Governor signs into law military pensions' tax exemption, its offsets

Gov. Asa Hutchinson signed legislation Tuesday that will exempt military retirement benefits from state income taxes and cut the excise tax on soft-drink syrup, starting with the 2018 tax year.

To offset the tax cuts, House Bill 1162 by Rep. Charlene Fite, R-Van Buren, will increase the 1.5 percent state sales tax on candy and soft drinks to 6.5 percent, levy income taxes on unemployment compensation and impose a sales tax on certain digital products.

"We worked hard to make sure that we could pay for it and it would keep within our budget, and we have done that," the Republican governor said before he signed the bill while surrounded by state lawmakers and veterans at a news conference in the Governor's Conference Room.

"I do believe that the legislation will be a significant boost to this state," Hutchinson said.

Uniformed-service retirees from the Army, Marine Corps, Navy, Air Force and Coast Guard will be eligible for the state income-tax exemption under what is now Act 141. It also exempts the retirement benefits of retirees of Reserve components, any state's National Guard, the Reserve Corps of the U.S. Public Health Service and the National Oceanic and Atmospheric Administration's Commissioned Officer Corps.

Those claiming an exemption cannot also claim the $6,000 exemption on nonmilitary retirement benefits, according to the state Department of Finance and Administration.

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The exemption is projected to cut general revenue by $6.7 million when it takes effect in midfiscal 2018 and then by $13.4 million in fiscal 2019, according to the state. That estimate is based on 29,009 retired taxpayers who receive a pension and a raw average benefit for each retiree of $462 a year, said Lynne Reynolds, income-tax administrator for the finance department.

After the news conference, Will Beams of Hot Springs, vice president of the Arkansas Veterans Coalition, said exempting military retirement benefits from state income taxes "means that Arkansas is recognizing the value of veterans to the economy of the state.

"Most military leaders now days have a two-year degree or higher and years of experience in leading people, so we are going to be attracting people to fill up our leadership positions in companies here in Arkansas, and we are going to bring people to Arkansas, which attract businesses to Arkansas, because there is an employable population here," he said.

"It shows that veterans are not looking for a handout. We are not a special-needs group. We are a special-skills group," Beams said.

During Tuesday's news conference, Hutchinson recalled that numerous Republican and Democratic lawmakers told him after he was elected governor in November 2014 that "we ought to gradually phase out, reduce the income tax on military retirement income."

The 2015 Legislature subsequently enacted Hutchinson's plan to cut individual income taxes for Arkansans with taxable income between $21,000 and $75,000, which is projected to reduce state general revenue by about $100 million in fiscal 2017.

But Hutchinson said lawmakers who favored cutting income taxes on military retirement benefits "persisted and they continued down that path. They would have been happy with phasing it out. Maybe not all of them. They just wanted to see us make some progress."

The Arkansas Veterans Coalition -- which is composed of 20 veterans service organizations -- also advocated for exempting military retirement benefits from income taxes, he said.

"So, all of that combined had me take another look at it," he said.

"I recognize really the importance of it, but also the impact that it could have on our economy and how it could really be an attraction for military retirees coming back to Arkansas. We compete with other states, and that is the benefit to us economically," Hutchinson said.

Act 141 also reduces the special excise tax 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 will transfer $3 million in the middle of fiscal 2018 to the Medicaid program to offset the reduction in that tax, and it will transfer $5.9 million to Medicaid in fiscal 2019.

The measure also levies the full 6.5 percent state sales tax on candy and soft drinks rather than the reduced rate of 1.5 percent levied on most grocery-store food items, which raises $6.9 million in fiscal 2018 and $13.8 million in fiscal 2019; makes unemployment compensation benefits subject to state income taxes, to raise $1.6 million in fiscal 2018 and $3.1 million in fiscal 2019; and levies a sales tax on sales of certain digital products -- including audio works, audiovisual works and books, as well as on sales of digital codes that allow the consumer to access these products -- to raise $1.2 million in fiscal 2018 and $2.4 million in fiscal 2019.

Last week, Americans for Tax Reform President Grover Norquist told lawmakers in an email that "some misguided tax hikes have been proposed targeting soda, candy, and digital downloads. I urge you to reject those proposals, which are problematic for a host of reasons, and instead focus on ways to improve the tax code."

Asked about Norquist's concerns, Hutchinson said Tuesday that Americans for Tax Reform "assured me that they were not scoring any of the legislation because it's really consistent with the pledge that any member would take that they would not support a tax increase."

Americans for Tax Reform "viewed this [legislation] as having offsetting tax reductions, so therefore it did not violate any principle of Americans for Tax Reform or any pledge that had been taken," Hutchinson said. "We received that assurance from them, and I really don't understand any objection beyond that."

Twenty-five lawmakers have signed the group's pledge to oppose or vote against any efforts to increase taxes, according to Americans for Tax Reform's website. Among these lawmakers, 16 voted for HB1162, five voted against it and four voted present.

Last week, Hutchinson signed into law legislation as Acts 78 and 79 that will cut individual income tax rates for Arkansans with taxable income below $21,000, starting in the tax year beginning Jan. 1, 2019. The tax cut is projected to reduce state general revenue by $25 million in midfiscal 2019 and $50 million in fiscal 2020.

A Section on 02/08/2017








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