The top preference of the Legislature's tax-overhaul task force is to implement Gov. Asa Hutchinson's plan to reduce the state's top individual tax rate in three years instead of the four years he proposed, the group decided Wednesday.
The Republican governor's tax-cut plan -- which also reduces the number of individual income-tax tables from three to one -- is projected by state officials to reduce tax revenue by nearly $192 million a year, when fully implemented.
Wednesday was the final meeting of the task force, which had been getting together since the spring of 2017.
State officials call Hutchinson's proposal the "2-4-5.9" plan because of the rates that ultimately would be charged at different income levels. People with taxable income up to $8,000 would pay a 2 percent rate; those with between $8,001 and $18,000 in taxable income would pay 4 percent; and those making $18,001 and up would pay 5.9 percent. The current top rate is 6.9 percent.
The task force's second preference is for the Legislature to implement the governor's income-tax cut plan within two years, said a task force co-chairman, Sen. Jim Hendren, R-Sulphur Springs.
The third preference is the task force's so-called Option A plan. It too would reduce the number of tax tables from three to one. It would cut the top individual rate from 6.9 percent to 6.5 percent within three years, Hendren said.
He announced the order of preference for these three plans after task force members ranked their choices in writing and submitted them to legislative staff members, who tallied the scores.
State officials project the Option A plan would eventually reduce revenue by $264.8 million a year. The plan, because it would not raise taxes, would require only a majority vote in the 100-member House and 35-member Senate for approval.
The governor's proposal, however, would require the votes of at least 75 representatives and at least 27 senators because it would increase income taxes for some filers, state officials have said. But they also have said the increased taxes would be offset by increasing the standard deduction for single taxpayers from $2,200 to $6,800 and for married taxpayers from $4,400 to $13,600.
The House will be comprised of 76 Republicans and 24 Democrats and the Senate will be made up of 26 Republicans and nine Democrats in the regular session starting Jan. 14.
Any tax cut that passes would be the third since Hutchinson took office.
In 2015 and 2017, the Legislature has enacted Hutchinson's plans to cut taxes for people with up to $75,000 a year in income. Those plans enacted in 2015 and 2017 are projected by state officials to collectively reduce revenue by about $150 million a year when they are fully implemented.
A three-year phase-in of the governor's plan would cut the top rate from 6.9 percent to 6.5 percent in tax year 2020; to 6.2 percent in tax year 2021; and then to 5.9 percent in tax year 2022, said Paul Gehring, an assistant revenue commissioner.
The four-year proposal would have cut the rate to 6.5 percent in tax year 2020; to 6.3 percent in tax year 2021; to 6.1 percent in tax year 2022; and then to 5.9 percent in tax year 2023.
A three-year phase-in would reduce revenue by $47.4 million in fiscal 2020; $71.8 million in fiscal 2021, $48.5 million in fiscal 2022 and then $24.1 million in fiscal 2023, Gehring said in documents provided to the task force.
Afterward, Hendren said the task force preferred a three-year phase-in because "I think that everybody was a little bit surprised when you looked at the net effect" of roughly $50 million a year in increased tax collections from some changes in the state individual tax code to conform to the federal income-tax code and in increased Internet sales taxes collections.
"It is going to continue to keep pressure on us to keep spending under control, but the amazing thing is, and I think the reason people like the governor's approach, with the standard deduction increase, is it does allow us to get that top rate down under 6 percent in just three years, which is going to make Arkansas much more competitive," said Hendren, whose uncle is Hutchinson.
Among Arkansas' neighboring states, Texas and Tennessee don't levy individual income taxes.
With a three-year phase-in, Gehring presented projections showing increased net general revenue -- money potentially available to state agencies -- of $126.5 million in fiscal 2020, $144.6 million in fiscal 2021, $167.7 million in fiscal 2022 and then $195.2 million in fiscal 2023.
But Sen. Keith Ingram, D-West Memphis, said his top preference is to implement the plan in four years.
