State finance official says 200,000 filers would see tax increase in plan's current form; governor wants fix

In its current form, Gov. Asa Hutchinson's proposed income tax cut plan would increase net state income taxes for roughly 200,000 taxpayers by more than $30 million a year, a state finance department official said Thursday.

But the Republican governor said he wants to fix his plan to make sure that no taxpayers would pay more net income taxes.

"We are going to have to continue to work to make some adjustments to make sure that that's not a tax increase on anyone," Hutchinson said Thursday in an interview in his office.

"Thank goodness we started early [developing income tax cut legislation], so these things bubble up before we actually have a vote or get into the session," the governor said.

The 92nd General Assembly will begin meeting in its regular session Monday. Its agenda will include the income tax plan.

The governor proposed gradually reducing the top individual income tax rate from 6.9 percent to 5.9 percent and reducing the number of individual income tax tables from three to one.

Since the governor's latest plan was unveiled Aug. 21 to the Legislature's tax overhaul task force, state officials have repeatedly said the plan also would increase individual income tax rates on some taxpayers, but increases in the standard deduction from $2,200 to $6,800 for single taxpayers and from $4,400 to $13,600 for married taxpayers would offset the rate increases so no taxpayers would be hit with a tax increase.

This plan is projected by state officials to reduce state tax revenue by nearly $192 million a year, after it's fully implemented. Hutchinson wants to phase it in over three years, said Hutchinson spokesman J.R. Davis. The governor originally proposed phasing it in over four years, but the task force suggested three years.

Rep. Lane Jean, R-Magnolia, said he started digging last month into a written analysis of the plan given by Lisa Christiansen Gee, senior policy analyst at the Institute on Taxation and Economic Policy in Washington, D.C. The analysis, given to the task force last fall, suggested some taxpayers would pay more in net income taxes under the proposal.

Gee said Thursday in a telephone interview that she concluded that about 199,000 taxpayers would pay about $47 million more in total income taxes, which is an average of $240 more a year.

The increased taxes ranged from an average of $74 more a year for people who have between $22,000 to $36,000 in total income, to $292 more a year for people with $93,000 to $199,000 in total income, she said.

She said she received a phone call last month from Richard Wilson, assistant director of research for the Bureau of Legislative Research, asking questions about her analysis.

Jean, who is a co-chairman of the tax overhaul task force, said that "we weren't really for sure until" Monday when state Department of Finance and Administration officials indicated that some taxpayers would get hit with a net income tax increase of about $34 million a year under their latest analysis of the plan. The finance officials said the governor directed them to develop a plan to guarantee that no taxpayers would pay more in income taxes.

"I'm not blaming anybody and I didn't want to go to [the House Revenue and Taxation Committee] with this," Jean said. "How that got overlooked at DF&A? You are asking the wrong guy."

Sen. Jim Hendren, R-Sulphur Springs, the task force's other co-chairman, said, "I don't think we blame anybody for it."

It's not unusual for this type of thing to occur when finance department officials thoroughly evaluate impacts of legislation on taxpayers, said Hendren, whose uncle is Hutchinson. Hendren said he expects the tax cut bill to be introduced within the first two weeks of the session.

Sen. Larry Teague, D-Nashville, said that "mistakes are made. That's the nature of life."

Scott Hardin, a spokesman for the finance department, said the latest analysis of the plan indicates about 197,000 taxpayers who itemize their deductions would experience a net tax increase of $33.3 million if the state conforms to the federal income tax code, and about 220,000 taxpayers who itemize their deductions would experience a net tax increase of $37.4 million if the state doesn't conform to the federal income tax code.

About 1.4 million taxpayers would receive a total income tax cut of $225 million with the state conforming to the federal income tax code and they would receive a total income tax cut of $229 million if the state doesn't conform to the federal income tax code, he said.

Some of the 1.4 million taxpayers would have no change in their tax liability, he said. The state has a total of about 1.59 million taxpayers, Hardin said.

Asked when this issue was discovered and who discovered it, Hardin said in a written statement that "in an ongoing effort to study the impact of the proposed tax cuts, DF&A's Revenue Division realized toward the end of 2018 there would be an impact to our taxpayers if recent federal changes to the tax system were not fully adopted.

"Immediately, upon discovery of this, DF&A began planning with the governor's office to ensure there is not one Arkansan that experiences increased taxes as a result," he said. "There was certainly never any intent to raise taxes on any Arkansan. Whatever it may take, this will be addressed appropriately in order to allow citizens to continue experiencing record income tax cuts."

In 2015 and 2017, the Legislature enacted Hutchinson's plans to reduce individual income tax rates on people with less than $75,000 a year in taxable income. State officials project these two plans will reduce revenue by a total of $150 million a year.

Hutchinson said one potential remedy for taxpayers who would experience net increases would be to "hold [them] harmless.

"You simply enact a 2-4-5.9 plan, but if this adversely impacts any taxpayer, they could file under the previous year's [individual income tax] rate," he said. "That allows you to have the plan and reduce [the top rate] to 5.9 percent, but you hold everyone harmless to make sure that there is not any tax increase for anybody."

He said he doesn't expect adjustments in his plan to substantially alter the projected revenue reduction of nearly $192 million a year.

"You are going to hold some harmless, so that will be some additional cost there," Hutchinson said. "But it is a little bit hard to know because you don't know if people are going to opt in to the old rate, if you did it that way. I think you have to set [aside] some funds for that hold-harmless provision to make sure that that's covered. But it is a little bit hard to put the precise number on it."

Hutchinson and state officials refer to his plan as 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 governor's proposal, however, would require the votes of at least three-fourths of lawmakers -- 75 representatives in the 100-member House and at least 27 senators in the 35-member Senate -- because it would increase income taxes for some taxpayers, state officials have said. 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 Monday.

Hutchinson said he expects that he'll ultimately garner a three-fourths vote for his plan.

"It takes a lot of work and I can't say the votes are lined up today and part of it is because people are still studying it and you have got to address issues like this with the itemized filers. These are complex changes that people have to study. But there is a need to do it, a desire to do it and I think we'll get there," he said.

Hutchinson said his priorities are to implement his income tax cut plan first and "then once that's accomplished you can trigger in these other recommendations for business tax cuts" recommended by the Legislature's tax overhaul task force.

A Section on 01/11/2019