By Caleb Taylor
Arkansas’s Tax Reform and Relief Legislative Task Force met on November 7th and 8th to discuss the state’s sales and use tax, as well as excise taxes (click links to see presentations). As the Task Force continues to meet, ACRE will offer summaries of the proceedings and how they relate to tax issues we have discussed in our research.
John Cape, a consultant with Public Financial Management (PFM), gave the main presentation and answered questions from tax force members and other legislators. Arkansas has the third highest sales tax rate in the country. According to a 2016 report by the U.S. Census Bureau, approximately 49 percent of Arkansas’s state revenue comes from the sales and use tax.
Mr. Cape told task force members the sales tax base had been “eroding in considerable ways” due to changes in consumption habits, an aging population and legislatively-created sales tax exemptions.
“There are a number of exemptions that have sort of changed the nice, monolithic base of sales tax that you started out with to more of swiss cheese that’s got things that are exempted and things that aren’t exempted,” said Cape. These exemptions run counter to ideal tax policy. Cape continues, “The basic law of taxation is the best practice is to have a broad, monolithic base for any tax and a low rate and don’t change it. Don’t change the rate. Don’t change the base. The people that have to pay it and businesses and industry that are looking at your state know what they can expect.”
Jeremy Horpedahl and Nicole Kaeding discussed this issue as well in a recent ACRE blog post.
Paul Gehring, Assistant Commissioner of Revenue for DFA, at the request of State Sen. Jim Hendren provided the task force with an estimate of how much Arkansas’s income tax rates could be reduced if all sales tax exemptions were eliminated. According to Gehring, the top income tax rate could be reduced to a 3.5 percent rate for taxpayers earning $35,100 or more annually. This rate is currently 6.9 percent. That’s a reduction of nearly 50 percent. How to close some of these exemptions to broaden the sales tax base and lower rates will likely be a recurring topic for the task force throughout 2017 and 2018.
According to a story by Michael Wickline on the meeting in the Arkansas Democrat-Gazette, Hendren said “the first thing we need to do is to establish which of these exemptions are off the tables because … of federal law or the constitution or because they clearly impact the policy to make us immediately not competitive.” Hendron goes on, “”I would ask you to identify the exemptions … we need to spend our time focusing on” at a future meeting, Hendren told three officials for PFM Consulting Group.
“I would like you to do that homework and say, ‘Look, out of this $1.4 billion, we think this $400 million is where you need to focus your efforts because that’s a policy issue — not required by law or not something that is immediately going to make us uncompetitive.” said Hendren, whose uncle is Republican Gov. Asa Hutchinson.
Excise taxes, which are taxes paid on specific goods, were discussed at a previous meeting. Randall Bauer, PFM’s Project Manager for Arkansas’s tax reform efforts, cited statistics from the Department of Finance & Administration(DFA) in a 2012 study that about $1.4 billion in sales tax revenue is exempted in Arkansas annually. Bauer said the three largest excise taxes in Arkansas by revenue are on alcohol, motor fuels and insurance premiums. These three taxes account for $791 million in state revenue in fiscal year 2016. Total excise tax revenue was $1.3 billion in 2016. Excise taxes are responsible for 13.5 percent of total state revenue in Arkansas. This is lower than the national average of 16.2 percent.
On December 5th, task force members will hear from legislators visiting from Indiana and Kansas to give their perspectives what did and did not work in their tax reform efforts that preceded Arkansas’s. Legislators from Louisiana, North Carolina, Oklahoma and Tennessee have been invited by the task force but haven’t confirmed their attendance yet, according to Rep. Lane Jean.
Check back soon for more ACRE updates on this issue.