Tax task force plans long look at state levies, with eye on changes

The state’s tax overhaul task force this spring will begin considering recommendations for the 2019 regular legislative session, the panel’s co-chairmen said Tuesday.

The Legislature’s task force issued a 180-page interim report last month that summarizes its research on some taxes — the state’s sales and use taxes, excise taxes and county property taxes — and gives possible changes. Among the options mentioned is repealing the state’s partial sales tax exemption on groceries and then creating a deduction or refundable credit for lower-income Arkansans on those taxes paid.

The task force next meets Monday, and is to analyze individual income tax and corporate income tax codes. The state’s individual income taxes and sales and use taxes are the two largest sources of general revenue, which funds programs ranging from public schools to Medicaid and from higher education to prisons.

One task force co-chairman, Sen. Jim Hendren, R-Sulphur Springs, said Tuesday that he knows “everybody is impatient on action items,” but he wants the 16-member panel to review the entire tax code before he starts considering what recommendations to make.

“I think you’ll see that start in March and April,” he said.

The task force’s other co-chairman, Rep. Lane Jean, R-Magnolia, said he expects the task force to begin considering making recommendations in the late spring and early summer, after the end of

the fiscal session that starts Feb. 12. The fiscal session is limited by the Arkansas Constitution to a maximum of 45 days and is designed for appropriations bills only.

Hendren said he expects Gov. Asa Hutchinson to appear before the task force after it completes its research but before it makes final recommendations. Hutchinson is Hendren’s uncle.

Hutchinson said Tuesday in a written statement that “as for my recommendations for the future in terms of tax reform, I would expect in the coming months to announce my specific priorities for the 2019 session.”

The Republican governor

has repeatedly said he favors further individual income tax rate cuts beyond the $150 million a year that the Legislature enacted in 2015 and 2017. The task force was created under 2017 laws in part to placate some lawmakers, who favor larger income tax cuts. The laws require the task force to issue a final report by Sept. 1.

Hutchinson has repeatedly said he ultimately would like to see the state’s top income tax rate be 5 percent, but it could take a while to get there. Reducing the state’s top individual income tax rate in the two highest brackets would cut general revenue by a projected $346 million, according to state Department of Finance and Administration spokesman Scott Hardin.

The task force sent copies of its interim report to legislative leaders and Hutchinson’s office. A copy was sent to Hutchinson’s office on Dec. 22, according to Bureau of Legislative Research records. Copies also were sent to House Speaker Jeremy Gillam, R-Judsonia, and Senate President Pro Tempore Jonathan Dismang, R-Searcy, and the task force members, said bureau Director Marty Garrity.

“It’s a helpful study as to where we are in the state now and where we stand with our surrounding states, which is a useful guide when making future decisions,” Hutchinson said in his written statement.

Among other things, the report said, “The task force might consider a [sales tax] modernization overhaul … by broadening the sales tax base by eliminating some exemptions and adding more services. … This could result in additional state revenue, even with a reduced [tax] rate.”

Another option would be “a slightly less comprehensive approach than a complete overhaul” by examining

“limited opportunities to expand or solidify the sales tax base and deal with adverse impacts in another tax source,” the report said.

“For example, the [sales tax] exemption for food could be eliminated and a deduction or refundable credit could be added to the lower levels of income tax to offset the regressivity effect,” the report said.

At the behest of then-Democratic Gov. Mike Beebe, the Legislature enacted laws gradually cutting the sales tax on groceries from 6 percent to 1.5 percent. Another law will further reduce the sales tax on groceries from 1.5 percent to 0.125 percent with the savings from the state no longer making about $60 million a year in desegregation payments to Pulaski County school districts.

“It is currently projected that the sales tax rate on groceries will be reduced from 1.5% to 0.125% January 1, 2019,” Hardin said Tuesday in an email. “Based on current levels of taxable spending, it is estimated that a 6% sales tax rate on groceries would generate $342 million compared to the $85.5 million currently collected. Of the $342 million in collections, about $213 million would be general revenue (compared to about $50 million currently).”

Hendren acknowledged that some lawmakers believe the Legislature should consider repealing the reduced sales tax rate on groceries, but he’s skeptical that there is enough support on the 16-member task force to make that recommendation.

The report said other options for increased revenue on sales taxes include “changes to state nexus and/ or reporting requirements; use tax reporting on individual income tax forms; and additional sales tax compliance auditors may be used to generate additional revenue from the existing rate and base structure. … However … these changes may face push back from taxpayers.”

The report said, “With the exception of certain natural resource severance taxes, Arkansas excise taxes appear to be following regional trends. Most rates are comparable to nearby states.

“In terms of opportunities, compared to the group of benchmark [states], Arkansas’ hotel/motel tax (via the amusement tax) is perhaps one that is below most comparable states. Also worthy of consideration are cigarette, alcohol and transportation taxes,” the report said. “These are commodities related to activities where costs are rising.

“Lastly, the Legislature should consider updating existing laws to include new commerce activities such as ride sharing and non-traditional short-term occupancy,” the report said.

The report also said property tax “relief and reform considerations” include the fact that exemptions for nonprofit organizations are becoming an “area of interest” in many parts of the country as local governments seek ways to cover the cost of services.

“On the other side of the ‘tax exempt equation,’ some states are limiting the ability of local government to provide targeted exemptions … for economic development purposes,” the report said. “Other property-related taxes, such as real estate transfer taxes, franchise and inventory taxes, have been targets for tax reduction or prohibition.”