Tax Experts Agree on Eliminating Exemptions — But Not on What to Do with the Revenue

By Caleb Taylor

Nicole Kaeding and Lisa Christen Gee both offered their recommendations for reforming Arkansas’s sales tax Monday at a meeting of the Arkansas Tax Reform and Relief Legislative Task Force.

Kaeding is a Arkansas: The Road Map To Tax Reform co-author and Director of Special Projects for the Tax Foundation. Other co-authors include ACRE Scholar and UCA Assistant Professor of Economics Dr. Jeremy Horpedahl, Scott Drenkard, Joseph Bishop-Henchman and Jared Walczak.

Gee is a senior policy analyst with the Institute on Taxation and Economic Policy, a research organization with offices in Washington D.C. and Durham, North Carolina that supports a “fair and sustainable tax system that raises enough revenue to fund our common priorities, including education, health care, infrastructure and public safety”

Differing Viewpoints

Kaeding and Gee both agreed that broadening the sales tax base by eliminating or adjusting certain sales tax exemptions should be a goal of the task force. However, they disagreed over what to do with the increased revenue from broadening the sales tax base.

Kaeding said legislators should focus on using the “newfound revenue” from broadening the sales tax base to reduce corporate and individual income tax rates.

However, Gee said there was a “tenuous connection” between state income tax cuts and economic growth.

Specific sales tax exemptions that Kaeding suggested legislators should eliminate or adjust were a back-to-school weekend sales tax holiday on clothing and school supplies that occurs annually in August, the gasoline and motor fuels exemption and a grocery exemption where consumers currently pay a much lower sales tax rate of 1.5 percent. These ideas are all discussed in Chapter 5 of the “Road Map” book.

Agreement on EITC

Kaeding and Gee both agreed that Arkansas should consider implementing an earned income tax (EITC) program to offset regressivity concerns over eliminating the exemption on groceries.

Gee noted that 29 states and the District of Columbia have an EITC.

Gee said:

“The solution to your sales tax might be found with your income tax. Enacting an earned income tax credit is another way apart from offering a sales tax rebate if you extend your sales tax rate to groceries to help provide some more equitable rates in your lower and middle income spectrums. It can be used to correct some of the regressivity you have in place because your high reliance on the sales tax.”

You can read Kaeding’s full presentation here and Gee’s full presentation here. Other news from Monday’s meeting included the Department of Finance & Administration’s release of their report on Arkansas’s sales tax exemptions for fiscal year 2017.

Legislators Suggest Exemptions for Further Study

The Tuesday meeting of the task force was brief compared to Monday. Legislators submitted “about four dozen” sales tax exemptions to be examined for further review at their April meeting, according to the Arkansas Democrat-Gazette. Matt Boch, an attorney with Dover, Dixon & Horne, has an unofficial list of all the exemptions that were submitted Tuesday here. Bureau of Legislative Research analyst, Maddie Arey, said the official list would be available “about two weeks” before the next task force meeting on April 25. Income taxes and sales tax exemptions will be discussed at the task force’s next meetings on April 25th and 26th.