Arkansas' three individual income-tax tables would become a single table and the top rate would gradually be cut from 6.9 percent to 5.9 percent under a proposal developed by state officials and backed by Gov. Asa Hutchinson.
The income-tax changes would reduce state revenue by nearly $192 million a year, according to state estimates.
The state Department of Finance and Administration unveiled the proposal to the Legislative Tax Reform and Relief Task Force on Wednesday, after the task force approved its final report to give to legislative leaders and the governor. The task force had a Sept. 1. deadline set in Act 79 of 2017.
"Over the last several months, legislators expressed their views and provided significant guidance that played a key role in the development of this proposal," the Republican governor said in a written statement after Wednesday's meeting. "I look forward to working closely with the Legislature and DF&A in order to fine tune this tax relief and reform package to be presented next January in bill form.
"Through our previous cuts, we've positively impacted approximately 90 percent of taxpayers in the state and have the opportunity to continue to lessen Arkansans' tax burden through this plan," Hutchinson said.
In 2015 and 2017, the Legislature enacted Hutchinson's plans to cut the individual income-tax rate for people with taxable incomes below $75,000 a year. The cuts are projected to reduce tax revenue by $150 million a year.
Phase One of the latest proposal includes cutting the top individual income-tax rate from 6.9 percent to 6.5 percent, which would reduce revenue by $94.8 million a year, said Paul Gehring, acting revenue commissioner.
Phase Two includes cutting that top rate from 6.5 percent to 5.9 percent, which would further reduce revenue by $96.9 million, for a total reduction of $191.7 million a year, he said in describing the proposal as "a work in progress."
The proposal also would increase the standard deduction from $2,200 to $6,800 for single taxpayers and $4,400 to $13,600 for married taxpayers, described as "a marriage bonus." It would retain the personal tax credit of $26. The proposal would give relief to middle-income and upper-income taxpayers, Gehring said.
"Because we are increasing the rate of tax within the tables, this would require a supermajority [three-fourths] vote" in the 100-member House and 35-member Senate, he said. "But the rate increases are offset entirely, and so it is not an overall tax increase on any taxpayers."
Under Phase One, those with taxable incomes:
• Up to $8,000 a year would pay an individual income-tax rate of 2 percent.
• Between $8,001 and $18,000 would pay a 4 percent rate.
• Between $18,001 and $65,000 would pay a 5.9 percent rate.
• Of at least $65,001 would pay a 6.5 percent tax rate, according to a finance department report.
Taxable income figures are rounded to the dollar, finance department spokesman Scott Hardin said afterward.
Under Phase Two, the rates would remain the same for people with up to $65,000 in taxable income. But the top rate for those making at least $65,001 would drop to 5.9 percent, the finance department said.
According to the finance department's analysis, $143.8 million of the tax cut would affect 170,000 tax returns filed by people with adjusted gross incomes of at least $80,000 a year.
About $26.8 million of the tax cut would affect about 341,000 tax returns filed by people with adjusted gross incomes between $35,000 and $80,000 a year, and $19 million would affect about 273,000 returns filed by people with adjusted gross incomes between $20,000 and $35,000 a year, the finance department said.
About $1.9 million of the tax cut would affect about 255,000 tax returns filed by people with adjusted gross incomes between $10,000 and $20,000 a year, and about $3,295 would affect about 110,000 tax returns filed by people with adjusted gross incomes between $5,000 and $10,000 a year, the finance department reported. None of the tax cut would affect the 118,000 tax returns filed by people with adjusted gross incomes below $5,000.
"When you look at this thing fully phased in at 5.9 percent, it seems like an extremely effective way to get $200 million in income tax relief, where nobody pays more taxes, everybody sees some benefits," said Rep. Charlie Collins, R-Fayetteville. "It is a very simple [income tax] code. There are a few brackets, and it is well-structured for future tax relief."
A task force co-chairman, Sen. Jim Hendren, R-Sulphur Springs, said the proposal presented by finance department officials "is really an adjustment to Option A," based on the governor's earlier plan to cut the top individual income-tax rate from 6.9 percent to 6 percent.
The task force's other co-chairman, Rep. Lane Jean, R-Magnolia, said he sees the governor's proposal "as complementing our [Option A].
"I look at it as getting on board with simplifying taxes. I applaud the governor for doing it," Jean said after the task force's meeting.
The task force voted to send the proposal to its Massachusetts-based consultant, Regional Economic Models Inc., for review.
Sen. Larry Teague, D-Nashville, asked Gehring about the time frame for implementing the two phases.
"There is not a timeline," Gehring replied.
"This is just to give an idea if the General Assembly were to do this in a phase-in approach, they could do it this way. If the General Assembly wanted to just jump to Phase Two and enact the entire plan at once, the revenue impact would also be $191.7 million," he said.
After the task force's meeting, Hutchinson's director of fiscal and agency operations, Jake Bleed, said finance department officials developed the phase-in plan as an option "to consider in the event that we have a budget situation that we can't absorb the full tax cut in a single year."
Hendren told task force members that "the timing [for implementing Phase One and Phase Two] depends on the priorities that this task force sets out" for other tax cuts.
In its report, the task force's top priority plan for cutting individual income taxes would reduce the number of individual income tax tables from three to one to simplify the rates and tax brackets, and reduce the top rate from 6.9 percent to 6.5 percent for people with taxable incomes of at least $80,000 a year. It's called Option A.
The finance department projected that proposal would reduce revenue by $264.8 million a year.
The task force's second priority plan was the governor's initial plan to cut the top individual income tax rate to 6 percent. That proposal is projected to reduce revenue by about $180 million a year.
The third priority plan -- called Option B -- also would reduce tax tables from three to one. It would reduce the top individual income tax rate to 6.5 percent for people with taxable incomes of at least $80,000 a year.
Option B also would repeal a tax cut set to go into effect Jan. 1 for people with less than $21,000 in taxable incomes, but also would create a state earned income tax credit equal to 10 percent of the federal earned income tax credit to offset the increased taxes for some filers.
The finance department projected this proposal would reduce revenue by $185.8 million a year.
Without debate, the 16-member task force approved its final report in a voice vote with no audible dissenters.
"Let's keep in mind that this is just a report and really when we get to the bills is where it matters," Hendren told task force members.
The task force's wide-ranging recommendations also address sales, property and other taxes.
The group meets again today to continue discussion about tax changes.
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A Section on 08/23/2018