The Tax Reform and Relief Task Force is over. After 18 months of meetings and in-depth research on Arkansas taxes, the task force concluded its final meeting on Wednesday. The task force approved out their final recommendations of draft legislation and their fiscal impacts. Conduit has crunched the numbers, and the results may not be what many expected. While some larger cuts may be implemented down the road if certain conditions are met, the first fiscal year impact is not looking good for taxpayers.
For the first fiscal year (2020), the draft legislation fiscal impacts and proposals result in a NET INCREASE of taxes to the government. The breakdown is as follows:
* City/County Net Increase: $11,140,237
TOTAL Government Revenue Increase: $49,361,944
*Part of Governor’s tax plan presented to the tax task force. Unclear if task force supports this proposal.
*JLL072 fiscal impact is adjusted to reflect the tax task force’s vote for phase in the income tax cut plan over three years rather than four years. The numbers come from DFA presentations to the task force.
The net tax Increase grows to over $48 million to the taxpayer when factoring in the increase to city and counties for the Internet Sales Tax.
Description of Draft Legislation / Proposals
JLL031 – Capital Gains Tax Increase ($7.7M Revenue Increase)
This draft legislation would remove the exemption on the amount of net capital gain in excess of ten million dollars. For those with capital gains over $10M, they will be limited to the 50% exemption from capital gains rather than a full exemption on capital gains above $10 million. This tax increase measure would, on average, increase tax revenue by $7.7M per year according to the Department of Finance and Administration (DFA).
JLL032 – Repeal Tax Credit for Political Contributions ($500K Revenue Increase)
This draft legislation would repeal the current income tax credit for political contributions. Currently, income tax credits are allowed up to $50.00 per individual for contributions to political candidates, political action committees, or political parties. This would increase tax revenue by $500,000 per year.
JLL051 – Pass Through Entity Tax with Corresponding Credit (No Revenue Impact)
This legislation applies to S-corporations and partnerships (including Limited Liability Companies treated as a partnership for state income tax purposes). It creates a passed through entity tax with a corresponding offsetting income tax credit for pass-through entities. The bill appears to deduct as a business expense what they formerly could deduct as a SALT deduction without limit.Imposes a tax on an “affected business entity” and provides a corresponding tax credit to the partners, members, or shareholders of the affected business entity. There is no revenue impact. New administrative costs for DFA are estimated to be $500,00 to implement this legislation.
JLL055 – New Fees on Electric/Hybrid/Alternative Fuel Vehicles ($600K Revenue Increase)
$100 – for each electric vehicle
$100 – for each alternative fuel vehicle
$50 – for each hybrid vehicle
JLL070 – Indexing of the Motor Fuel Taxes (Mandatory, Annual Gas Tax Increase)
This draft legislation would implement an indexed fuel tax increase based on the changes in the Consumer Price Index, commonly referred to as the inflation rate. The annual tax increase would be the lesser of the percentage growth in the CPI or 4%. If there is a decline in growth in the CPI or no growth, the tax rate would remain the same.
The new mandatory annual tax hike would average between 2% – 2.5% increase each year based on DFA estimates. This would result in the fuel tax rate moving from the current rate of 21.8 cents per gallon up to 23 cents per gallon by fiscal year 2022. Arkansas currently has the highest gas tax rate among all of its bordering states.
The revenue increase estimates for the first three fiscal years are:
2020 – $11,351,847 Tax Increase
2021 – $22,035,424 Tax Increase
2022 – $32,050,729 Tax Increase
JLL069 – Tax Reform Act – ($1.4M Net Revenue Reduction)
This draft legislation reforms several areas of Arkansas tax law.
1.Franchise Tax –Transfers administration of the franchise tax from the Secretary of State to the DFA.
2.Property Tax – Requires the Assessment Coordination Department (ACD) to adopt mandatory guidelines to be followed by County Assessors in identifying property exempt from property tax and for assessing business inventory. All County Assessors must comply with the guidelines.
3. Report of Tax Exemptions and Deductions – requires that DFA issue a report on the current tax exemptions and deductions, including the loss of revenue. New DFA administrative costs of $875,000.
