Bill swaps manufacturers' incentive

The Senate's calendar for Monday includes a bill that would phase out the InvestArk tax-credit program in exchange for providing a sales-tax exemption for manufacturers on purchases related to repairing machinery and equipment.

Senate Bill 362, by Sen. Lance Eads, R-Springdale, sailed through the Senate Revenue and Taxation Committee on Wednesday.

Randy Zook, president of the Arkansas State Chamber of Commerce/Associated Industries of Arkansas, told the committee that his groups support the legislation.

Arkansas is alone in the region in levying sales tax on manufacturers' purchases for repairs and replacement, which has increased their costs, and "helps prevent them from being as competitive as possible in selling their products," Zook said.

The state has used the InvestArk tax credit, for projects of more than $5 million, as "a Band-Aid" for charging those repair-related sales taxes, he said.

"At the end of the day, according to the Tax Foundation, Arkansas' rank on the state business tax climate will move, with passage of this bill, from 40th best overall to 34th best overall, a significant move to put us in the best stead to compete," Zook said.

Sen. Larry Teague, D-Nashville, asked whether it's fair to say that all industries support eliminating the tax-credit program.

Zook said the "overwhelming majority of our members in the industrial sector" favor the bill. The program doesn't help the smaller manufacturing companies, he said.

The legislation's net change in state general revenue is projected to be a $1.2 million increase in fiscal 2018, which starts July 1; and then a $680,000 increase in fiscal 2019. But then the state is expected to see annual decreases in revenue -- eventually as much as $4.64 million by fiscal 2022, according to the state Department of Finance and Administration. But the biggest estimated drops in revenue under the bill's changes start the next year: from a $12.38 million decline in fiscal 2023 to a $12.62 million decrease in fiscal 2026.

When asked about the projected revenue reductions exceeding $10 million a year in fiscal 2023-26, Teague said Friday, "There should be plenty of growth in state revenue to take care of that."

Teague is co-chairman of the Legislature's Joint Budget Committee.

SB362 would sunset the InvestArk program on July 1 of this year with no new applicants for the tax credits being accepted. Program participants would continue to earn and use tax credits for projects that are applied before the sunset date, the finance department said in its impact statement on the bill.

Under the InvestArk program, a manufacturer is eligible for a retention sale and use tax credit if certain conditions are met.

To participate in the program, a manufacturer must have been in continuous operation in Arkansas for at least two years and invest a minimum of $5 million in a project to construct, expand or modernize a manufacturing facility, the finance department said.

The tax credit amount is based on the investment in land, buildings and equipment and is established at 7 percent of the eligible project expenditures. The credit is used to pay 50 percent of the taxpayer's monthly "direct pay sales and use tax liability," the department said. The credits are earned for a project period covering up to four years, with established credits eligible to be carried forward for up to five years.

In November 2015, auditors with Arkansas Legislative Audit said, "InvestArk-only projects do not return positive cost-benefit ratios because they do not require job creation; therefore, the only potential tax benefits identified are construction benefits."

"InvestArk projects may result in new or updated facilities or equipment, which could lead to increased jobs and productivity or could lead to decreased jobs if the improvements reduce the workforce," the auditors said in their written report.

From 2012-14, InvestArk distributed nearly $110 million in sales and tax credits to 96 companies. Companies receiving the most credits during the three-year period include Tyson Foods' $12.3 million; Georgia Pacific's $11.5 million; Lion Oil Co.'s $6.3 million; Domtar A.W.'s $6.3 million; and Nucor Corp.'s $6.2 million, finance department records showed.

Marvin Childers, president of The Poultry Federation, said Friday that the InvestArk job retention incentive program "has come under fire" in recent years.

"In an effort to alleviate just doing away with it, we felt it was a fair trade" to gradually reduce the sales tax on repairs and replacements parts for manufacturing machinery and equipment, he said.

The legislation hopefully will result in more companies willing to make these investments in Arkansas, Childers said. He said he hopes state officials will consider creating another type of job retention incentive program in the future.

Under current state law, manufacturers' purchases of repair, replacement and modification parts and services for existing machinery and equipment are eligible for a tax refund of 1 percent of Arkansas' 6.5 percent sales and use tax, the finance department said.

SB362 would increase gradually the tax refund amount each year until the purchases become fully exempt from taxation, the finance department said.

The bill would reduce the net tax rate to 4.5 percent, effective July 1, 2018; then 1 percentage point a year until it reaches 1.5 percent in 2021. Then it would be zero percent, effective July 1, 2022, according to the finance department.

Business on 02/25/2017

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