sales tax proposals and make recommendations. A Task Force member will need to bring support for the recommendation and seek approval from the Task Force as a whole. In his words, "it's getting ready to get real."

 


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