Gov. Asa Hutchinson on Monday told lawmakers that in the 2019 regular session, he wants to cut the state's top income tax rate from 6.9 percent to 6 percent, which would reduce revenue by about $180 million.
The top individual rate applies to Arkansans' taxable income exceeding $75,000 a year, a spokesman for the state Department of Finance and Administration said.
Hutchinson, who is seeking re-election this year to a second four-year term, announced his goal during his State of the State speech on the first day of the 2018 fiscal session.
The Republican governor's announcement surprised and divided some lawmakers.
"I was surprised from that statement as probably everyone else" was, said Sen. Bart Hester, R-Cave Springs. "I didn't see it coming but [am] very pleased. Any time the governor is endorsing what you are hoping for, it is a good feeling."
House Democratic leader David Whitaker of Fayetteville said, "I'm not completely surprised.
"The governor's got a primary challenge, and I'm sure he wants to put his best foot forward and stay aggressive on those kinds of things," he said. "[But] we're already to the point where it feels like a whole lot of our priorities are underfunded or not funded at all."
During his remarks, Hutchinson said he also hopes that by the end of the fiscal session, he will have a waiver from President Donald Trump's administration that will allow the state to impose a work requirement on many of the 285,000 low-income Arkansans enrolled in the Medicaid expansion program for health insurance.
"We are all watching the costs, I know, and the most effective cost control is helping people be trained and to earn their way off," he said. "While our work requirement will be one of the most stringent in the country, it is not designed to be punitive, but to increase training and opportunities for employment."
Hutchinson said he's also working to address challenges outside this fiscal session.
"We need to have a fair reimbursement rate for our pharmacists," he said. Two weeks ago, pharmacists told lawmakers that cuts in reimbursements for drugs provided to Arkansas Blue Cross and Blue Shield customers, including Arkansas Works enrollees, are threatening to put drugstores out of business. Last week, GOP Attorney General Leslie Rutledge said she has launched an investigation into the complaints.
The governor's remarks came as supporters of the state's version of Medicaid expansion, called Arkansas Works, aim to get the required votes to approve the Department of Human Services' Division of Medical Services appropriation. The measure will require 27 votes in the Senate, which has 32 members and three vacancies, and 75 votes in the House, which has 99 members and one vacancy. That appropriation includes spending authority for the Arkansas Works program.
"You never know until the vote is cast," said Senate Republican leader Jim Hendren of Sulphur Springs. He said he hasn't done a hard vote count in the Senate yet.
"I am optimistic. I think folks want to find a way to avoid that drama and get past part of our repeated fighting over an appropriation bill," said Hendren, whose uncle is the governor. "There are a lot of folks who are saying things like: 'I feel pretty good about it. I think I am going to vote for it.'"
During the fiscal session, the Republican-controlled Legislature will consider Hutchinson's proposed general revenue budget of $5.626 billion for fiscal 2019, an increase of $172.8 million over funding in the current fiscal year.
"This is the right budget for Arkansas because it is conservative in spending, it increases our savings and it invests in the future of our state," the governor told lawmakers.
Hutchinson said his proposed budget would create a $64 million surplus with $48 million set aside into a restricted reserve fund that cannot be touched without the concurrence of the Legislature. The other $16 million would be used to match federal highway funds.
SETTING THE STAGE
The governor said the Legislature's 16-member tax overhaul task force will issue its recommendations later this year in advance of the 2019 regular session that begins in January. The task force is co-chaired by Rep. Lane Jean, R-Magnolia, and Hendren.
"I want the task force to do its work, but I want to tell you today my priorities, and my priorities have been consistent, and that is we need to reduce the individual income tax rate in Arkansas," he said. He has said repeatedly that he eventually would like to cut the top income tax rate to 5 percent but that it could take a while to do that.
Hutchinson said of cutting the top rate to 6 percent, "We will be working on it this year and set the stage for that.
