Northwest Arkansas Democrat-Gazette
Tax cuts, teacher pay on to-do list
Session’s agenda stacked at start
Arkansas’ 92nd General Assembly will wrestle with how deeply to cut individual and corporate income taxes, while trying to develop a plan to raise more money for highways, reorganize state government and raise starting salaries for teachers during the regular session starting Monday.
Also, the Republican-controlled Legislature will enact a general- revenue budget; decide how much money to give public schools, human services and other programs; and consider reauthorizing the use of federal and state funds to provide health insurance for about 230,000 low-income Arkansans.
Other items predicted for the legislative agenda include authorizing sales-tax collection on Internet sales; new stand-your-ground and “red flag” gun laws; ethics laws; and further restrictions on abortion. Regular sessions also are when lawmakers pick proposed constitutional amendments to refer to voters in the 2020 general election.
The House of Representatives will have 76 Republicans and 24 Democrats, and the Senate will have 26 Republicans and nine Democrats — the same number as the chambers had in the
2017 regular session.
“I think it will be one of the most historic sessions in my lifetime, the most historic session in my lifetime because we are tackling so many big issues from the highways and long-term funding of that to transformation [ of state government] and on and on down the list, tax cuts included,” said Gov. Asa Hutchinson, who will be sworn in on Tuesday to his second four-year term.
The Republican governor’s plan to reduce the number of agencies that report directly to him from 42 to 15 would be the most sweeping overhaul of state government since Gov. Dale Bumpers, a Democrat, led an effort to consolidate 60 agencies into 13 under Act 38 of 1971.
But House Democratic leader Charles Blake of Little Rock said it’s hard for him to get a good read on the coming regular session in the House because “the process has been slowed down.” That’s because, he said, representatives and interest groups won’t know who serves on what committees until Speaker Matt Shepherd, R-El Dorado, announces his committee appointments on Monday.
In the 2017 session, the House changed its rules to grant the speaker the authority for committee assignments. Previously, the assignments were based on seniority and determined two months before the start of the regular session. Shepherd is the first speaker to make committee assignments under the new rules.
TAX CUTS
Hutchinson has proposed cutting the number of state individual income-tax tables from three to one and gradually reducing the top individual income-tax rate from 6.9 percent to 5.9 percent.
His plan is projected by state officials to reduce revenue by nearly $192 million a year after it’s fully implemented. He originally proposed phasing in the cut over four years but agreed to seek a three-year phase-in because that was the preference of the Legislature’s tax overhaul task force.
The plan would raise rates for some taxpayers. It would increase the standard deduction from $2,200 to $6,800 for single taxpayers and from $4,400 to $13,600 for married taxpayers.
A snag emerged in the plan last week after state officials concluded that roughly 200,000 taxpayers would pay more than $30 million in additional income taxes under the governor’s plan. Hutchinson and key lawmakers said they’re trying to figure out how to change his plan to guarantee that no filer will be hit with a tax increase.
Hutchinson and state officials refer to his plan as the “2-4-5.9” plan because of the rates that ultimately would be charged at different income levels. People with taxable income up to $8,000 would pay a 2 percent rate; those with between $8,001 and $18,000 in taxable income would pay 4 percent; and those making $18,001 and up would pay 5.9 percent.
Since Hutchinson’s plan would boost individual income-tax rates on some, it would require a three-fourths vote of the 100- member House and 35-member Senate for approval.
“The governor has his plan and we are looking to him for leadership on that,” Shepherd said. “He just won re-election. He campaigned largely on that plan. I think we are going to cut taxes. I think the real question is how exactly do we do it and what other reforms might be involved in that process.”
Sen. Jim Hendren, R-Sulphur Springs, said, “The goal of getting the top rate below 6 [ percent] so we don’t stand out in t h e region as the highest-taxed state in the South still has a very good chance of passing.” Hendren is a co-chairman of the legislative tax task force and also is set to become the next Senate president pro tempore.
The tax-overhaul task force also developed a tax-cut plan that it called Option A, which would reduce the top rate to 6.5 percent and cut the number of individual income-tax tables from three to one. Option A would require a simple majority vote — not a threefourths vote — for approval. State officials projected Option A would reduce revenue by $264 million a year.
Hendren said he expects a separate bill to be introduced, based on recommendations of the tax-overhaul task force, for corporate income-tax cuts that would be phased after the state meets certain tax-collection thresholds. Those cuts would follow the implementation of a plan to cut the individual income taxes.
“We are talking about over $400 million in phase one and phase two in tax relief,” Hendren said. “We have averaged about $50 million a year in tax cuts the last six years, so you’re talking about a plan that if we use the same rate of tax reduction, seven, eight years long. It is still important to map out that plan so businesses and [the Arkansas Economic Development Commission] — the folks that are trying to recruit businesses now — know where Arkansas is going.
“But it is also important for us to anticipate that between now and then, there might be an economic downturn, and the last thing we want to do is to have an economic downturn and then trigger tax cuts that make the state go into fiscal distress.”
Democrats also are thinking about taxes in their legislative plans.
