Tax Reform Task Force Takes a Good Look at 3 Ways to Cut the Income Tax

By Caleb Taylor

And then there were three.

Three tax reform proposals were selected by the Arkansas Tax Reform & Relief Task Force as worthy of further study by outside consultants on June 26th.

Income Tax Proposals

The three proposals include a plan previously announced by Gov. Asa Hutchinson and two new plans. Hutchinson’s plan includes a reduction in the top individual income tax rate from 6.9 percent to 6 percent. The two other proposals include reducing the top individual income tax rate while also simplifying the tax code by reducing the number of individual income tax tables from three to one. The “Option A” proposal would cut the top individual income tax rate from 6.9 percent to 6 percent. The “Option B” proposal would cut the rate from 6.9 percent to 6.5 and include an earned income tax credit. There could also be various changes to the corporate income tax, and not just lowering the rate. Possible changes include modifications to net operating losses (how many years a business can carry forward losses), the throwback rule, and corporate income tax apportionment (these last two apply to businesses operating in more than one state).

These rate and table reductions are similar to the reform suggestions outlined by ACRE scholar Jeremy Horpedahl and Tax Foundation experts in their book, ‘Arkansas: The Road Map to Tax Reform.’ In the book they outlined two plans that would consolidate the income tax tables from three to one, reduce the top tax rate to either 5 or 6 percent, and lower other tax rates as well (see page 3 in the Executive Summary).

According to the Arkansas Democrat-Gazette, “Option A” would cost the state $276 million in revenue annually while “Option B” would reduce revenue by $125 million. Both of these estimates are about $80 million more than previously estimated by the state’s Department of Finance and Administration. These two options and the Governor’s plan have been sent to Regional Economics Models Inc. at Amherst, Massachusetts to estimate of the economic effects of lowering taxes in these ways.

‘Arkansas: The Road Map to Tax Reform’ authors recommend repealing certain sales tax exemptions to mitigate the effects of lost revenue from possible income tax cuts, but the task force has so far been hesitant to propose any substantial exemptions for repeal.

Nicole Kaeding, Special Projects Director with the Tax Foundation, recommended task force members cut the top marginal income tax rate below 6 percent while also consolidating the state’s three income tax brackets.

Kaeding said in her presentation to the task force on June 21st:

I think it’s important because it will bring you closer in line to all of your neighboring states. You all at 6.9 for a top rate kind of stick out in the region.”

Kaeding will present to the task force this Friday, July 27th at their 9 a.m. meeting on Arkansas’s overall tax burden and tax triggers. You can read the agenda for the meeting here.

While income tax changes have made the most headlines in tax reform news in recent weeks, task force members have also suggested property and excise taxes for further study.

Property Tax Proposals

The following is a list of property tax proposals approved for further study by the task force on June 20th, but this list will be narrowed down at a future meeting:

  • Create an individual income or corporate income tax credit or deduction to offset the ad valorem (assessed value) personal property tax paid on business inventory (Rep. Cavenaugh and Rep. Dotson)
  • Repeal the Arkansas corporate franchise tax (Rep. Dotson, Rep. Johnson, and Sen. Irvin)
  • Implement a tax deduction or tax credit to be taken against Arkansas individual income tax liability or corporate income tax liability to offset payments made under the Arkansas corporate franchise tax (Sen. Irvin)
  • Reduce the rate of the Arkansas corporate franchise tax from three-tenths percent (0.3%) to one-tenth percent (0.1%) under Arkansas Code § 26-54-104 for corporations, banks, and mortgage loan corporations with outstanding capital stock (Rep. Cavenaugh)
  • Amend Arkansas law to create uniform and transparent statewide guidelines for assessing property that is exempt from ad valorem (assessed value) taxation (Sen. Hendren, Sen. Elliott, Sen. Hester, and Sen. Irvin)
  • Amend Arkansas law to transfer the Assessment Coordination Department (ACD) into the Department of Finance and Administration (DFA) (Sen. Irvin)
  • Use the excess funds in the Property Tax Relief Trust Fund from the one-half cent (0.5¢) sales tax under Arkansas Code §§ 26-52-302(c) and 26-53-107(c) that are not used to fund the homestead tax credit under Arkansas Constitution (Sen. Hendren)

Excise and Miscellaneous Tax Proposals

The following is a list of excise and miscellaneous tax proposals approved for further study by the task force on June 26th:

Cigarettes, E-cigarettes, Alcoholic Beverages

  •  Create an e-cigarette tax (Sen. Wallace)
  • Levy a tax on e-cigarettes that is equal to the tax on other tobacco products (Rep. Cavenaugh, Rep. Pitsch)
  • Levy a tax on e-cigarettes that is “middle of the road” among other states (Sen. Irvin) Cigarette Taxes
  • Increase the excise tax on cigarettes to $1.30 per pack and use resulting revenues to reduce income tax burden (Sen. Irvin)
  • Increase the cigarette tax to $1.65 per pack (Sen. Wallace)
  • Convert the excise taxes on alcoholic beverages from a volume-based tax to a percentage of the purchase price (Sen. Hendren)
  • Increase the excise taxes on wine and beer (Sen. Wallace)
  • Levy a special excise tax on alcoholic beverages, cigarettes, and other tobacco products (Rep. Johnson)

Fuel and Vehicle Tax Proposals

  • Index the excise taxes on fuel using a combination of the Consumer Price Index, fuel efficiency, and income (Sen. Hendren)
  • Index the excise taxes on fuel using several factors, such as the Consumer Price Index, population, personal income growth, and other indexes and implement a floor and ceiling on the tax (Sen. Irvin)
  • Index the excise taxes on fuel using the inflation of construction costs (Rep. Johnson)
  • Index the excise taxes on fuel using inflation (Rep. Pitsch, Sen. Wallace)
  • Impose an indexed retail sales tax on fuel using Arkansas highway construction costs and to implement a floor and ceiling on the tax (Rep. Jett)
  • Impose a road-user fee for electric/hybrid vehicles at the point of registration (Sen. Irvin)

Tax Reform in Arkansas

The Arkansas Tax Reform and Relief Legislative Task Force was created during the 2017 legislative session to:

  • Modernize and simplify the Arkansas tax code
  • Make the Arkansas tax laws competitive with other states in order to attract businesses to the states
  • Create jobs for Arkansans
  • Ensure fairness to all individuals and entities impacted by the tax laws of the State of Arkansas

Members of the task force have a September 1st deadline to submit a report to the Governor, Speaker of the House and President Pro Tempore of the Senate that contains the task force’s recommendations for tax reform.

For further information, you can read Learning from Other States’ Successes and Failures in Tax Reform by Horpedahl and Kaeding. Their op-ed on the same topic “Reform Taxes Now” in the Arkansas Democrat-Gazette on May 21st can be read here. More of ACRE’s research on taxation can be found here.