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Stepping Back from the “Tax Cliffs”: Tax Reform Plans Take Shape for Arkansas

By Caleb Taylor

Legislators took a big step towards finalizing their tax reform priorities for the 2019 session.

Arkansas Tax Reform & Relief Legislative Task Force members voted August 7th to pursue a comprehensive tax reform proposal that would reduce the top personal income tax rate to 6.5 percent and consolidate its three rate schedules.

The top personal income tax rate is currently 6.9 percent. The estimated cost of the plan in lost revenue to the state is approximately $276 million annually.

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).

“Road Map” authors describe Arkansas’s current rate schedule as “incredibly cumbersome” filled with “tax cliffs” where “a small increase in income results in a dramatic increase in tax liability.” Consolidating rate schedules also means some of the tax cuts in the plan will go to middle income taxpayers in addition to high income taxpayers.

A separate plan by Gov. Asa Hutchinson to reduce the top individual income tax rate from 6.9 percent to 6.0 percent without reform of the rate schedules received the second-highest amount of support from the task force.

Cost Estimates

Task Force members spent Monday, August 6th listening to a lengthy presentation from Dr. Peter Evangelakis, a senior economist with Regional Economic Models Inc. (REMI) of Amherst, Massachusetts, on the dynamic scoring results of Arkansas’s tax reform plans.

Dynamic scoring attempts to model economic growth changes when projecting the budgetary effects of policy changes. Static scoring doesn’t attempt to forecast changes in economic behavior resulting from policy changes. Matt Boch, a tax attorney with Dover, Dixon and Horne, said the dynamic scoring results “generally indicated that the state could expect that the net costs of its proposed tax cuts and reforms should be somewhat less than the static revenue impacts projected by the Department of Finance and Administration (“DFA”), but not by much: up to 6% depending on the specific proposals and modeling assumptions.”

Horpedahl told the task force on August 6th regarding REMI’s analysis:

In large part I think what their model is saying kind of confirms a lot of what we’ve been saying all along which is that most of these tax cuts, especially if they’re a net cut, will provide some increase in economic activity and some increase in employment. They aren’t large enough to pay for the tax cuts. There’s been some concern at least initially that what came out of this task force might be something like what came out of Kansas. These models make it clear that none of these proposals are like that. They’re reasonable enough where they’re going to cause some new economic activity but they’re not going to cause any large holes in the budget.”

Horpedahl also said the tax cuts could have a larger impact on capital than REMI estimates.

Horpedahl said:

It’s not just that businesses will have more money so they’ll invest more. It’s that there would be an increase in productivity from the tax cuts so that people will work more and be more productive.”

You can read the full response to REMI’s estimates by Nicole Kaeding, Special Projects Director at the Tax Foundation, here.

Other Approved Tax Reform Proposals

There were numerous other proposals approved by the task force last week that are recommendations in “Arkansas: The Road Map To Tax Reform.” Corporate income tax changes recommended in “Road Map” that were approved on August 7th include increasing the carry-forward period on net operating losses and reducing the corporate income tax rate. Repeal of the “throwback rule” and inventory tax reform were also “Road Map” recommendations that were passed by the task force.

One of the most-debated proposals was over whether to earmark sales tax revenue from remote sellers for income tax cuts in light of a recent Supreme Court ruling, South Dakota v. Wayfair Inc. For more information on this ruling, check out our blog post on this subject on June 29th.

Other tax reform proposals approved by task force members on August 7th include:

Sales Tax

 

 

Income

 

 

Property

 

 

Excise

 

 

 

Next Meeting

Task force members will meet again on August 22 and 23 to review a final report including their recommendations for tax reform and relief changes to be considered in the 2019 legislative session.

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. More of ACRE’s research on taxation can be found here. For media coverage of recent task force meetings with Horpedahl check out Arkansas Tax Task Force Refines Recommendations for 2019 Legislation by KARK’s Jessi Turnure and Adviser details tax-cut scenarios; effects on state economy, population draw task force look by the Arkansas Democrat-Gazette’s Michael Wickline.