"We do it by, first of all, a commitment to the essential services of our state, and I remind you that whenever we had $150 million in tax cuts, we approached it in a way that did not jeopardize the essential services of our state," he said. "They said it couldn't be done. We did it."
In 2015, the Legislature approved Hutchinson's plan to cut rates for Arkansans with taxable income between $21,000 and $75,000 a year. The plan was projected to reduce general revenue by $100 million a year starting in fiscal 2017, which ended June 30 last year.
In 2017, the Legislature enacted Hutchinson's plan to cut rates for Arkansans with up to $21,000 a year in taxable income. That plan, effective Jan. 2, 2019, is projected to reduce general revenue by $25 million a year in fiscal 2019 and then $50 million in each subsequent fiscal year.
"Our transformation effort to reduce unnecessary spending is in full gear," Hutchinson said.
He said his transformation office and teams will continue to look at savings that can be created in state government without diminishing services.
"And then, most importantly, will be the recommendations of the task force that is representing this body," Hutchinson said, referring to the tax overhaul panel. "I want to support you. I want to build that partnership. I want you to do your work, and I look forward to your recommendations as to what you want to achieve, how you want to achieve it and what can be done to achieve those goals.
"It is important to achieve this in order that we have continued success in job creation and economic growth," he said.
Asked after his remarks whether he plans to phase in the next income tax cut, Hutchinson said, "I am going to leave my announcement the way it is right there."
Then, he said, "I am hopeful that we can pass it in '19 ... [and] that [it] goes into effect in '20. But it all depends upon the progress we make between now and then."
Among Arkansas' neighboring states, Texas doesn't have an income tax and Tennessee doesn't have an overall income tax but applies its top rate of 5 percent to interest and dividends, finance department spokesman Scott Hardin said after the governor's address.
Of surrounding states, the top rates are 5 percent in Oklahoma and Mississippi and 6 percent in Louisiana and Missouri, Hardin said.
As for Hutchinson's proposal, Rep. Charlie Collins, R-Fayetteville, said, "I think it's fantastic.
"It's just as critical to help out the people that are actually creating the jobs. When you reduce the income tax burden on those folks, it really helps job creation. It becomes particularly true given the new federal tax law, which no longer allows people to write off their state income taxes. So there was a double-whammy with that income tax that was coming with the federal bill," he said.
Rep. John Payton, R-Wilburn, said, "Honestly, I don't know how it's going to fit in the budget."
The state can't afford the proposed tax cut "unless we reduce spending levels. ... Historically, I guess it would be naive to expect that to happen," he said.
Sen. Will Bond, D-Little Rock, said that since "2007 with all the tax cuts enacted, we've cut general revenue by about $500 million, which is significant."
"At some point we have to look and see, are we investing enough to make Arkansas the best she can be for the future," he said. "We need to invest in our infrastructure, we have to invest in our teacher shortage and look at our disparity in teacher salaries, and we don't need to take a step back in [pre-kindergarten] where we did lead the nation and in health care, where we led the nation in accessibility," Bond said.
Senate President Pro Tempore Jonathan Dismang, R-Searcy, said the proposed cut is "a high bar."
"It means the [tax overhaul] task force is really going to have to dig in on the incentives. We're going to have to make sure that we're able to absorb it through new revenue and new growth in the state," he said. "I think it can be done. ... We're going to do so responsibly."
Arkansas Supreme Court Justices (left to right) Shawn A. Womack, Courtney Hudson Goodson, Josephine L. Hart and Robin F. Wynne recite the Pledge of Allegiance on Monday before Gov. Asa Hutchinson’s State of the State speech in the House chamber at the state Capitol.
Gov. Asa Hutchinson speaks Monday afternoon to a joint session of the Legislature. Monday was the first day of this year’s fiscal session.
Rep. LeAnne Burch (left), D-Monticello, and Rep. John Maddox, R-Mena, greet each other Monday in the House chamber at the state Capitol before the start of the fiscal session.
A Section on 02/13/2018
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