4. Sales Tax – Car Washes –amends existing law to provide that sales tax does not apply to a “car wash”. This would result in a $1.4 million reduction in state sales tax revenue and a $450,000 reduction in city/county sales tax revenue in Fiscal Year 2020 and increasing to $2.1M (state) and $700K (city/county)reduction for Fiscal Year 2021.
5. Sales Tax – Certain Entities – repeals existing sales tax exemptions for named entities. This includes:
Boys and Girls Club
Poets Roundtable of Arkansas
4-H Clubs
FFA Clubs
Arkansas 4-H Foundation
Arkansas Future Farmers of AmericaFoundation
Arkansas Future Farmers of America Association
Habitat for Humanity
Salvation Army
Heifer International
Community Service Clearinghouse ofFort Smith
American Search Dog Association
The legislation would allow these organizations to submit documentation to DFA to request a rebate of the state tax paid. Local sales taxes would not be eligible for the rebate. There is no change in state revenue due to rebate options. Unclear if increase to cities/counties. New DFA administrative costs of$325,000.
6. Sales Tax – All Terrain Vehicles (ATV) – removes the tax exemption on the purchase of all terrain vehicles used by commercial farmers and implements a rebate system to request a rebate for the sales tax paid. DFA would determine adequacy of the claim,complete taxpayer registration, perform desk audit review and conduct procedures necessary for issuance of the refund payment. Unknown revenue impact. New DFA administrative costs of $650,000.
7. Water Usage Fee – Car Washes – levies a new monthly water usage fee or annual fees on car wash operators who operate either an “automatic car wash”, a “car wash tunnel” or a car washing self service bay. The fee rates are dependent on the water source of the car wash facility and amount of water usage. Unknown gain to state general revenue on fees levied.
8. Local Sales Taxes – Establishes the maximum sales tax a city and county may levy.
Cities – Capped at 4% sales tax
Counties – Capped at 3% sales tax
JLL072* – Governor’s 2-4-5.9 Income Tax Plan + Internet Sales Tax + Removal of Sales Tax Exemption for Magazine Subscriptions (NET Revenue Reduction of $12.9 Million)
1. Governors 2-4-5.9 Income Tax Plan Phased In Over 3 Years
Year 1 – Would collapse the current income tax tables into a simplified single tax table and lower the top income tax rate to 6.5%. This would be an income tax revenue reduction of $47.4 million for fiscal year 2020.
Year 2 – Would reduce the top income tax rate down to 6.2%. This would be an income tax revenue reduction of $71.8 million for fiscal year 2021.
Year 3 – The top income tax rate would drop down to 5.9%. This would be a reduction of $48.5 million for fiscal year 2022 and a reduction of $24.1 million for fiscal year 2023.
If fully implemented, there would be a total income tax revenue reduction of $191.8 million over four fiscal years.
*The JLL072 Fiscal Impact Statement is adjusted in this section to correspond with the tax task force’s vote to phase in the plan over three years rather than four. These numbers are DFA figures under the phase in plan presented to the tax task force before their vote. You can see the official voting ballots showing a plurality of task force members supporting the three-year phase in. The fiscal impact for JLL072 includes the political contributions repeal but is omitted to avoid double adding since JLL032 is a standalone bill addressing that.
2.Internet Sales Tax –this legislation would create a new Internet Sales Tax. It would require online retailers without a physical presence in the state to collect and remit Arkansas sales tax. The tax would be paid by Arkansans and would just be collected and remitted by remote sellers. Remote sellers would be defined to include those having gross revenue from sales of products and services exceeding $100,000 OR a seller with at least 200 separate sales transactions. For Fiscal Year 2020 there is an estimated tax increase of $32.4 million to the state and $10.8 million to the cities and counties. For fiscal year 2021 there is an estimated tax increase of $35.3 million to the state and $11.8 million to the cities and counties.
Previous estimates by bill sponsors in 2017 ranged from $100 to $150 million.
3. Repeal of Sales Tax Exemption for Magazine subscriptions – The repeal of this sales tax exemption would increase taxes by an estimated $2 million to the state and $685,503 to cities and counties for fiscal year 2020. For fiscal year 2021 the estimated tax increase would be $2.2 million to the state and $740,237 to the cities and counties.
