Correction: This story about House Bill 1402, sponsored by Rep. Matthew Shepherd, R-El Dorado. contained incorrect information about the bill and changes in the state’s capital gains taxes. HB1402 would increase the 40 percent exemption of capital gains from income taxes to 45 percent, retroactive to Feb. 1, and increase the exemption to 50 percent starting July 1, 2016. It also would exempt from income taxes net capital gains in excess of $10 million if they are realized after Jan. 1, 2014. Act 1488 of 2013 raised the net capital-gains exclusion from 30 percent to 50 percent, starting this tax year, and exempted capital gains received by a taxpayer in excess of $10 million, starting last tax year. As part of Act 22 that reduces income-tax rates on Arkansans with taxable income between $21,000 and $75,000 a year, Gov. Asa Hutchinson and the Legislature allowed for the 50 percent capital-gains exclusion through the end of January and the exemption was reduced to 40 percent thereafter. Act 22 also repealed, retroactively to Jan. 1, the income-tax exemption on capital gains exceeding $10 million.
Legislation that would restore 2013 capital gains tax cuts repealed by the Arkansas Legislature earlier in the session passed through the Arkansas House of Representatives on Wednesday.
House Bill 1402, by Rep. Matthew Shepherd, R-El Dorado, passed the House 68-17 and will head to the Senate.
The measure would increase the 40 percent exemption on capital gains from income tax to 45 percent retroactive to Feb. 1, and increase the exemption to 50 percent starting on July 1, 2016. In a compromise to pass Gov. Asa Hutchinson's middle-class tax cut plan earlier this year, the 2013 exemption on 50 percent was reduced to 30 percent from January 1 to February 1 and to 40 percent from Feb. 1 forward.
It also would exempt from income taxes net capital gains in excess of $10 million if they are realized after Jan. 1, 2014, a tax break benefiting a handful of Arkansans.
"HB1402 simply puts back into place the capital gains exemptions that were rolled back earlier in the session," Shepherd said. "It, hopefully by fiscal year 2016, by July 1, 2016, will put all of those exemptions back into place."
Shepherd was one of two representatives who voted against Hutchinson's income tax cut plan early in the session because he said he was concerned about the message it would send to Arkansans if the Legislature broke the promise it had made in the previous session to cut the capital gains income tax.
"I think it's important to have some consistency in our tax policy going forward," he said.
In this year's session, the Legislature and Hutchinson passed Act 22, cutting income tax rates for Arkansans with taxable incomes of between $21,000 and $75,000, and repealing certain capital-gains income tax cuts enacted in 2013.
Act 22 is projected to reduce state general revenue by $22.9 million in fiscal 2016 and $90.3 million in fiscal 2017, according to the Arkansas Department of Finance and Administration.
HB1402 would reduce state general revenue by $6 million in fiscal 2016 and $10.7 million in fiscal 2017, according to the finance department.
Rep. Kim Hendren, R-Gravette, raised concerns about how the General Assembly and the governor's office planned to pay for reinstating the tax cuts.
"My understanding from leadership is that this has been discussed by leadership on both ends and by the administration and this will be taken care of partly out of revenue growth and also by other means within the budget," Shepherd said.
Hendren later spoke against the bill, saying that if there is money in the budget to grant additional tax cuts, he would rather give them to low-income Arkansans who were left out of the governor's middle-class income tax cut.
"In committee the other day, we had another bill for tax credits for people making less than $20,000 a year and we didn't put that out of committee because they said the state couldn't afford those kind of tax cuts," Hendren said. "I think this thing is for folks who make over $10 million. And it just bothers me a bit when we say we can't afford it for the low-income folks, but we can afford it for us fat cats. So, I'm going to vote against this feller."
The bill Hendren was referring to, HB1344, by Rep. Warwick Sabin, D-Little Rock, failed in the House Revenue and Taxation Committee on Tuesday. The bill would have given an earned income-tax credit to people making $21,000 or less.
The bill would have created the Working Families Opportunity Credit equal to 1.25 percent of the federal earned income tax credit for tax years starting in 2016. Under the bill, the state earned income tax credit would increase to 2.5 percent of the federal earned income tax credit for tax years starting in 2017 and rise to 5 percent for tax years starting in 2018.
HB1344 would have reduced state general revenue by $10 million in fiscal 2017, $20 million in fiscal 2019 and then $40 million a year in fiscal 2019 and each subsequent fiscal year, the state Finance and Administration Department estimated.
Sabin also spoke against HB1402 on the House floor Wednesday, saying his own bill would offer greater relief to Arkansans.
"I brought that bill ... to try to extend a tax credit to the only taxpayers that we're not really offering opportunity to get the tax cut this session, and those are people who make less than $20,000 a year," Sabin said. "As we're kind of prioritizing how we're bringing tax relief to the taxpayers of Arkansas, I think it's important ... to keep in mind one simple fact. Through this bill we're making a capital gains fully exempt above $10 million a year. There are literally only 10 to 12 taxpayers in the state of Arkansas who will claim that benefit."
Shepherd defended the reinstatement of the capital gains tax cuts by saying they would promote business in the state.
"I understand some of the concerns involved, but many of those who will be able to take advantage of these exemptions are those who create jobs. And I think it's vitally important in the economy we're in to be competitive, and I think this is a step in the right direction," Shepherd said.
Metro on 03/26/2015