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Competing low-income tax cuts clear House panel

by Michael R. Wickline | January 20, 2017 at 3:24 a.m. | Updated January 20, 2017 at 3:24 a.m.

The Arkansas House tax panel endorsed competing bills Thursday -- Gov. Asa Hutchinson's legislation to cut individual income tax rates for people with less than $21,000 in taxable income and Rep. Warwick Sabin's bill to create a state earned income tax credit.

The 20-member House Revenue and Taxation Committee -- comprising 10 Republicans and 10 Democrats -- advanced both bills to the full House of Representatives. The House is made up of 76 Republicans and 24 Democrats. Hutchinson is a Republican from Rogers. Sabin is a Democrat from Little Rock.

After the committee's meeting, its chairman, Rep. Joe Jett, R-Success, said he wishes that Hutchinson and Sabin would "sit down together and work it out in a meaningful solution that does not hurt the [state] budget, but it gives the people of Arkansas a tax cut."

Sabin told reporters, "I have always been looking for the opportunity to have a compromise with the governor. I have been working on it for two years, and I think you've got to offer up a proposal as the first step toward achieving the compromise."

House Speaker Jeremy Gillam, R-Judsonia, said the House probably would consider the two tax-cut bills when representatives return Monday.

"I appreciate the House tax committee's bipartisan support for my $50 million tax cut for those Arkansans who make below $21,000 annually, and I am thankful for the leadership exhibited by House [Republican] Leader Mat Pitsch in shepherding it through," Hutchinson said in a written statement.

"I am pleased with our tax package as is. It's the right thing to do, and, as such, it continues to generate a great deal of support from both sides, as indicated by the quick passage in both committees."

The House tax committee endorsed the Republican governor's legislation -- House Bill 1159 by Pitsch, of Fort Smith -- in a voice vote without any audible dissenters.

The action came a day after the Senate Revenue and Taxation Committee recommended Senate approval of an identical bill -- Senate Bill 115 by Senate Republican leader Jim Hendren of Sulphur Springs -- without any dissenters heard.

Task force in bill

HB1159 would become effective for tax years starting on or after Jan. 1, 2019, if it's enacted by the Legislature and Hutchinson. It's projected to reduce general revenue by $25.25 million in fiscal 2019, which starts July 1, 2018, and $50.5 million each full year thereafter, according to the state Department of Finance and Administration.

"Our governor has proposed this as part of how he wants to operate his business," Pitsch told the House tax committee.

He said his bill also would create a legislative task force that's "going to focus on what real [tax] reform is."

HB1159 would create a 16-member Arkansas Tax Reform and Relief Legislative Task Force to recommend further tax cuts for the Legislature. The task force would be required to file its final written report with the governor, the House speaker and the Senate president pro tempore on or before Sept. 1, 2018, in advance of the 2019 regular session. The creation of the task force has placated some lawmakers who favor a larger income tax cut, particularly for Arkansans with taxable income exceeding $75,000.

Previously, the 2015 Legislature enacted Hutchinson's proposal to reduce individual income tax rates for Arkansans with taxable income between $21,000 and $75,000. That cut is projected to reduce general revenue by $100 million in the current fiscal year, 2017. Six months into fiscal 2017, net general revenue available to agencies is $8.8 million below forecast, largely because of lagging sales tax revenue.

Sabin's measure

With a few lawmakers dissenting, the House tax committee Thursday also endorsed House Bill 1161 by Sabin, which would create a state earned income tax credit equal to 5 percent of the federal earned income tax credit for tax years starting on or after Jan. 1, 2017.

The bill is projected to reduce general revenue by $40 million in fiscal 2018, which starts July 1, according to the finance department.

Sabin told reporters that he proposed his bill "knowing that there is an opportunity to amend it if we want to make it comparable to the governor's proposal and have it delayed until fiscal 2019."

Earlier, he told the House tax committee, "This is a policy that has been at the federal level for about 30 years, and from the very, very beginning it was a bipartisan effort.

"In fact, Ronald Reagan, when he was president, called this his favorite anti-poverty program, and the reason why is because it's really the most effective way that we've seen to incentivize work, move people out of poverty, reduce dependence on social services and stimulate the economy," he said.

Sabin said his bill would target the low-income working families of Arkansas, and "for that reason I think it is a better policy than what the governor is offering."

The federal earned income tax credit is a refundable income tax credit for low- to moderate-income working individuals. The federal credit is based upon a percentage of a taxpayer's earned income, the finance department said.

Hutchinson's tax cut plan is conceived for the right reasons, but "because it is a simple cut to the marginal tax rate, [it] doesn't sufficiently target the people that we are targeting," Sabin said.

Southern Bancorp CEO Darrin Williams, a former Democratic state representative from Little Rock, said 26 other states and Washington, D.C., have created state earned income tax credits.

But David Ray, director for the Americans for Prosperity's Arkansas chapter, told the House committee that the earned income tax credit "is primarily a spending program.

"It is a wealth redistribution program," he said. "The federal earned income tax credit, which is what this bill seeks to emulate, is a program that is riddled with fraud."

"If we want to encourage work for low-income individuals ... then let's reduce and eliminate wherever possible personal income taxes, which penalize work and productivity, and I would argue that the committee just did this a moment ago by passing Rep. Pitsch's bill to reduce marginal income tax rates on low-income Arkansans," Ray said.

For Arkansans with taxable income of less than $21,000 a year, SB115 and HB1159 would each reduce the individual income tax rate from 0.9 percent to zero percent for taxable income up to $4,299; from 2.4 percent to 2 percent for income from $4,300 to $8,399; from 3.4 percent to 3 percent for income between $8,400 and $12,599; and from 4.4 percent to 3.4 percent for income between $12,600 and $20,999.

The bills would affect about 657,000 Arkansans, including 120,000 people in the lowest tax bracket who no longer will pay state income taxes, according to lawmakers. The largest tax cut a single taxpayer could receive is $156 and a married couple could receive a $312 tax cut, the finance department said.

Possible offset swap

Hutchinson also proposed exempting military retirement benefits from income taxes at reduction in revenue of about $13 million a year, as part of a larger $19 million-a-year plan to reduce two taxes and modify three other tax exemptions.

Some lawmakers have objected to Hutchinson's proposal to apply sales tax to the full cost of manufactured housing, which would raise about $2.4 million a year. The sales tax is now applied to 62 percent of manufacturing housing costs.

"My understanding is that a compromise has been reached by the bill sponsors to substitute one of the exemptions in the military tax cut proposal," Hutchinson said in a written statement. "I have always said as long as the offset is paid for, that I would be flexible, and I appreciate the General Assembly's work to get majority support."

Senate Revenue and Taxation Committee Chairman Jake Files, R-Fort Smith, floated the idea Wednesday of instead ending the sales-tax exemption on digital products and computer software delivered electronically.

Hendren said Thursday that Files is helping draft such an amendment for the bills on military retirement benefit taxes. They are Senate Bill 120 by Sen. Jane English, R-North Little Rock, and House Bill 1162 by Rep. Charlene Fite, R-Van Buren.

Information for this article was contributed by John Moritz of the Arkansas Democrat-Gazette.

A Section on 01/20/2017

Print Headline: Competing low-income tax cuts clear House panel


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