Tax Reform Task Force Studies Income Tax Reforms; Members to Make Proposals on May 10

On April 26, 2018, the Arkansas Tax Reform and Relief Legislative Task Force shifted focus from Sales and Use Taxes to Individual and Corporate Income Tax Reform. The Task Force heard testimony on income tax policy from several groups, notably including a northwest Arkansas manufacturer. The Task Force will have an interim meeting May 10 for members to make income tax policy proposals, which then will be considered at the meeting on May 23.

Recall that taxes under review by the Task Force have divided into three groups: Sales/Use Taxes; Individual/Corporate Income Taxes; and Property/Excise Taxes. Sales/Use Taxes went first with hearings in March and April. The present phase of Task Force deliberations concerning Individual/Corporate Income Taxes will continue through the May meeting scheduled for May 23, 2018. Property/Excise Taxes will be considered in May/June.

The five lengthy presentations on the agenda provided a load of information for the Task Force to absorb. Companies or groups represented included McKee Foods Corporation (which actually presented April 25 because of scheduling constraints), Tax Foundation, Institute on Taxation & Economic Policy (ITEP), the Bureau of Legislative Research (BLR) and the Department of Finance and Administration (DFA).  Of the five, McKee Foods and Tax Foundation seemed to attract the most interest and questions.

Leisa Cagle, Vice President and Controller of McKee Foods explained that McKee ranks “State and Local Tax Structure” as its fifth most important criteria for site selection, and Arkansas ranks very low on its Manufacturing Location Scorecard in this area.  McKee has operations in Tennessee, Arkansas and Virginia, and ranks Arkansas particularly low in the areas of: Corporate Income & Franchise Taxes; Sales and Use Taxes – Cost per Case; and Personal/Equipment Property Taxes – per $1,000 of Cost. Although the presentation related to all three tax groupings under Task Force review, McKee has found Arkansas’ 3-factor / double-weighted sales approach to apportioning multi-state corporate income to be the most problematic. Tennessee and Virginia have both followed the national trend of using a state’s proportion of a company’s overall sales to identify the fraction of total income on which taxes are assessed (single sales factor apportionment). By contrast, Arkansas continues to use an apportionment formula that was prevalent in years past, which takes the state’s relative proportion of property, payroll and sales into account. This approach has been criticized as penalizing companies with manufacturing facilities and jobs in a state and favoring companies that only take advantage of a state’s market, and most states have moved away from multi-factor apportionment in recent years, including 4 of the 6 states around Arkansas. The Task Force Chair asked DFA to furnish the revenue impact of shifting to single sales factor apportionment.

Nicole Kaeding of Tax Foundation covered a wide variety of income tax topics focusing primarily on business tax climate and reforms that could encourage economic growth. In the individual income tax area criticisms included Arkansas’ unusually complex tax brackets, high marginal income tax rate and marriage penalty. Corporate income tax criticisms included high rates; unnecessary brackets; the extremely short 5-year window for offsetting new earnings with prior net operating losses; and various aspects of its multi-state apportionment formula, including a provision that taxes “nowhere income,” referred to as the “throwback rule.” Tax Foundation generally advocates paying for lower tax rates and structural reforms by limiting exemptions.

Lisa Gee of ITEP promoted the Earned Income Tax Credit (EITC) as a method to promote tax fairness and social change. Ms. Gee criticized recent changes limiting taxes on capital gains, and also joined virtually all of the economists providing information to the Task Force in criticizing Arkansas low 1.5% tax on grocery purchases, which is scheduled to drop further on January 1, 2019. 

BLR provided a rehash of information provided earlier by PFM Consulting, whose service contract was terminated in January; and DFA closed out the agenda by reviewing a list of individual and corporate exemptions and the revenue cost of each exemption where available. AEDC Director Michael Preston was originally scheduled to provide information on economic development incentives as part of the April program, but this presentation has apparently been postponed until the May meeting.

The next step in the process is for Task Force members to propose individual and corporate income tax changes for action on May 23. This is the same general approach that was used to develop the list of Sales and Use Tax changes considered in April; but with important differences. First, the Chairs have scheduled an interim meeting of the Task Force on May 10 for members to submit their proposals in a more orderly fashion.  Second, members are being asked to put their names on their proposals, instead of submitting proposals anonymously. Task Force procedures have been fairly fluid so far, and we will need to wait and see how this is ultimately handled.

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