A taxing responsibility

Task force will focus on income, sales taxes

Tax reform is more than tax cuts, although that’s what taxpayers generally expect whenever talk turns to the issue. Who doesn’t want to pay less tax, whether it be income tax or sales tax or any one of the other levies that support government?

The problem is that people also want — and need — government services.

From time to time, someone takes a look at rebalancing who pays what kind of tax and at what rates and how all of that affects the state’s bottom line. The Arkansas Tax Reform and Relief Legislative Task Force is the latest to take up the work.

Lawmakers created the task force last year with a goal to modernize and simplify the state tax code. The stated objective is to make Arkansas more competitive and create jobs as well as “ensure fairness” to those affected by the tax laws.

The task force is required to report to the Legislature and to the governor by Sept. 1.

An interim report issued at year’s end by the task force illustrates the deep dive the panel is making into understanding the overall tax picture.

The Legislature could ultimately alter any number of tax laws. But the most critical, because these taxes produce the most general revenue for the state, are the income and sales taxes.

Although taxpayers may be more aware of the income tax bite, especially at this time of year, Arkansas is actually more reliant on sales taxes.

A 2016 breakdown of revenue by tax category showed Arkansas received 48.6 percent of its revenue from sales taxes and 34.2 percent from income taxes. Together, they accounted for $8.28 of every $10 the state collects in taxes.

Property taxes bring in another 11.8 percent while license taxes and others contribute 5.4 percent.

So, while this task force (like other panels that have come before) is examining all of the tax structure, they’re necessarily focused on the big two — sales and income.

One of the apparent reasons behind the current study is to support another income tax cut, this one advocated by Gov. Asa Hutchinson to lower the top individual income tax rate from 6.9 percent to 6 percent.

The governor led efforts in 2015 and 2017 to get the Legislature to cut income tax rates for Arkansans with taxable income up to $75,000 a year.

Those earlier cuts were projected to reduce state tax revenue by about $150 million a year. The newer proposal to cut the top tax rates, too, would cost the state roughly $180 million more each year.

State Sen. Jim Hendren, R-Sulphur Springs, is a co-chairman of the task force and the nephew of the governor. He recently emphasized that the 16-member tax force’s job “is not to figure out how to generate more revenue for the state and raise taxes.” Their job is to overhaul the tax code.

He’s right. It is the Legislature’s job to understand the fiscal impact and to balance the state’s budget with input, of course, from the governor.

Nevertheless, the task force is now into a dicey discussion over another of the chronic challenges to tax reform — sales tax exemptions.

Again, remember that sales taxes are the single largest source of state tax revenue.

Later this month, the tax force will review a list of 43 of the existing sales-tax exemptions. Cumulatively, those particular exemptions reduce tax revenue by about $1.3 billion a year.

The partial sales-tax exemption on groceries is on the list for review. So are numerous long-standing exemptions for agriculture, manufacturing and motor fuels.

Advocates for those exemptions are already lining up to oppose their reduction.

“I don’t think anybody needs to panic unless their exemption doesn’t make sense,” Hendren suggested in advance of an April 25 meeting when the exemptions will be considered and public testimony taken.

Just so you know, the Legislature has undertaken numerous times over the years to do tax reform, including the reduction in sales tax exemptions. The efforts frequently fizzle out.

Lawmakers often do conclude that exemptions really are justified. But some get continued because the lobby for them is just too strong.

That will happen this time, too, but at least someone is looking at all of the taxes — and the exemptions — and trying to make the system fairer.