"I am worried about the economy. I have been in business long enough to know that times can change very drastically in a short period of time and I think we are seeing some signs of the economy maybe softening a bit," he said. He said he is worried about the potential negative impact of some of President Donald Trump's policies in the next two years.
"A lot of people in here were very aware of what has happened in Kansas, in Oklahoma and in Louisiana and they don't want to see it happen to the state," Ingram said, referring to budget shortfalls in those states.
Rep. Joe Jett, R-Success, said his top preference is to implement Option A over a three-year period in part because it would require only a majority vote.
"But, that being said, I like the governor's plan," he said.
Jett, who is chairman of the House Revenue and Taxation Committee, said he would like to think the governor would get a three-fourths vote to enact his own tax-cut plan, but "it is going to be portrayed as raising taxes to cut taxes and all that."
With Sen. Larry Teague, D-Nashville, dissenting, the task force voted to add a proposal that gradually extends to 20 years the five-year carry-forward period for corporations' net operating losses. Corporations can use the losses against income earned in the future. This proposal initially was included in a package of proposed future corporate-tax cuts that would be implemented if tax collections exceed certain amounts once the individual income tax plan is fully implemented.
The "task force has really done a great job in analyzing the possibilities and I am very open to the three-year timetable," Hutchinson said afterward.
"We all want to get this tax lowered as quickly as possible, and they have actually suggested some other means of achieving that goal, so I want [the state Department of Finance and Administration] to analyze the cost impact of this and see how we can make the adjustments to achieve that goal. So we'll work very hard to look at the budget and see where we can make the adjustments to achieve that three-year time frame that they recommended," the governor said.
HOME OFFICE CREDIT
Hendren also announced that he reached agreement with many people in the health insurance industry on a plan to gradually cut the home-office tax credit granted to those companies against their insurance premium taxes.
In October, the task force learned that the tax credits cost the state more than $40 million a year.
A decades-old law allows for life, health and disability insurers to get home-office credits against their premium taxes. The credits are equal to the noncommissioned salaries and wages of the insurers' Arkansas employees who are paid in connection with their insurance operations.
For health and disability insurers, the home-office tax credits may not reduce their premium taxes by more than 80 percent, according to the Insurance Department. For life insurers, the credit may not reduce their premium taxes by more than 70 percent.
"We have one provider that is over $20 million in that credit, so if an $18 million cap is put in place in 2020, that would really be the only provider that is affected by that, and the amount of premium tax credit would drop from $43.4 million to $39.9 million" in 2020, Hendren said.
He said he wants to change the limit on the credit to 70 percent of a company's insurance premium taxes in 2021, "so this will affect everybody, and we are just talking about health insurance premiums." The limit would be changed to 60 percent of a health insurance company's premium taxes in 2022 and then to 50 percent in 2023, he said.
"At the end of year four, the amount of premium tax credit that the state would be issuing has dropped from $43.4 million to $27.1 million," he said. The proposal's $16.3 million a year in increased revenue could be used to cut other taxes.
Ingram said he plans to propose legislation to create state breaks that mirror federal tax breaks for companies that move into 85 so-called Opportunity Zones. Hutchinson designated these economically distressed areas as allowed under the federal tax overhaul enacted by Congress last year.
State Revenue Commissioner Walter Anger said in a letter to the task force that Opportunity Zones are designed to spur economic development by providing tax benefits to investors.
Investors can defer tax on any previous gains invested in a qualified opportunity fund until the earlier of two dates -- the date on which the investment in the fund is sold or exchanged, or Dec. 31, 2026, he said.
If the investment in the fund is held for longer than five years, there is a 10 percent exclusion of the deferred gain, he said. If it is held for more than seven years, the exclusion of the deferred gain increases to 15 percent, he said.
"What my legislation would do is we'll just match the federal tax law," Ingram told the task force. "Realistically, it will be at least six years at the quickest before there could be any fiscal impact on our budget."
Sen. Larry Teague (right), D-Nashville, questions state finance officers as he and Sen. David Wallace, R-Leachville, take part in Wednesday’s meeting of the tax overhaul task force.
A Section on 12/13/2018