“From our perspective, we are geared up to fight for the families of the state of Arkansas” by creating an earned income tax credit for low-income Arkansas and authorizing sales-tax collections on Internet sales, Blake, the party’s House leader, said. He also said legislative plans include expanding health coverage for Arkansans.
STATE BUDGET
Hutchinson proposes a state general-revenue budget totaling $5.75 billion for fiscal 2020, which starts July 1.
That budget is $125.2 million more than fiscal 2019’s budget. Most of the increase would go to human services and education programs, including a boost in starting pay for teachers. The proposal factors in a $47.4 million reduction in general revenue from phased-in implementation of his “2-4-5.9” income-tax plan.
Hutchinson proposes to raise the starting teacher salary from $31,800 to $36,000 over the next four years He also wants lawmakers to transfer $60 million from the educational adequacy fund to the public school fund for implementing teacher pay raises.
The state general-revenue budget for the Department of Human Services would increase by $68.2 million to $1.73 billion, including a $61.6 million increase for its grants budget for Medicaid to $1.3 billion. The department obtains other funding from the federal government.
The state pays 7 percent of the cost of the Medicaid expansion program that provides health insurance coverage to about 230,000 low-income Arkansans. The program is called Arkansas Works under Hutchinson. The state’s share will increase to 10 percent in 2020 under existing federal law.
In fiscal 2019, the state’s share of the cost of the program has been projected at $135 million and the federal government’s share at $1.95 billion, according to Scott Hardin, a spokesman for the state Department of Finance and Administration. In fiscal 2020, the state’s share is projected at $177 million and the federal government’s share at $1.91 billion.
“I don’t see a lot of tension on the budget like we have had in some years,” said Hendren. “Part of that is going to depend on how aggressively we decide to implement tax cuts and that’s why tax cuts really have to be one of the first issues we deal with.”
ARKANSAS WORKS
Hutchinson said he met in recent weeks with federal government attorneys who are fighting a lawsuit challenging the work requirement for many of Arkansas Works’ 230,000 participants.
“I believe that we’ll win,” the governor said. “As to whether this particular [federal] district judge rules in our favor is a little bit closer question because he’s the same judge that knocked down Kentucky’s first round.” He was referring to Kentucky having a similar requirement.
“But in the end, hopefully, he will approve it,” Hutchinson said. “But regardless, I do believe that the work requirement will be able to stay in place until it is finally heard and upheld.”
Hutchinson said he was confident that the Legislature would muster the threefourths vote needed to approve state and federal funding for the program.
“If the judge [overturns the work requirement] for various reasons, we’ll see if there is a way we can adjust and satisfy the courts working with the federal government,” Hendren said. “But I don’t think a federal judge’s decision is going to immediately allow Arkansas to throw our budget into turmoil and to terminate Arkansas Works.”
MONEY FOR HIGHWAYS
Hutchinson, Hendren and Shepherd said there is no consensus in the Legislature about a long-term plan for boosting funding for highways, including whether to refer a plan to voters.
Senate Republican leader Bart Hester of Cave Springs said there is “zero” chance that the Legislature will approve a tax increase to fund highways. He also said it’s a “coin flip” whether lawmakers would refer a highway funding plan to voters.
Hutchinson said, “I am committed to a highway plan and the Legislature wants time to work on a plan themselves, so we are seeing what they come up with.”
He said he considers a permanent extension of the 10-year half-percent sales-tax increase for highways approved by voters in 2012 to be “foundational” for a ballot measure that’s referred to voters.
“There has to be something that surrounds that to have money that flows more quickly to our highways and maintenance needs, that’s probably the biggest part of the debate, so that is still a work in progress and that’s one of the undefined items as we go into the Legislature. It is going to be a real challenge because none of that is easy,” he said.
Shepherd said, “My feeling is that we have to first look at what resources are available currently that we need to show that we have done our due diligence with resources that are available right now or that might could be moved towards highways before we try to go back to the people with some further proposal.
“My feeling has been all options should be on the table,” he said, adding that he supports using some undetermined amount of general tax revenue for highways.
REORGANIZATION
Hutchinson said his proposal to reduce the number of state agencies reporting to him from 42 to 15 will require a two-thirds vote for approval in the House and the Senate because the legislation will change some provisions of initiated acts.
“I would like that to go early in the session because once you pass transformation, and hopefully that will go through, that impacts subsequent legislation just in terms of terminologies and how things work,” he said.
He said he anticipates his reorganization wouldn’t save money until fiscal 2021, which starts July 1, 2020. He said he conservatively estimates the savings at about $15 million a year and “everybody hopes it will be more.”
Thus far, Rep. Andy Davis, R-Little Rock, has pre-filed seven bills that would implement parts of Hutchinson’s reorganization proposal.
Davis said he plans to file the other nine soon in order to get feedback from the public and lawmakers on them. Then, he said, he will withdraw the bills from consideration and consolidate them into one bill that is estimated to be 1,500 pages.
“I think generally the response has been positive,” Shepherd said. “But we are in that phase of members are reviewing, finalizing the drafting [of the bills], really looking at the details of it, and we’ll evaluate if there is any significant issues or concerns or push-back. … But I am optimistic that we are going to be able to get something down on that.”