Talks center on fiscal 2022 state spending
Legislators, governor discuss long-term reserve, tax cuts
Legislative leaders have met twice with Gov. Asa Hutchinson to discuss the proposed legislation that will set spending priorities for state government next fiscal year, and lawmakers will see a draft of the proposal as early as this week, according to a co-chairman of the Joint Budget Committee.
The proposed Revenue Stabilization Act will be for fiscal 2022, which starts July 1.
“It is going to be very similar to what the governor’s balanced budget was that we received in November,” the co-chairman, state Rep. Lane Jean, R-Magnolia, told the House Revenue and Taxation Committee on Thursday.
In November, Hutchinson proposed a $5.84 billion general revenue budget for fiscal 2022. Most of the $161 million increase over the current funded budget would go to human services, public schools, and public colleges and universities.
But Senate President Pro Tempore Jimmy Hickey, R-Texarkana, on Friday was skeptical about whether lawmakers would see a draft of the Revenue Stabilization Act this week.
“I just think we have got a little more work before we put out a draft,” he said. “We haven’t produced a bill yet.”
Jean told the House committee that reaching a consensus on the use of onetime state funds “has been the big stickler between us and the Senate.”
“With the exceptional year we are having now [with tax collections], it looks like between the House and Senate leadership, we will be able to save a substantial number of dollars for long-term reserve,” he said, referring to the fund that Hutchinson has called the state’s savings account.
“We would like to see in the neighborhood of another $400 million go into long-term reserve because of what our economy may be in two or three years down the road, after all this federal money kind of dries up and things get back to normal, ” Jean said. He was referring to federal funds for covid-19 pandemic relief.
“We think we have got some pretty good ideas on what we are going to do with one-time money as far the legislative pot, which requires Legislative Council oversight, and that’s going to be what you call restricted reserve money, and then also the governor will have have a pot of rainy-day money as the governor has always had and the governor before that has always had,” he said.
Boosting the reserve fund would help the state’s bond rating in the long term, and “if anything happens catastrophic we will be able to operate for two or three months,” Jean said.
Hickey said he hopes the reserve fund increases to more than $600 million.
In November, Hutchinson proposed devoting $100 million of the $240 million surplus collected before fiscal 2021 to the reserve fund.
The reserve fund has $209.9 million, and the governor presented a plan in November to boost that fund to $420 million by the end of his term in January 2023.
During the first ninth months of fiscal 2021, net general revenue increased to $4.6 billion, exceeding the revenue forecast by $549.9 million, or 13.3%.
The state’s April 2, 2020, forecast will provide $5.68 billion in general revenue for the fiscal 2021 general revenue budget, leaving $212.2 million unfunded. If net general revenue exceeds $5.68 billion in fiscal 2021, the additional money would cover at least part of the unfunded portion of the budget.
Jean acknowledged, “I know that a lot of people will think, ‘I want to do more tax cuts’ [or] ‘I want to do more spending.’
“But I think with all the federal money going down there, we got enough money out in the economy right now that we need to save what we can, so that’s what we are working on,” he said.
The top individual income tax rate dropped from 6.6% to 5.9% on Jan. 1, the second cut under Act 182 of 2019. State officials originally projected Act 182 would reduce general revenue by $48.5 million more in fiscal 2021.
USED-CAR SALES TAXES
The House Revenue and Taxation Committee’s preliminary priority list of tax cuts includes a sales tax cut on used vehicles and several other tax cuts collectively totaling about $18.6 million in fiscal 2022. The list includes House Bill 1555 by Rep. Joe Jett, R-Success, to increase the amount of historic rehabilitation tax credits issued by the state from $4 million to $10 million a year.
The House tax committee on Thursday subsequently advanced a bill that would gradually increase the price of used motor vehicles exempt from the sales tax from $4,000 to $10,000, and another bill that would phase out the soda tax if certain tax collections thresholds are met.
House Bill 1160 by Rep. John Payton, R-Wilburn, would exempt from tax the sale of used motor vehicles with a purchase price of less than $7,500 — up from the current $4,000 threshold, starting Sept. 1. That exemption level would increase to less than $10,000 two years later under the bill.
The state Department of Finance and Administration said the bill would reduce tax collections by $9.5 million in fiscal 2022, $12.7 million in fiscal 2023, $24.4 million in fiscal 2024 and $28.4 million in fiscal 2025.
Hutchinson has proposed instead reducing the sales tax on used vehicles priced between $4,000 and $10,000 from 6.5% to 3.5%.
Payton told the House tax committee that he is willing to amend his bill so the sales tax rate on used vehicles priced between $7,500 and $10,000 would be 3.5% instead of the current 6.5% if that will get the bill votes in the Senate.
Hickey, who serves on the Senate Revenue and Taxation Committee, said Friday that there is an appetite in the Senate for Payton’s plan to provide a sales tax break on used vehicles.
“I am hopeful he’ll agree to amend it to the governor’s plan,” he said.
PROPOSED SODA TAX CUT
The House tax committee on Thursday recommended House approval of House Bill 1546 by Rep. Lanny Fite, R-Benton, which would phase out the soda tax if certain tax collection thresholds are met. Gov. Asa Hutchinson supports phasing out that tax.
The bill would transfer general revenue funds to the Medicaid trust fund in amounts that reflect the projected fiscal impact from the gradual reduction and elimination of the soft drink tax, the finance department said.
If the soft drink rate cuts occur on July 1 in 2023, 2024 and 2025, the bill would authorize a transfer of funds to the Medicaid trust fund — $9 million in fiscal 2024; $23.4 million in fiscal 2025; $38.2 million in fiscal 2026; and $39.4 million in subsequent fiscal years, according to the finance department.
Fite said it could take more than three years to phase out the soft drink tax, and there needs to be at least a year between each rate reduction under the bill.
Total sales and use tax revenue collection would have to exceed $2.681 billion for the first rate cut, $2.754 billion for the second rate cut, and $2.83 billion for the final soft drink rate cut, he said.
Act 141 of 2017, which exempted military retirement benefits from income taxes, also reduced the soda tax. The 2017 law also authorized the transfer of $3 million in general revenue to the Medicaid trust fund in fiscal 2018 to offset the reduction and $5.9 million in fiscal 2019 and subsequent fiscal years, according to the finance department.
OTHER TAX ISSUES
Jett said there were discussion about creating an income tax credit for railroad track maintenance and modernization expenses and expanding the state’s sales tax holiday to include electronic devices.
House Bill 1456 by Rep. Jeff Wardlaw, R-Hermitage, would implement the railroad tax credit.
Senate Bill 141 by Sen. Trent Garner, R-El Dorado, would alter the sales tax holiday.
Jett said the Legislature could be considering further tax cuts in the fall, when it resumes meeting to decide congressional redistricting.
Those discussions between lawmakers and the governor included reducing the top income tax rate from 5.9% to 5.7%.
Hutchinson said later Thursday, “The RSA discussions are still ongoing, and the exact parameters of the current tax cuts and future tax cuts are still in the planning stages.
“Rep. Jean and Rep. Jett have correctly outlined the general areas of discussion which include tax cuts and long term reserve, but the specifics are fluid and not yet finalized,” he said in a written statement.