The Arkansas Tax Task Force met again this week in its next to last meeting of its existence. The task force began meeting in the Spring of 2017 and will expire at the end of the year. This week the meeting detailed how, when, and how much tax cuts and increases are to be expected over the coming years, including draft legislation for the 2019 legislative session.

Governor’s Income Tax Plan

A few meetings ago the Governor’s office unveiled their income tax plan for the 2019 legislative session. This was labeled the 2-4-5.9 plan. It was originally presented to be phased in over two years with an income tax decrease of around $191 million over that two-year period. However, the Governor’s office has now revised the plan to phase it in over the next four to five years. Because of how fiscal years versus calendar years fall “half years” extend the timing about an extra year according to government officials. State Representative Jim Dotson asked the Governor’s Department of Finance and Administration officials about the feasibility of phasing the cuts in sooner rather than over the four fiscal years as presented.

Under the Governor’s plan, there would be an income tax reduction of $47.4 million in the first fiscal year. The tax brackets would be revised to the following, simplified single table:

Beginning January 1, 2023, the brackets would look as follows under the plan:

Tax Increases – Conformity Measures

DFA officials also presented possible tax increase measures in their PowerPoint presentation. Their presentation included discussion and a breakdown of “conforming” with changes at the federal level which would be a tax increase of $28.8 million per year. They also discussed a proposed tax increase measure of removing the sales tax exemption on magazine subscriptions, which would be a $1.56 million tax increase.

While DFA discussed the possibility of conforming to the IRS code and changes at the federal level, it was limited to conformities that resulted in tax increases. They did not include discussion of options to conform with the IRS code that would benefit small businesses and result in tax decreases. Specifically, the options that Conduit for Commerce recommended of extending the carryforward of a net operating loss, allowing for a carryback of a net operating loss, and federal conformity with other deductions or depreciation laws that are more helpful to small business.

“Great Weight Given to What Governor Says”

While the Governor’s 2-4-5.9 plan is not a recommendation from the task force, Task Force Co-Chair Rep. Lane Jean shed light on its importance. Jean stated that “we put a lot of weight to what the Governor says around here” referring to the plan. The Governor’s budget for the coming fiscal years already assumes his plan passing, as well the passing of an internet sales tax.

Internet Sales Tax

There was also discussion on the impact of passing an Internet Sales Tax and how much revenue that would bring in. A previous estimate for an internet sales tax would increase taxes at the state level by $35 million. A U.S. Supreme Court ruling earlier this year opened the door for the legality of an Internet Sales Tax. However, like the Obamacare Medicaid Expansion program, the tax increase measure is optional to the states to pass or not. Taxes would be paid by Arkansans, not out of state sellers and governments at the state, city, and county levels would grow due to the tax increase.

Tax Shifting

Some legislators pointed out how the combined tax cuts and increases would work together, and possibly undermine attempts at tax relief. For example, if the Governor’s plan was implemented ($47 million income tax cut) along with the discussed offsets ($29 million tax increase) and internet sales tax ($35 million increase), then the taxpayer would be seeing a net tax increase on them of $17 million. It would be even higher than that because it does not take into effect the local sales tax increases that would be felt by taxpayers under the Internet Sales Tax.

Task Force Options – Draft Legislation

The Task Force also heard details on draft legislation that would implement their recommendations they previously included in their final report. At the final meeting on December 12, the task force will be voting on the draft legislation they want to propose from the task force to the General Assembly in the 2019 legislative session that will begin January 14.