LITTLE ROCK — A newly created legislative task force that will recommend tax cuts in advance of the 2019 session is set to hold its first meeting Monday.
The Tax Reform and Relief Legislative Task Force was created this year as part of legislation that also cut state incomes taxes for low-income Arkansans by about $50 million. Gov. Asa Hutchinson won support from some legislators who were resistant to the tax cut by tying it to a review of the state’s tax code with an eye toward future cuts.
The 16-member panel includes 10 Republicans and six Democrats. Its mission, according to Act 79 of 2017, is to recommend legislation for consideration in 2019 that would modernize and simplify the tax code; make Arkansas’ tax laws competitive with other states’ in attracting new businesses; create jobs; and ensure fairness to all entities affected by the state’s tax laws.
In 2015, Hutchinson successfully pushed through a $100 million income tax cut for middle-income Arkansans. He has said one of his goals for his second term, if he wins re-election, is to reduce the state’s top income tax rate from 6.9 percent to 5 percent.
Last month, the governor announced $70 million in state budget cuts prompted by state revenues that have lagged below projections. Sen. Larry Teague, D-Nashville, who is on the tax reform panel and co-chairs the Joint Budget Committee, said last week it remains to be seen whether the state can afford to cut more taxes in times of tight budgets.
“There will be an appetite to cut taxes,” Teague said. “I don’t like paying taxes any more than anybody else. I have no problem with trying to cut taxes if that’s what we can do, but I want us to stay fiscally solvent too. We’ll just have to see.”
Teague said he would like to see the Legislature increase the state’s long-term reserve fund to between $500 million and $1 billion before any more taxes are cut, to safeguard against future budget shortfalls.
Eliminating tax breaks
Several task force members have said they expect the panel to review tax breaks that have been passed piecemeal over the years to see which ones could be eliminated, with resulting boosts to revenue that could pay for broader tax cuts. Reducing the number of tax breaks, or loopholes, also would simplify the tax code and make it more fair, they say.
“When you have a tax exemption, you should look and see if it’s benefiting the state,” said Rep. Mathew Pitsch, R-Fort Smith.
Rep. Joe Jett, R-Success, a member of the task force and chairman of the House Revenue and Taxation Committee, said he believes Arkansans feel the effects of reduced income tax rates more than they feel the effects of the many tax breaks that have been passed over the years to benefit various groups.
“The average Arkansan tells me that we need to cut taxes, and I say, well you know since ‘08 we’ve cut close to $600 million worth of taxes. In the aggregate that’s $2 billion and change,” he said. “We’ve cut all these taxes, and the people on the street I talk to tell me they haven’t felt a bit of it being cut on them.”
Eliminating a tax exemption can be a challenge. During this year’s session, a proposal to do away with a sales tax exemption for manufactured housing met with strong resistance and ultimately was abandoned.
“I served on the blue ribbon tax committee … I think it was in the late ’90s, and one thing I learned at that point was that every one of those exclusions or exemptions has a constituency base and that when you start talking about doing away with it, those constituents come out of the woodwork,” Teague said. “I think it’ll be harder to do than people think it will be.”
Rep. Jim Dotson, R-Bentonville, a member of the task force and chairman of a subcommittee of the House Revenue and Taxation Committee, said the proposal to eliminate the tax exemption for manufactured housing was put forth without an effort to build a consensus in advance.
“Nobody knew this was coming, so there wasn’t a lot of discussion or buy-in from the various folks that were involved in it. I think you’ve got to have a lot of discussion on the front end, and that’s what this task force will be charged with,” he said.
Dotson said some tax breaks would be easier to do away with than others. The task force will be in a position to determine which would have the most support and which would encounter the most resistance, he said.
He noted that during this year’s session, lawmakers approved legislation to phase out the InvestArk investment incentive program — which he said required businesses to “jump through all sorts of hoops” to qualify for tax credits — as well as the sales tax on partial replacements and repairs of manufacturing machinery and equipment.
The InvestArk program is an example of a tax break that was ripe for elimination, according to Dotson.
“Hopefully the task force will find (more) examples and look at what’s going to benefit all Arkansans or the vast majority of us and do away with some of the loopholes and exemptions that are only beneficial to certain segments,” he said. “And if it’s done in an open and well-lit manner, it’ll have broad-based support. That’s my hope, anyway.”