LITTLE ROCK — Lawmakers on Monday sent to Gov. Asa Hutchinson’s desk his proposed $50 million income tax cut for low-income Arkansans and advanced his proposal to give a tax break to retired military veterans.
The Senate voted 33-0 and the House voted 92-0 to approve matching bills containing the governor’s tax cut for Arkansans earning less than $21,000 a year, his key policy goal for the session. The chambers approved each other’s bills after having approved their own bills last week.
A spokesman said Hutchinson plans to sign the legislation into law Wednesday.
Also, the House voted 75-14 to approve House Bill 1162, a bill containing the governor’s proposal to exempt military retirement and survivor benefits from the state income tax. The bill goes to the Senate.
A Senate committee on Monday advanced a matching Senate bill.
Hutchinson said in a statement Monday, “The legislative action today in support of two major tax reduction bills gives confidence to all Arkansans that tax relief and reform will be major accomplishments of this session.”
The governor said the low-income tax cut will provide tax relief to 600,000 Arkansans and that the House’s passage of HB 1162 “moves us a step closer to having a tax environment in Arkansas that will be an incentive for military retirees to locate in Arkansas.”
The low-income tax cut will take effect Jan. 1, 2019. It will change tax rates 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.
For Arkansans with incomes between $21,000 and $75,000, the income tax rate will change from 0.9 percent to 0.75 percent for income up to $4,299, to avoid a “cliff” effect when a taxpayer shifts from one tax bracket to another.
Hutchinson has said the cut is the second part of a long-term plan to cut income tax rates for all Arkansas. In 2015, lawmakers approved a $100 million income tax cut for middle-income Arkansans.
The legislation creating the low-income tax cut also creates a legislative task force that will recommend future tax reforms in a preliminary report due Dec. 31 and a final report due Sept. 1, 2018.
Presenting HB 1162 on the House floor Monday, its sponsor, Rep. Charlene Fite, R-Van Buren, said that since 2010, Arkansas has been one of 10 states — and the only state in the region — to see a decline in its population of retired military veterans.
“Why is that? Because we have basically been putting out the unwelcome mat,” she said. “We are the only state from New Mexico to the Atlantic Ocean in the Southern region that will tax their military retirement pay at the full cost.”
The tax exemption is estimated to cost the state $13.4 million a year.
The bill also includes a provision that would reduce the state’s special excise tax on soft-drink syrup, a tax that generates revenue for the state Medicaid program and that Hutchinson has said was intended originally to be temporary.
HB 1162 would transfer $5.9 million a year from general revenue to the Medicaid program to offset the tax reduction.
To offset the veterans’ tax break and the transfers to Medicaid, the bill would repeal a state income tax exemption on unemployment compensation; end the classification of candy and soft drinks as groceries so the state sales tax on them would increase from 1.5 percent to 6.5 percent; and levy a sales tax on digital downloads of movies, books and ringtones.
Some House members objected to taxing digital downloads. Rep. Bob Ballinger, R-Hindsville, said only 13 states currently have similar taxes.
“It’s neat for Arkansas to be on the cutting edge, but not in forming a new tax,” he said.
Senate Bill 120 by Sen. Jane English, R-North Little Rock, which mirrors Fite’s bill, received a “do pass” recommendation Monday from the Senate Revenue and Taxation Committee and goes next to the Senate.