Today was the big day: the Arkansas Tax Reform and Relief Legislative Task Force convened to vote on proposals to include in the final report. The Task Force went through proposal-by-proposal with up or down votes. Most proposals that had survived thus far were approved for inclusion in the final report. The final report will have vastly more revenue reducing cuts or reforms than offsetting revenue raisers. It may be more like a compendium of priorities and aspirations that will need to be formed into workable bills as part of post-report Task Force proceedings.
Sales Tax Proposals
- Car Washes: Sales tax proposal #8, to expand the car wash sales tax exemption to all car washes and to impose a water user fee, was approved for inclusion in the final report.
- ATVs: Sales tax proposal #9, to replace the farm equipment sales tax exemption for ATVs and four-wheelers with a rebate mechanism, was approved for inclusion in the final report. This is intended to prevent perceived abuse of the exemption by people buying ATVs for hunting or other recreational purposes.
- Specific entity sales tax exemptions: Sales tax proposal #16 would eliminate all sales tax exemptions with a revenue impact under $10,000, and sales tax proposal #17 would eliminate exemptions for specifically named entities. The sponsors agreed on a consolidated proposal to eliminate sales tax exemptions for specifically named entities and to replace them with more general exemptions that would not be constitutionally suspect. The revised proposal was approved for inclusion in the final report. This may result in some sort of general charitable or nonprofit sales tax exemption.
- Magazine and publication subscription sales: Sales tax proposal #41, to remove the sales tax exemption for magazine and periodical subscriptions (once Arkansas starts requiring tax collection by remote sellers), was voted for inclusion in the final report.
- Remote sellers: Sales tax proposal B, which would adopt South Dakota economic nexus thresholds on a prospective basis, was approved for inclusion in the final report. There was discussion and concern among Task Force members about the uncertainty about revenue impacts and how to use the proceeds: tax cuts, surplus to improve credit rating, highway funding, or otherwise. This culminated in party-line votes about whether the revenue should be used to reduce taxes, as set forth in the proposal which ultimately was adopted without modification. There also were concerns by Task Force members about what happens to a remote seller's sales earlier in a year that then hits the thresholds later in the year.
In addition, the Task Force previously had approved proposals to implement a regular sales tax exemption review process and to cap cumulative local sales tax burdens.
Income Tax Proposals
- NOL extension: Income tax proposal 1B, which would phase in an extension of the carryforward period from the current 5 years out to 20 years, was approved for inclusion in the final report. Co-Chair Hendren commented that while this would be included in the final report, the Task Force will have to prioritize what reforms are actually implemented first.
- Individual income tax cuts and bracket simplification: Income tax proposal 5 contains both Option A, which generally puts everyone on a modified version of the low-income bracket schedule and with a top rate of 6.5%, and Option B, which generally puts everyone on a modified version of the middle class bracket schedule and would also be coupled with an earned-income tax credit (EITC). The Governor's proposed top rate reduction from 6.9% to 6.0% is also under consideration. The Task Force polled its members about their preferences. They preferred Option A by a wide margin, followed by the Governor's proposal and then Option B. It seems likely that all three approaches will be included in the final report.
- Triggered tax cuts of corporate rates: Income tax proposal 10, to reduce the corporate tax rate to 5.9% based on a series of tax triggers, was approved for inclusion in the final report.
- EITC: Income tax proposal 10, to create an EITC equal to 15% of the federal EITC, did not pass.
- Triggered income tax cuts through RSA: Income tax proposal 16, which would integrate triggered tax cuts with the state's Revenue Stabilization Act (RSA) budget mechanism, did not pass.
- Capital gains exclusion: Income tax proposal 21, to repeal the capital gain exclusion for gain in excess of $10 million and use the proceeds to reduce the top marginal income tax rate of 6.9%, passed on a close vote.
- Political contributions tax credit: Income tax proposal 29, to repeal a political contribution tax credit, was approved as modified and broadened to repeal the credit both for candidate and political action committee contributions.
- SALT workaround passthrough tax: Income tax proposal 30, which would provide an optional Connecticut-style entity level income tax for passthrough entities, was approved for inclusion in the final report.
The Chair also noted that the apportionment reforms (single sales factor and throwback repeal) had been approved already. The Task Force also had previously approved a proposal for a regular legislative review process for income tax deductions, exclusions, and credits.
