By Caleb Taylor
Seven.
That’s the number of sales tax exemptions members of the Arkansas Tax Reform and Relief Legislative Task Force recommended for further study on April 25th and 26th.
Sales Taxes
According to a Department of Finance & Administration report, there are currently at least 115 state sales tax exemptions. Some of these are required by federal law, others are to make sure only final consumption is taxed (by exempting business purchases), but many are “policy choices” — that is, choices by policy makers to use sales tax exemptions to achieve some other policy goal. Total exemptions from the 2017 DF&A report were $1.689 billion. The total known amount of the exemptions voted on to be studied further is $194.930 million.
Task force members had previously recommended 43 sales exemptions for consideration for reform, but legislators only decided to move forward with further study of just seven exemptions.
Those seven exemptions along with their annual negative effect on general revenue are:
- Sales of magazines sold through a publication, $1,556,266
- Services provided by coin-operated car washes, $100,813
- Sales of 4-Wheelers and ATVs for farm use, (unknown)
- Sales tax exemptions of Less Than $10,000, $41,679
- Back-to-school sales tax holiday, $1,834,615
- Sales tax exemption for groceries, $190,676,068
- Named Non-Profit entities, $720,240
Most of these exemptions were identified in Arkansas: The Road Map To Tax Reform as exemptions that make little economic sense. Pairing an Earned Income Tax Credit (EITC) for low-income consumers with a repeal or reform of the sales tax exemption on groceries is also discussed in the book.
The task force also voted on April 25th to use the revenue increases from whatever income or sales tax exemptions they discontinue for overall tax reductions so state government wouldn’t see any net new revenue from their final tax reform package.
Income Taxes
Nicole Kaeding, Arkansas: The Road Map To Tax Reform co-author and Director of Special Projects for the Tax Foundation, recommended on April 26th that legislators focus on lowering Arkansas’s income tax burden instead of lowering its sales or property tax burdens. She said all taxes burden economic growth, but income taxes are generally considered to be more burdensome than property or sales taxes. Thus, Arkansas legislators should focus their efforts on lowering the income tax, according to Kaeding. Kaeding was also critical of the state’s “complex” income tax code. It’s the only state in the nation with three different sets of income tax brackets.
Other co-authors of Arkansas: The Road Map To Tax Reform include ACRE Scholar and UCA Assistant Professor of Economics Dr. Jeremy Horpedahl, as well as Scott Drenkard, Joseph Bishop-Henchman and Jared Walczak of the Tax Foundation.
In their book, the authors suggest lowering the top income tax rate of 6.9 percent and consolidating the number of rate schedules from three to one. Revenue losses to the government would be offset by closing sales tax, income tax and corporate tax exemptions.
You can read a one-page infographic of their work on income taxes here.
An alternative view was presented by Lisa Christensen Gee, a senior policy analyst with the Institute on Taxation and Economic Policy (ITEP). Gee urged lawmakers not to to include cuts to the top individual income tax rate in eventual tax reform legislation because they can provide both a means to make Arkansas’s overall tax system fairer and a sustainable form of revenue for public services. Gee also questioned income tax rates relationship to a state’s economic growth.
You can read both Kaeding’s and Gee’s presentations here and here. The next meeting of the task force will take place at 9 am Thursday, May 10th. Members will propose corporate and individual exemptions for further study. More of ACRE’s research on taxation can be found here.