LITTLE ROCK — Gov. Asa Hutchinson said Tuesday that during the legislative session that begins next month he will ask lawmakers to approve a $50 million income tax cut for people earning less than $21,000 a year and an income tax exemption for military retirement benefits.
If approved, the tax cut for Arkansans earning less than $21,000 would affect about 657,000 people, or 44 percent of the state’s taxpayers, Hutchinson said.
The cut would take effect at the beginning of the 2019 tax year, or halfway through the 2019 fiscal year, so its cost in fiscal 2019 would only be $25 million. Hutchinson said he expects growth in state spending to make the cut affordable.
Tax rates would change as follows: from 0.9 percent to zero for people earning $4,299 or less a year; from 2.4 percent to 2 percent for people earning between $4,300 and $8,399; from 3.4 percent to 3 percent for people earning between $8,400 and $12,599; and from 4.4 percent to 3.4 percent for people earning between $12,600 and $20,999.
In 2015, lawmakers approved Hutchinson’s proposal to cut income taxes for middle-class Arkansans by $100 million. He said Tuesday he wants to cut taxes for upper-income Arkansans later but believes low-income Arkansans should be the beneficiaries of the next tax cuts.
“Whenever you’re looking at a limited amount that we can cut this year, $50 million in the lower brackets has a much greater impact to encourage spending, to drive our economy, than $50 million does in the higher brackets,” he said.
The exemption for military retirement benefits would cost about $13 million a year, Hutchinson said. He said he is proposing to pay for the exemption by repealing certain tax exemptions.
“We see very clearly that Arkansas is not receiving here military retirees at the same rates as other states with lower income tax brackets or where their retirement benefits are exempt. It is clearly indicated and demonstrated to me that this is an economic driver and will be an economic driver for our state,” he said.
The governor said he wants to repeal a state income tax exemption on unemployment compensation, which would mirror federal law and generate $3.1 million a year; apply the state sales tax on 100 percent of the cost of manufactured housing instead of the current 62 percent, which would generate $2.4 million a year; and apply the full state sales tax to candy and soft drinks instead of the current reduced rate for groceries, which would generate $13.8 million a year.
Repealing those exemptions would generate $19.3 million a year, of which Hutchinson said he wants to use $6.3 million to reduce by 40 percent the state’s syrup tax.
The original purpose of the syrup tax, which was intended to be temporary, was to benefit Medicaid. Hutchinson said the Medicaid program would not be harmed because the $6.3 million would be replaced with revenue from the repealed tax exemptions.
The tax exemption for military retirements would take effect when the other exemptions are repealed, which could be as early as the beginning of the 2018 calendar year, Hutchinson said.
State legislators had mixed reactions to the governor’s proposal. Rep. Charlie Collins, R-Fayetteville, said he was “disappointed.”
Collins said the most fair way to cut income taxes is across the board, instead of “picking winners and losers.”
“For the people at the top, we continue to do nothing, and I think that’s unfair,” he said.
Rep. Warwick Sabin, D-Little Rock, said he was glad to see the governor propose tax relief for low-income Arkansans, but he said the best way to provide that relief would be through an earned income tax credit for low-income working families.
“I’ll be introducing one in the upcoming session, mainly because an earned income tax credit does more to bring people out of poverty and stimulate the economy,” he said.
Sen. Jake Files, R-Fort Smith, who is chairman of the Senate Revenue and Taxation Committee and will continue in that position in the coming session, said he also believes an earned-income tax credit might be a better way to provide tax relief because it “might incentivize work and production a little more.”
Rep. Joe Jett, R-Success, who is currently chairman of the House Revenue and Tax Committee — the chairman for the coming session has not yet been named — said he thought Hutchinson’s proposal was “responsible.”
“I like what the governor’s put out,” he said, but added, “I think there’s going to be a debate.”