The House Revenue and Taxation Committee on Thursday rejected a bill that would create a state earned income tax credit equal to 10 percent of the federal earned income tax credit for low- and middle-income workers.
House Bill 1418 by Rep. Tippi McCullough, D-Little Rock, is projected to reduce state revenue by $76.7 million in fiscal 2020 that starts July 1, the state Department of Finance and Administration reported. The forecast is based on Internal Revenue Service information that shows that 287,000 Arkansas taxpayers received the federal earned income tax credit in 2017.
The House committee then endorsed Senate Bill 196 by Sen. Keith Ingram, D-West Memphis, to provide tax incentives for investments in the state's 85 distressed Opportunity Zones.
Gov. Asa Hutchinson designated these areas under the federal Jobs and Tax Cut Act of 2017.
SB196 is projected to reduce state revenue by $1 million in fiscal 2019, which ends June 30, and then $2.6 million a year between fiscal 2020 and fiscal 2026, the finance department reported.
[RELATED: Complete Democrat-Gazette coverage of the Arkansas Legislature]
But then the measure is forecast to actually increase tax revenue by $13 million in fiscal 2027 and by $4.3 million in fiscal 2028.
Thursday's action came two days after the committee recommended House approval of Senate Bill 211 that would implement Hutchinson's plan to cut the state's top individual income tax rate from 6.9 percent to 5.9 percent over two years. SB211 cleared the House on Thursday afternoon. State officials project it will reduce state tax revenue by about $97 million a year after it's fully implemented.
The House Revenue and Taxation Committee is comprised of 18 Republicans and two Democrats.
In a voice vote, the committee declined to recommend approval of McCullough's HB1418. Similar legislation has failed to clear the Legislature in recent years.
McCullough told the committee that an earned income tax credit "is an idea that is rooted in the value of rewarding hard work and is legislation that was originally signed into federal law by President Ronald Reagan.
"I say this is to remind the committee that this idea has deep roots in the Republican Party and has found bipartisan support across the nation," she said. Twenty-nine states have an earned income tax credit, she said.
McCullough said HB1418 would grant 312,000 Arkansas households "real tax relief." It would help families that have three children and earn up to $54,000 a year or a single mother with one child and who makes up to $40,000 a year.
"We can more than pay for [the credit] by limiting the governor's tax cut plan to those earning over $456,000 a year, which would affect 14,000 people," she said.
Paul Gehring, a state assistant revenue commissioner, said Hutchinson "wanted to make clear that he is not philosophically opposed to providing for some type of earned income tax credit in Arkansas."
The Legislature enacted in 2015 cuts in individual income tax rates for people with taxable income between $21,000 and $75,000 a year and enacted in 2017 cuts in rates for about 725,000 people with taxable income below $21,000 a year that became effective Jan. 1, he said. The former cuts were projected to reduce revenue by $100 million a year and the latter cuts by $50 million a year, he said.
"There is currently just not sufficient room in the budget to provide for this type of relief at this time," Gehring said, estimating HB1418 would reduce revenue by about $76 million a year.
Bruno Showers, a senior policy analyst for Arkansas Advocates for Children and Families, countered that low- and middle-income Arkansans still pay a higher share of income in state and local taxes than upper-income Arkansans, despite the 2015 and 2017 income tax cuts.
OPPORTUNITY ZONES
In a voice vote, the committee recommended House approval of Ingram's SB196 that would adopt federal Internal Revenue Code provisions for Opportunity Zones for tax years starting Jan. 1, 2018.
Taxpayers would be able to defer tax on a capital gain from an Opportunity Zone investment if they invest the money in a Qualified Opportunity Fund, according to the finance department.
Taxpayers can delay recognizing a gain until the end of 2026 and exclude 10 percent of the gain if the fund investment is held for five years, and exclude 15 percent of the gain if the investment is held for seven years, the finance department reported in its legislative impact statement on the bill. Taxpayers can completely exclude gain on any further appreciation of the qualified investment if the fund investment is held for 10 years.
Rep. Robin Lundstrum, R-Springdale, cited a letter from Republican U.S. Rep. French Hill in her pitch for SB196 to the House committee.
Noting central Arkansas' 2nd Congressional District includes 14 Opportunity Zones, including eight in Pulaski County, Hill wrote that he supports Lundstrum's and Ingram's efforts "to provide tax relief from the state and capital gains tax on investments made in opportunity zones.
"Reducing this high marginal cost of capital will enhance our state as compared to our peer states when considering opportunity zone capital investment," Hill wrote. "Without this important legislation, Arkansas will once again not be competitive."
Gehring said the finance department projects the bill would reduce tax revenue by about $19 million from fiscal 2019 through fiscal 2026 and then "you recoup approximately $17.3 million in fiscal year 2027 and fiscal year 2028."
The finance department "is speaking against the bill ... because this revenue impact over the next approximately eight fiscal years is not accounted for in the budget," he said.
But Lundstrum said, "This is to spur economic development in depressed zones.
"While it might have an impact on a budget long term, as soon as those projects start, taxes are going to be collected every time a piece of lumber or a piece of dirt turned," she said. "There is no way to calculate what local investment is going to do in a depressed zone."
Asked if the governor plans to veto the bill if the House approves it, Hutchinson spokesman J.R. Davis said in an email that "he's going to further study the budgetary impact as it moves through the House."
A Section on 02/15/2019