Tax Task Force Approves Final Report
The Arkansas Tax Task Force met again this week. The committee approved a 20-page “final” report outlining their recommended tax changes ahead of the 2019 legislative session. Immediately after they approved their final report, Paul Gehring of the Department of Finance and Administrating (DFA) outlined a new income tax proposal from Gov. Asa Hutchinson.
This new plan would be a two-part phased in income tax cut that would result in just one tax table with four, then three brackets. It would also triple the standard deduction here in Arkansas. This mirrors the similar type reform at the federal level last year.Currently, the Arkansas standard deduction is $2,200 for single filers and $4,400 for married couples. Under the proposal the standard deduction would increase to $6,800 for single filers and $13,600 for married couples.
Phase One of 2-4-5.9/6.5 Plan
|$0 – $8,000||2.00%|
|$8,001 – $18,000||4.00%|
|$18,001 – $65,000||5.90%|
Phase Two of 2-4-5.9/6.5 Plan
|$0 – $8,000||2.00%|
|$8,001 – $18,000||4.00%|
Gehring stated their goal was to create a simplified income tax system while ensuring no taxpayer saw a tax increase.
Final Report Breakdown of Proposals
|Proposal||Tax Increase or Decrease||Revenue Impact|
|Local Sales Tax Caps – would place caps on cities/counties on how much sales tax they could levy.
|Sales Tax Exemption for Coin-Operated Car Washes – expanding for all car washes; new water use fee||INCREASE – new fee
DECREASE – exemption for all car washes, instead of just coin-operated
|Increase – Unknown
Decrease – $1.8 million
Net – Unknown
|+2.5Repeal Sales Tax Exemption on Sales of 4-wheelers and ATVs for farm use; create new rebate system instead.||Neutral||DFA does not give an estimate but claims it would not have an immediate impact on state tax revenue.|
|Repeal Sales Tax Exemption for Named Entities; replace with broad exemption||Unknown||Unknown|
|Repeal sales tax exemption for magazine/publication subscription sales (contingent on internet sales tax passing)||INCREASE||$1.8 million|
|Internet Sales Tax||INCREASE||$35.4 million|
|Repeal the Throwback Rule||DECREASE||$24.5 million|
|Single Sales Factor Apportionment||INCREASE||$8.8 million|
|Net Operating Losses incrementally increased from 5 to 20 years; steel manufacturers max of 10 years.||DECREASE||$16.8 million – first fiscal year 2026
$159.5 million – by fiscal year 2044 when fully implemented
|Individual Income Tax – Option A:
$0 – $4,299: 0.0%
$4,300 – $8,399: 2.0%
$8,400 – $12,599: 3.0%
$12,600 – $20,999: 3.4%
$21,000 – $35,099: 5.0%
$35,100 – $80,000: 6.0%
$80,000 plus: 6.5%
|6.5Corporate Income Tax Cuts – use of tax triggers to gradually reduce over time for a final top rate of 5.9%.
|DECREASE||$6.5 million – initial
$38.7 million – total phased in.
|Repeal Capital Gains Tax Exemption for capital gains over $10 million.||INCREASE||$4.65 million|
|Repeal political contribution income tax credit||INCREASE||$759,000|
|+Create a Pass-Through Entity Tax – allows a pass through entity to pay Arkansas income tax directly to DFA in the same manner a C-corporation may do so.||NEUTRAL||New administrative costs of $500,000|
|Business Inventory Tax Credit – non-refundable tax credit equal to the amount of property tax the taxpayer paid on business inventory, with carry-forward period of 10 years.||DECREASE||Up to $70.2 million*
*will likely be lower as some may claim the tax credit.
|Franchise Tax Filing Dates change, move authority to DFA, no penalty on closing a business.||Administrative Cost increase:
$630,000 one time
|State Guidelines on Assessing Exempt Property||Neutral||Unknown|
|Index Fuel Taxes – indexing based on inflation rates of construction costs. Minimum of current year rate, max at 3% over the tax rate of previous year.||INCREASE||DFA unable to provide estimate but with built in potential for 3% increase each year would be substantial tax increase.|
|Road User Fee for Electric and Hybrid Vehicles
$184 – election vehicles
$90 – hybrid vehicles
*Using updated estimate from actual number of registered electric/hybrid cars
Total Tax Increase for next fiscal year: $55.3 million
Total Tax Decreases for next fiscal year: up to $379.5 million
Total Net Tax Cut If All Proposals Implemented in first year: $324.2 million
Although over $55 million in tax increases were proposed by the tax task force, their tax cuts resulted in an overall net tax reduction of $342.2 million.
At the end of the second day chairman Jim Hendren, who is the Governor’s nephew, did caution task force members about the large amount of proposed tax cuts being implemented all at once. He asked DFA to put together a proposal that would break down what if they just did a $50 million net cut in the first year versus $100 million up to $200 million. Previously a cap of around $200 million had been discussed.
DFA officials also cautioned legislators specifically mentioning the increased amount the state would have to pay under the Obamacare Medicaid Expansion program called Arkansas Works. Mention of the long-planned phase in of the grocery sales tax cut also came up at this time.
Nicole Kaeding of the Tax Foundation analyzed the final report proposal against the “business tax climate index” that measures business friendliness of state tax policies. Her analysis showed that if the tax task force fully implemented their report it would result in Arkansas moving from 39th overall in business tax climate to 36th overall. This improvement is entirely tied the improvements on the corporate income tax rate as the other subcomponents did not change with the proposed reforms.
Tax Foundation Business Tax Climate Index Changes
Kaeding went into detail on how Arkansas could implement tax triggers to ensure ongoing tax relief to Arkansans as the economy continues to grow. The triggers would automatically reduce the income tax rates when specific revenue growth targets are hit.
Kaeding also analyzed how the tax task force could possibly enact the full 2-4-5.9/6.5 plan through both phases at the same time. Her recommendation involved removing the inventory tax cut/credit proposal while fully implementing the income tax cuts. While still accounting for the tax increases, her projection was a NET $203 million tax cut.
Although the tax task force approved their “final” report for submission to the House Speaker, Governor, and President Pro Tem, chairman Hendren stated it would be a dynamic document with changes over the coming months. He also mentioned that the Bureau of Legislative Research would begin drafting bills based on the proposals.
The committee voted to send the new 2-4-5.9/6.5 plan for dynamic scoring and for further analysis from the Tax Foundation. The tax task force will meet again in September.