The Legislature's tax overhaul task force wants its consultant to determine which of the state's sales-tax exemptions -- together worth more than $1 billion -- should be reviewed to see which to keep and which to ditch, a co-chairman, Sen. Jim Hendren, said Tuesday.
The directive by Hendren, a Republican from Sulphur Springs, to Philadelphia-based PFM Consulting Group came after its director, Randall Bauer, presented a report to the task force with 7-year-old state estimates of the financial impact of the exemptions.
More than 100 sales-tax exemptions reduced revenue by $1.4 billion in fiscal 2011, says the report, citing estimates from the state Department of Finance and Administration. The department is updating its numbers, said Walter Anger, a deputy director of the department and the state's revenue commissioner. The state is now in fiscal 2018.
Sales taxes and individual income taxes are state government's largest sources of tax revenue.
In fiscal 2017 that ended June 30, the state collected $3.3 billion in sales tax, netted more than $2.7 billion in individual income taxes (based on collections of $3.2 billion and refunds of $446 million), netted $397 million in corporate income taxes (based on collections of $464 million and refunds of $67 million), and $469 million in motor vehicle fuel taxes, according to the finance department.
At the end of a nearly three-hour meeting Tuesday, Hendren said, "The first thing we need to do is to establish which of these exemptions are off the tables because ... of federal law or the constitution or because they clearly impact the policy to make us immediately not competitive.
"I would ask you to identify the exemptions ... we need to spend our time focusing on" at a future meeting, Hendren told three officials for PFM Consulting Group.
"I would like you to do that homework and say, 'Look, out of this $1.4 billion, we think this $400 million is where you need to focus your efforts because that's a policy issue -- not required by law or not something that is immediately going to make us uncompetitive.'" said Hendren, whose uncle is Republican Gov. Asa Hutchinson.
Hendren said he wants people who support the exemptions to tell the task force why the exemptions are important and good public policy.
Ten of the exemptions accounted for $1.1 billion in reduced revenue in fiscal 2011, Bauer told the task force.
The largest of these were exemptions in fiscal 2011 were:
• Gasoline or motor fuel on which gas or fuel tax has been paid, costing $325 million.
• Food and food ingredients, costing $176 million.
• Prescription drugs, costing $143 million.
• Sales to any nonprofit hospital, sanitarium or nursing home, worth $104 million.
• Feed used in the commercial production of livestock and poultry, totaling $99 million.
• Machinery and equipment used directly in manufacturing or processing, worth $85 million.
The sales tax rate was 6 percent in fiscal 2011. The rate rose to 6.5 percent when voters approved a half-cent sales tax for highway improvements.
The sales tax on groceries was 2 percent in fiscal 2011 and it's now 1.5 percent. Under current law, it's expected to decline to 0.125 percent on Jan. 1, 2019.
Hendren asked finance department officials to develop "a hypothetical" proposal for cutting the top income tax rate if the state had no sales-tax exemptions.
"I just want folks to understand the math of exemptions to a ... top end [individual income tax] rate," he told the task force. The top individual income rate is 6.9 percent for Arkansans with taxable income of more than $75,000 a year.
Paul Gehring, the state's assistant revenue commissioner for policy and legal, said that by eliminating all sales-tax exemptions, the state "potentially could do an approximately 50 percent reduction in the [individual income tax] rates to the tables, which would result in about a $1.4 billion reduction."
Under "another scenario, for incomes between zero and $8,400, you could eliminate the tax rate down to 0 [percent] on those taxpayers, which would eliminate 123,000 taxpayers off the tax rolls, start income tax rates at 1 percent and then work gradually up to a 3 percent rate and then the top rate [of] 3.5 percent kick in at $35,100," Gehring said.
After the task force meeting, Hendren said he asked finance department officials to develop the hypothetical because "I just want people to visualize what could happen with those type of reductions in exemptions. Not all sales tax. That would make no sense.
"But I just wanted to know myself if you really wanted to go for it and say, 'We're eliminating all [sales] exemptions,' what would your tax code look like? You can see you could cut in half," he said. "It was just really an exercise in math to let folks see that even $100 million isn't going to move the needle much on that top rate. Moving down that top rate down takes a lot of dollars."
The task force was created by the Legislature under Acts 78 and 79 during this year's regular session in part to placate lawmakers who favor larger state income tax cuts for Arkansans, particularly for those with taxable income above $75,000 a year.
These laws contain Hutchinson's plan to cut individual income tax rates for Arkansans with less than $21,000 in taxable income. This plan is projected to reduce general revenue by about $25 million in fiscal 2019 because it takes effect Jan. 1, 2019, and then $50 million each year thereafter.
The 2015 Legislature enacted Hutchinson's plan to cut individual income tax rates for Arkansans with taxable income between $21,000 and $75,000 a year. That proposal was projected to reduce general revenue by about $100 million starting in fiscal 2017.
Hutchinson has said he would like to see the top income tax rate be 5 percent, but it could take a while to do that. Reducing the top rate in the two highest income tax brackets to 5 percent would cut general revenue by about $346 million.
Meanwhile, Bauer told the task force that he wants to wait a few months before trying to estimate how much online retailer Amazon has paid in sales tax based on its sales to Arkansans. Bauer noted that state "tax folks can't divulge what Amazon as a single corporate entity is paying to the state," under state law.
Amazon announced Feb. 10 that it would collect the taxes starting March 1 and remit the money to the state government.
"The issue right now is you just have a small number of months [of tax collections from Amazon]. You don't have the big months for Amazon which are the holiday season for collections," Bauer said.
"Our belief is that until we get additional data related to at least that period of time for comparison purposes, we really wouldn't want to make an estimate. But we will make an estimate and we'll explain the caveats with it."
Bauer said it's estimated that Amazon's share of e-commerce retail sales is about 43 percent "so you already are capturing over four-tenths of the market of sales and most of the analysis that we have looked at suggests that Amazon is going to continue to grow in terms of market share."
Hendren said he wants to get a grasp of how much the state is collecting from Amazon and how much it could collect in the future because "I think there may be some false expectations this means hundreds of millions of dollars."
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