Military retirees set to get tax break
State law seen as economic benefit
Most of the more than 100 members of the armed services who thanked Rep. Charlene Fite for sponsoring a bill with a new state tax break for military retirees also had a little extra something to say in their emails and other correspondence.
They indicated they’re reconsidering decisions not to make Arkansas their retirement home, she said.
Act 141 of 2017 becomes effective Monday — Jan. 1, the beginning of the 2018 tax year — and it will exempt military retirement benefits from state income taxes.
“I think that it would be a good economic boon for the state,” said Fite, a Van Buren Republican. After all, the typical military retiree is 38 to 42 years old after 20 years of service and has skills desired by employers, she said.
Fite said she’s not sure exactly how many more retired veterans will end up in Arkansas as a result of Act 141.
But Don Berry, a member of the governmental affairs committee for the Arkansas Veterans Coalition, has an idea of the potential economic impact.
“If we were to attract the 1 percent growth [in military retirees] that our neighbors do,” that would bring in about 250 such families a year to Arkansas with $10 million in annual retirement benefits. The coalition backed Fite’s bill.
Of the state’s 240,000 veterans, more than 26,000 of
them are retired with benefits totaling about $560 million a year, he said. The state puts the number of retired veterans and survivors at 29,009.
Berry said he would like to see more done to spread the word elsewhere about Arkansas’ income-tax exemption for military retirement benefits.
“We are just letting people discover it. It is a frustration,” he said.
Mike Preston, executive director of the Arkansas Economic Development Commission, said, “When recruiting companies and talent to Arkansas that would benefit, we talk about the tax exemption and how it makes sense for veterans to work and do business in the state.”
The new law replaces one that exempted the first $6,000 of military retirement benefits from Arkansas’ income taxes.
In the 2018 tax year, Act 141 exempts all military retirement and survivor benefits from state income taxes. That provision of Act 141 is projected by the state Department of Finance and Administration to reduce general revenue by $6.7 million in fiscal 2018. The fiscal year started July 1, and the law will be in effect for half the fiscal year. The exemption is projected to reduce revenue by $13.4 million in fiscal 2019.
The finance department’s
estimates are based on 29,009 retired taxpayers in Arkansas who received a military pension in fiscal 2015, based on figures from the Department of Defense Office of the Actuary, said finance department spokesman Scott Hardin.
According to the news release from the governor’s office, taxpayers wanting to adjust state income tax withholding should call (800) 3211080 or go to https://mypay. dfas.mil.
The first adjustment will appear on February checks for changes made in January, the release said.
The average raw income-tax break would be $462 per retiree based on net taxable income of $16,900 from military retirement benefits before any tax credits, Hardin said.
For net taxable income of $20,000 from military retirement benefits, the exemption would generate $598, he said.
If the net taxable income was $100,000 from military retirement benefits, the exemption would generate a break of $5,956 before credits, Hardin said.
A taxpayer claiming an exemption on military retirement or survivor benefits won’t be able to claim the state’s $6,000 income-tax exemption on retirement benefits received from nonmilitary sources, according to the finance department.
Two of Arkansas’ neighbors — Texas and Tennessee — don’t have state income taxes. Seven other states, including Florida, also don’t have state income taxes, according to the Department of Finance and Administration.
Three of Arkansas’ neighbors fully exempt military retirement benefits from state income taxes, according to the Arkansas finance department. They are Louisiana, Missouri and Mississippi. Fifteen other states fully exempt military retirement benefits from state income taxes. Arkansas and West Virginia will join these states, according to the Arkansas finance department.
Oklahoma exempts from its state income taxes 75 percent of a taxpayer’s military retirement benefits or $10,000, whatever is greater, but not to exceed the amount in the federal adjusted gross income, according to the Oklahoma Tax Commission’s website. Oklahoma will be one of 15 states partially exempting military retirement benefits after the start of the year, according to the Arkansas finance department.
The finance department said military retirement benefits are fully taxed in California, New Mexico, North Dakota, Utah, Vermont and Virginia.
In February, Fite said she was surprised to hear Americans for Tax Reform criticize her legislation. Fite was one of 25 state lawmakers who signed the Washington, D.C., group’s pledge to oppose and vote against any and all efforts to raise taxes.
Americans for Tax Reform President Grover Norquist said in an email earlier this year to state lawmakers that “while a number of good tax reform proposals are being discussed, it’s important that lawmakers first do no harm by rejecting calls to impose new and higher taxes.”
At that time, Fite said her legislation was “revenue neutral” in its combination of increases and cuts and that Norquist had indicated that voting for “revenue neutral” legislation was not a violation
of the taxpayer protection pledge.
Fite’s bill that became Act 141 sailed through the Senate in a 29-0 vote and the House in a 75-14 vote before Republican Gov. Asa Hutchinson signed it.
According to the finance department, to offset the tax cuts, Act 141 also will:
Reduce the special excise tax levied on bottled soft drinks and soft drink powders from 21 cents to 20.6 cents per gallon and the tax for each gallon of soft-drink syrups from $2 to $1.26. It also will transfer $3 million in fiscal 2018 to the Medicaid program to offset the reduction in that tax and $5.9 million in fiscal 2019.
Levy the 6.5 percent sales tax on candy and soft drinks rather than the reduced salestax rate of 1.5 percent on foods to raise a projected $6.9 million in fiscal 2018 and then $13.8 million in fiscal 2019.
Make unemployment compensation benefits subject to state income taxes to raise a projected $1.6 million in fiscal 2018 and $3.1 million in fiscal 2019.
Levy a sales tax on certain digital products, including “digital audio works, digital audio-visual works and digital books,” as well as on digital codes that allow the consumer to access these products, to raise a projected $1.2 million in fiscal 2018 and $2.4 million in fiscal 2019.
Examples of “digital audio
works” include downloaded music files, cellphone ring tones and audible books purchased in electronic formats, Hardin said.
Examples of “digital audio-visual works” include downloaded movies, streaming videos, other audio-visual materials, and files sold in downloaded digital/electronic formats, he said.
Examples of “digital books” included downloaded books for reading on electronic devices, Hardin said.
Hutchinson discussed the coming military-benefit tax cut in his weekly address.
He referred to a couple, Adam and Brittany Boccher, who because of Act 141 “have decided to remain in Arkansas after Adam retires from the Air Force in mid-2019.”
“By exempting their retirement benefits from state tax, we honor in a small way the sacrifice of our veterans, many of whom, like Adam, have deployed overseas. During his 18 years in the Air Force, Adam has served three tours in the Middle East,” the governor said in a news release. “The law is a benefit to the state, as well. By enticing military families to retire in Arkansas, we will keep their skills, their experience and their leadership.”
In addition to the Bocchers staying, Brittany Boccher’s stepfather — a retired Marine — and mother are moving to the state from Texas, according to the address.
“When recruiting companies and talent to Arkansas that would benefit, we talk about the tax exemption and how it makes sense for veterans to work and do business in the state.” — Mike Preston, executive director of the Arkansas Economic Development Commission