Arkansas tax-exemption review list grows; pared grocery levy popular target, task force co-leader says

Members of the Legislature's tax overhaul task force on Tuesday contributed to a list of about four dozen sales tax exemptions that they want the task force to scrutinize for possible changes.

These exemptions range from a partial one on groceries, to one on sales of gasoline and motor vehicle fuels on which fuel taxes have already been paid, to the exemption on sales of feed used in the commercial production of livestock or poultry.

The task force on Tuesday also authorized its co-chairmen to finalize a yearlong contract between the Bureau of Legislative Research and Massachusetts-based Regional Economic Models Inc. for up to $80,500 for analysis of up to 16 future proposals on tax policy changes.

In January, the task force voted to terminate a contract with Philadelphia-based consultant PFM Consulting Group, after a task force co-chairman, Sen. Jim Hendren, R-Sulphur Springs, said the task force would "go in a different direction" and rely on government staff instead. The bureau paid PFM $156,375. Hendren told the task force Monday that Regional Economic Models Inc. provided the bureau with "some dynamic scoring" for the proposed Big River Steel mill project in 2013, and the bureau and the Department of Finance and Administration don't have that capability.

During Tuesday's meeting, those on the 16-member Arkansas Tax Reform and Relief Legislative Task Force each submitted lists of sales tax exemptions that they want the task force to review further during its next meeting April 25-26. The task force plans to hear testimony at that time.

"There was no collusion at all because this [list] comes from every spectrum that you can think about," a task force co-chairman, Rep. Lane Jean, R-Magnolia, said, adding that the list covered 2 1/2 pages. "This [list] is not a task force endorsement."

Under state law, the task force is required to issue its recommendations by Sept. 1 in advance of the regular legislative session, which starts in January.

Hendren told task force members that "if you put a recommendation on here, we let you put them on anonymously, but you need to own that. You need to let the staff know what it is you want and you need to be prepared to tell us what you are after.

"I think some of these will be disposed of pretty quickly," he said.

After the meeting, Jean said numerous task force members put the state's 1.5 percent sales tax on groceries on their lists.

At the direction of then-Gov. Mike Beebe, a Democrat, the Legislature enacted laws gradually cutting the sales tax on groceries from 6 percent to 1.5 percent between 2007 and 2011. A state finance department report Monday estimated that the 1.5 percent sales tax rate on groceries reduced total tax collections by $248 million, including $190 million in general revenue, in fiscal 2017.

A 2013 state law is scheduled to further reduce the sales tax on groceries from 1.5 percent to 0.125 percent, starting Jan. 1, 2019. The cut will be covered by the savings of the state, which will no longer be making about $60 million a year in desegregation payments to Pulaski County school districts.

Asked about the review of the grocery sales tax exemption, Hendren said in an interview that officials for the Tax Foundation and for the Institute of Taxation and Economic Policy, both based in Washington, D.C., suggested Monday that the state would be better off providing a targeted income-tax credit to low-income families rather than charging everyone a reduced sales tax rate on groceries.

Hendren said the sales tax exemptions on groceries and motor vehicle fuels are "the two big-dollar items on the exemption list, so I am not surprised that those two made the list."

But asked about the grocery sales tax, one task force member, Sen. Keith Ingram, D-West Memphis, said, "I don't see how you can undo that."

The motor fuel sales tax exemption was estimated by the finance department to reduce total revenue by $304 million, including $210 million in general revenue, in fiscal 2017.

Hendren said the task force isn't necessarily looking at how to finance a highway improvement program, but it could consider using some of the increased revenue from a broader state tax overhaul for highways.

Asked about the intent of the task force in proposing any repeals in sales tax exemptions, Hendren noted that an official for the Tax Foundation contended Monday that increased revenues from repealing the exemptions should be used to cut income taxes, while an official for the Institute of Taxation and Economic Policy favored using the increased revenues to reduce the sales tax rate.

"So that's a policy decision that we will have to hash out down the road," he said.

Last month, Gov. Asa Hutchinson told lawmakers that in the 2019 regular session, he plans to propose cutting the state's top income-tax rate from 6.9 percent to 6 percent, which he said would reduce revenue by about $180 million a year. In 2015 and 2017, the Legislature enacted the Republican governor's plans to cut other individual income taxes, which the state projected will reduce revenue by about $150 million a year.

Sales tax exemptions to be reviewed include the following, with their fiscal 2017 impacts:

• Prescription drugs, reduced revenue by $208 million.

• Feedstuff used in the commercial production of livestock and poultry, $148.7 million.

• Machinery and equipment used in manufacturing or processing, $106 million.

• Any hospital, sanitarium or not-for-profit nursing homes operated for charitable and nonprofit purposes, $98 million.

Hutchinson said Tuesday in a written statement: "I'm following the discussions of the task force and testimony very closely. I appreciate the emphasis from many who are testifying as to the importance of reducing our state's income tax rate, and I look forward to the ideas that may be brought forward when their final report is submitted."

Marty Garrity, director of the Bureau of Legislative Research, said the bureau next week will release the official list of the sales tax exemptions to be reviewed after consulting with lawmakers who made the suggestions.

Metro on 03/21/2018

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