JLL073 – Phased In,Dependent on Triggers Met – Eliminate Throwback rule and Single Sales Factor Apportionment– Corporate Income Tax Cut – Phase In 20 – Year Net Operating Loss Carry forward*– Inventory Tax Credit
Conditions – for any portion of this proposed legislation to pass, certain conditions must first be met. These conditions are:
1. That net individual income tax collections have increased by 2% per year multiplied by the number of years since FY2019 until the most recent fiscal year; AND
2. The balance of the Long-Term Reserve Fund for the most recently completed fiscal year is at least equal to the balance of the fiscal year before.
3. Phase One (JLL072 – Tax Reform and Relief Act of 2019) has been fully implemented.
A. Eliminate Throwback Rule and Single Sales Factor Apportionment– the legislation includes provisions to eliminate the throwback rule in Arkansas. The throwback rule recaptures “nowhere income” from companies with locations in multiple states and reapportions it into the Arkansas tax base even though multiple states may claim the right to tax the same income. The change would remove the “throwback rule” and thus decrease taxes for business. The draft legislation would also move Arkansas to a single sales factor apportionment state. When states determine the tax liability of a business with locations in several states, some use a greater weight on sales rather than property and payroll in their formula. The change would move Arkansas to a single sales factor apportionment state. There are exemptions for sales to the U.S.government on the throwback rule and financial institutions on the single sales factor apportionment.
For these two changes, there is an estimated reduction of revenue of $28.5 million in both fiscal year 2023 and 2024.
B. Reduce Corporate Tax Rate to 5.9% – if the conditions outlined above are met, the corporate income tax top rate would be reduced from 6.5% to 5.9% on net income exceeding $25,000. This would result in a $19.8 million revenue reduction beginning in fiscal year 2024.
C. Phase-In 20-year Net Operating Loss Carry forward*- this provision of the draft legislation would allow businesses to carry forward their net operating loss corporate income tax deduction over twenty years. This would be phased in over several years. Currently, this is carry forward is restricted to just five years. This would result in a $16.8 million revenue reduction in fiscal year 2030, $32.8 million reduction in fiscal year 2031, and a $47.8 million reduction in fiscal year 2032.
D. Inventory Tax Credit – this provision would provide for an income tax credit on property tax paid on inventory. The credit can only be used to reduce income tax liability but cannot exceed the amount of income due and could be carried forward over ten years. This change would reduce state revenue by $35.1 million beginning in fiscal year 2025.
*At the very end of the task force meeting after they had finished voting on their recommendations, Rep. Jim Dotson made a motion to implement the Net Operating Loss carry forward provision sooner. This motion was approved,but it remains unclear how the tax task force would implement that and the fiscal impact for the corresponding fiscal years that would be affected rather than those outlined in the fiscal impact statement for JLL073.
Governor’s “Conformity” Proposal
As part of the last two tax task force meetings,a “conformity” measure was presented as part of the governor’s 2-4-5.9 tax plan.This measure would conform state tax law to federal law and reduce the deductions available on things such as moving expenses, mortgage interest, and employee business expenses. This measure would beat tax increase of $28.8 million according to DFA who presented this combined with the 2-4-5.9 3-year phase in plan.
Premium Tax Credit Adjustment
The tax task force approved a proposal that would lower the home office tax credit that are used against insurance premium taxes paid by health insurance providers. The reduction of that tax credit over the next few years would see an increase of tax revenue of $3.5 million the first year, $6.3 million the next year, $10.8 million the next, and $16.3 million in fiscal year 2023.
Conclusion
The next step is for legislation to be filed and ran during the 2019 legislative session. Co-Chair of the task force Sen. Jim Hendren encouraged fellow task force members to sponsor the draft legislation they are recommending. After meeting for about 18 months, the task force will expire at the end of the year.
Sources:
Fiscal Impact Statements Prepared by Arkansas Department of Finance and Administration (DFA)
Conformity Proposal as part of Governor’s 2-4-5.9 Plan – Slide 13
Premium Tax Credit Adjustments
In person attendance at Tax Task Force meetings in Little Rock
