LITTLE ROCK — Budget hearings in advance of the 2017 legislative session began at the state Capitol last week amid discussions of a possible new round of tax cuts.

Gov. Asa Hutchinson is expected to unveil a proposed plan for cutting taxes on Nov. 9 when he presents a revenue forecast and proposed budget for fiscal 2018 to the Legislative Council and Joint Budget Committee. He has not revealed the details of his plan but has said the state should be able to afford $50 million in tax cuts.

Dampened mood

Some legislators say they are cautious about the idea of cutting taxes at a time when state revenues are below projections. Revenues were below forecast in each of the first three months of the fiscal year that began July 1, with total collections for that period coming in at $32 million below projections largely because of lower than expected corporate income and sales tax collections.

“It’s really kind of dampened the mood,” said Rep. Joe Jett, D-Success, chairman of the House Revenue and Taxation Committee. “A lot of my colleagues are kind of pulling back or maybe not quite as optimistic, if you will, about moving forward on a big package.”

Hutchinson’s $50 million number is only half the size of the tax cut he proposed and the Legislature approved in the 2015 session. That plan lowered the individual income tax rate for people earning between $21,00 and $35,099 a year from 6 percent to 5 percent and lowered the rate for people earning between $35,100 and $75,000 a year from 7 percent to 6 percent.

In 2013, the Legislature approved a capital gains tax cut that took effect last year. That cut raised the tax exemption on capital gains from 30 percent to 50 percent and exempted all capital gains in excess of $10 million from the state income tax. During the 2015 session, Hutchinson proposed repealing that tax cut to help offset his middle-class income tax cut, but legislators chose to make cuts elsewhere in the budget instead.

Jett said last week that if the state can afford to provide tax relief, he would like to see it to go to the people who have not benefited from the last two rounds of cuts.

“We’ve done one for the upper-income folks, we’ve done one for the middle. I’d like to see us take one one the low side now to kind of even it out,” he said.

Earned income tax credit

Jett said that if the budget allows, he is prepared to support a proposal by Rep. Warwick Sabin, D-Little Rock, to create an earned income tax credit for working people with low to moderate incomes, similar to the federal earned income tax credit.

Sabin, who pushed unsuccessfully for an earned income tax credit in the 2015 session, said bipartisan support is building around the idea.

“It’s got the most proven track record for moving people out of poverty, incentivizing work, reducing the need for social services and having a stimulative effect on the economy,” he said.

Sen. Jake Files, R-Fort Smith, chairman of the Senate Revenue Tax Committee, said earned income tax credits “have proven themselves to work and to encourage people to get out and find employment and do what they need to do and then at the same time reward that kind of behavior.”

Files said that if the state can afford income tax cuts, he would like to see them implemented “across the board.”

“Let’s figure out what the best return on our investment is in terms of getting more jobs here,” he said.

Rep. Charlie Collins, R-Fayetteville, who co-sponsored the 2013 capital gains tax cut, said he is “totally against” an earned income tax credit.

Collins said he would support the idea if it were intended to replace other social welfare programs, but not as an addition to existing offerings such as the state’s expanded Medicaid program, which launched in 2013 and has provided health insurance to about 300,000 low-income Arkansans.

“Dramatic welfare expansions like that are already occurring,” he said. “We don’t need another method or a new welfare program,” he said.

Using desegregation funds

Collins said he would support a net income tax reduction of $100 million, which he said the state could pay for in part with the approximately $70 million a year in desegregation settlement funds that the state previously paid to Pulaski County schools.

A 2013 law requires using that money to reduce the state sales tax on groceries, but Collins said he would prefer to leave that tax at the current 1.5 percent and use the money to offset reducing what he called “taxes on work.”

“When you lower taxes on work, you’re incentivizing work,” he said.

Senate Minority Leader Keith Ingram, D-West Memphis, said that would be “a very poor idea.”

“We’ve crossed that bridge,” he said. “We all agreed on that, and to go back, I just think that not a wise use of it. (The grocery tax) disproportionately hits the poorest Arkansans.”

Ingram said he would support tax relief for middle- and lower-income Arkansans if the state can afford it.

Economic trigger

Jett said that if the Legislature passes an income tax cut, he would like to see it tied to an economic trigger to ensure it does not take effect unless and until the state can afford it. He said the trigger could be written into the Revenue Stabilization Act, which sets spending priorities for the next fiscal year.

Several legislators interviewed for this report said they like the trigger idea. But Senate President Pro Tem Jonathan Dismang, R-Searcy, said he is “hesitant.”

“I think there needs to be predictability for the taxpayers, and I think that would be really hard to achieve having that kind of trigger in place,” he said.