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Which Tax Credits Should Arkansas Chop?

By Caleb Taylor

Arkansas Tax Reform and Relief Legislative Task Force members discussed three tax credits for possible elimination on Monday, October 29th.

The three insurance premium tax credits include the New Market Tax Credit ($16 M), the Low-Income Housing Tax Credit ($1 M) and the Home Office Tax Credit ($61 M). In total, these three credits cost the state approximately $78 million annually, according to the Tax Foundation.

Insurance Premium Tax Credits

Task force members have spent the last year searching for credits and exemptions across the tax code to help raise revenue to help fund a broad tax reform package for the upcoming legislative session. Members heard from two experts last Monday about three insurance premium tax credits.

Arkansas currently has a net effective premium tax rate of 1.89 percent. The insurance premium tax is a tax paid by insurance companies doing business in Arkansas.

Both speakers at the meeting agreed the revenue lost from these credits could be put to other uses, but differed on their solutions.

Arkansas Insurance Department Commissioner Allen Kerr said revenue savings from credit elimination or reform should go towards reducing the insurance premium tax rate in the state to better attract insurance businesses to the state.

Kerr said:

In order to draw business to Arkansas one of the best ways to do it is to reduce your overall (insurance premium) tax rate. If a state like Texas has a 1.75 percent tax rate for instance, there’s going to be a lot of companies build home offices in Texas.”

Nicole Kaeding, Director of Federal Projects at the Tax Foundation, said there was an “economic impact” from higher insurance premium tax rates, but these effects were “much lower” than taxes that are relatively high such as individual and corporate income taxes in Arkansas.

Kaeding is a co-author with UCA Assistant Professor of Economics ACRE Scholar Jeremy Horpedahl and other Tax Foundation experts in their book, ‘Arkansas: The Road Map to Tax Reform.’

Kaeding said:

I’d rather see you mitigate the more harmful taxes than the one that is less harmful. I think that these credits could easily be eliminated and that money could be spent elsewhere. I’m always thinking about how do we maximize economic growth. I think here the literature tells us that the Insurance Premium Tax is not as harmful as other taxes and if you can use these credits to offset other taxes that would be a better trade.”

Kaeding said both the New Market and Low-Income Tax Credits duplicate other programs, are complicated, and don’t tend to benefit low-income areas.

Kaeding said:

The literature is pretty clear that these credits are not effective. They tend to go to projects that probably would’ve been completed anyways.”

Task force co-chair Sen. Jim Hendren said in an interview with the Arkansas Democrat-Gazette after the meeting that the task force would decide in the next two months whether to make no changes or use the revenue savings to reduce taxes.

Tax Reform vs. Tax Incentives

In other task force news, Mike Preston, executive director of the Arkansas Economic Development Commission, discussed how Arkansas’s tax structure places it at a “competitive disadvantage” when competing for jobs nationwide. Among the areas Preston mentioned, were Arkansas’s top individual income tax rate of 6.9 percent and a corporate tax rate of 6.5 percent.

Preston said:

If you can correct the tax policy, you can lessen the amount of incentives we’d need.We have incentives that kind of help offset our tax policy. The way we stay competitive is we have to offer incentives to do that. That’s why we’ve been able to compete on projects. If we could find a way to bring that a little lower, that would lessen the emphasis that we’re putting on the incentives to make up that tax policy.”

Bills for 2019 Legislative Session

The task force also discussed seven bills to possibly be considered in the 2019 legislative session based on some previous task force policy recommendations.

The bills are as follows:

  • An act to require biennial reports of tax exemptions, deductions, discounts, exclusions, credits, deductions, special accounting treatments and special rates relating to income tax, sales tax and use tax.
  • An act to repeal certain sales tax exemptions for named entities and to create sales tax exemptions for various types of organizations.
  • An act to reduce the corporate income tax rate on net income exceeding $100,000 from 6.5 percent to 5.9 percent.
  • An act to provide for guidelines and penalties related to assessments for purposes of property taxes and to require the Assessment Coordination Department to establish mandatory guidelines for counties.
  • An act to transfer the administration and collection of the franchise tax to the Department of Finance and Administration and to eliminate the franchise tax penalty on closed businesses.
  • An act to provide for the annual indexing of motor fuel taxes and special fuel taxes to the consumer price index.
  • An act to impose an additional registration fee on electric vehicles and hybrid vehicles. Revenues from these fees will be dedicated to highway funding.

Next Meeting

Task force members will meet again on 9 a.m., November 27th.

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

More of ACRE’s research on taxation can be found here.