Property and Franchise Tax Proposals
- Business inventory property tax credit: Property tax proposal 2, which would create a non-refundable income tax credit for business personal property tax paid on inventory, was approved for inclusion in the report.
- Franchise tax administration: Property tax proposal 3 would reduce the franchise tax and would transfer administration to the Department of Finance and Administration (DFA) to make compliance more streamlined. The sponsor, Representative Dotson, also expressed support for repealing the franchise tax. After lengthy discussion, the proposal was modified to be administrative only: transfer administration to DFA; move the return date to the federal income tax deadline, and eliminate the penalties that often prevent business closure.
- Standardization of property tax administration: Property tax proposal 6 would give the Assessment Coordination Department (ACD) enhanced oversight and enforcement powers to ensure that Arkansas property tax is being assessed and exemptions applied consistently. It was approved for inclusion in the final report.
- Transfer of ACD to DFA: Property tax proposal 7 was withdrawn, in deference to the state government reorganization currently being planned by the Governor's Office.
- Excess funds in property tax relief trust fund: Property tax proposal 10 would transfer current excess funds from the homestead credit Property Tax Relief Trust Fund to the Public School Fund Account, and it would dedicate future excess revenue toward reduction of income, franchise, or sales tax. The proposal failed for lack of a second to the motion to approve.
Excise Tax Proposals
- E-cigarette taxation: Excise tax proposal 2 would tax e-cigarettes like other tobacco products, at 68% of the wholesale value. The proposal failed in a close vote.
- Cigarette tax increase: Excise tax proposal 4-5 would increase the tax on cigarettes to help make up for the costs of providing medical care to smokers. The proposal calls for a study by the Department of Human Services and the Department of Health to determine the state's health care costs and would look at an increase of between 15 and 50 cents per pack. The proposal failed.
- New excise tax on tobacco and alcohol: Excise tax proposal 8 would impose a new 2% excise tax on retail sales of cigarettes, other tobacco products (OTP), e-cigarettes, and alcohol. The sponsor withdrew the proposal.
- Gas tax inflation indexing: Excise tax proposal 11 would index fuel taxes for construction cost inflation, not to exceed 3% per year. The proposal was approved for inclusion in the final report.
- Road user fee for electric and hybrid vehicles: Excise tax proposal 14 would impose annual user fees of $184 on electric vehicles and $90 on hybrids. The proposal was approved for inclusion in the final report.
After the proposals were voted on, the Task Force members were asked to prioritize the sales and excise tax policy proposals. The results have not yet been released.
Clearly the proposals approved today well exceed the state's current capacity for revenue cuts. The protracted nature of the Task Force's proceedings does not lend itself to finding revenue raisers. Some of the revenue raising ideas that have been dropped by the Task Force may reemerge in the legislative session.
Over the next two weeks BLR will take the proposals and prepare a draft final report. The Task Force will reconvene August 22-23 for final revisions to the report. The Task Force seems to be on track for its final report deadline of September 1, 2018. Once the final report is done, the Task Force will continue meeting to craft legislation based on its recommendations. The first two post-report meetings are scheduled for September 26 and October 29.
Casino Ballot Initiative Fiscal Impact
As a coda to the day's proceedings, the Task Force heard testimony from DFA and a Driving Arkansas Forward initiative backer about the fiscal impact if the casino initiative is approved. Under DFA's static modeling, the effect of the initiative would be to reduce general revenue tax receipts substantially, as Southland and Oaklawn would be taxed differently and their revenues distributed differently from the status quo. General revenues were projected to drop by $36 million initially while the new casinos were under construction. Once all four casinos were in operation and paying taxes, that was projected ease to a permanent $14 million general revenue drop.
Alex Gray from Driving Arkansas Forward offered more of a dynamic scoring approach taking into account spillover effects from construction and ancillary operations. He also pointed out a number of conservative DFA modeling assumptions (no business growth, slow construction). He did not offer a competing general revenue impact number, in part because he apparently had late notice that the casino proposal would be on the Task Force's agenda.
While DFA's modeling may be too conservative, some sort of significant negative general revenue impact still seems likely to be the case. There would have been more questions but the limits on spending state time on ballot initiatives prevented further discussion.