Gov. Asa Hutchinson last week proposed reducing the sales tax charged on used vehicles priced between $4,000 and $10,000 from 6.5% from 3.5% nearly two years after legislation that would have entirely exempted used vehicles below $7,500 from sales tax failed to clear an Arkansas Senate committee.
But the Republican governor's proposal, unveiled Tuesday, is drawing mixed reviews from state lawmakers.
House Revenue and Taxation Committee Chairman Joe Jett, R-Success, said the 2019 version of legislation -- sponsored by state Rep. John Payton, R-Wilbur -- that would have increased the sales tax exemption for used vehicles priced up to $7,500 has "a lot of support in the General Assembly." Under current law, used vehicles priced under $4,000 are exempt from sales tax.
That legislation in 2019 sailed through the state House of Representatives before narrowly failing to clear the Senate Revenue and Taxation Committee.
"I don't think anybody is 100% sold on any of the [governor's tax cut proposals]," Jett said. "I'm certainly not."
Regarding those tax cut proposals, incoming Senate Revenue and Taxation Committee Chairman Bill Sample, R-Hot Springs, said "we are going to have to do a lot of work to see if they will work."
Hutchinson on Tuesday also proposed planning for a $50 million-a-year income tax cut for low- and moderate-income Arkansans and reducing the state's top individual income tax rate for new residents to 4.9% for a five-year period with the aim of reducing the state's top individual income tax rate for others to 4.9% over a five-year period.
The state's top individual income tax rate dropped from 6.9% to 6.6% on Jan. 1 of this year and will fall further to 5.9% on Jan. 1, 2021, under Act 182 of 2019. State officials projected that Act 182, eventually, will reduce state tax revenue by about $97 million a year.
Hutchinson told lawmakers Tuesday that reducing the tax on many used cars would have multiple effects.
"This not only provides a tax break, but it also reduces the incentive to game the system," he said.
Hutchinson said his proposal is projected to reduce sales tax revenue by $13 million a year. His proposed budget factors in $6.5 million in reduced tax revenue in fiscal 2022 and a $13 million reduction in fiscal 2023.
Those estimates are based on the sales of 65,716 used vehicles priced at $4,000 to $9,999 in a recent year, according to state Department of Finance and Administration records. The records show the sales of 259,817 used vehicles priced below $4,000 and the sales of 183,493 used vehicles priced at $10,000 and above in that recent year.
Payton said he expects bills to be introduced in next year's regular legislative session that would:
• Reduce the sales tax on used vehicles priced between $4,000 and $10,000 from 6.5% to 3.5% for two years and then eliminate the sales tax for used vehicles priced up to $10,000 after that two-year period.
• Increase the sales tax exemption on used vehicles from $4,000 to $7,500 for two years and then increase that amount to $10,000 after that two-year period.
mIncrease exemption from the sales tax on used vehicles from a price of $4,000 to $10,000 at once.
Increasing the sales tax exemption on used vehicles to vehicles bought for $7,500 is projected by state officials to reduce tax revenue by about $12.7 million a year, said state Department of Finance and Administration spokesman Scott Hardin.
Increasing the sales tax exemption on used vehicles to those purchased for up to $10,000 is projected by state officials to reduce state tax revenues by $28.3 million a year, said state Revenue Commissioner Charlie Collins.
Payton said his aim is to help Arkansans who live paycheck to paycheck be able to purchase a used vehicle that is dependable to get to work and back home.
As far as "gaming" of the sales price of used vehicles, he said honest people shouldn't suffer because of the actions of the dishonest.
"I have tons of support in the House and the Senate to do something," Payton said. "It's a matter of what the budget can afford. ... I think we have a good opportunity to get something done."
Sample said he worries that increasing the sales tax exemption for used vehicles leads to used car dealers boosting the prices of their used cars for the benefit of themselves, not consumers.
Regarding income taxes, Hutchinson said reducing the top individual income tax rate to 4.9% for new residents in Arkansas for five years would help recruit talent for the state's growing tech industry and manufacturing from large urban areas while also attracting retirees to the state. The next aim would be reducing the state's top rate to 4.9% for the others over a five-year period.
His proposal estimates that reducing the top rate to 4.9% for new residents would reduce state tax revenue by $1.5 million in fiscal 2022 and $4.6 million in fiscal 2023. These estimates are based on 9,000 new residents moving to Arkansas annually, Collins said.
State Rep. Lane Jean, R-Magnolia, said he didn't like reducing the income taxes of new residents, and that he hadn't talked to many members who liked the plan.
"I think that's got serious trouble," he said.
"How do you go back to your district and people been working 30, 40, 50 years and you have got a newcomer in and they get a better rate than they get? That just doesn't make sense," said Jean, a co-chairman of the Joint Budget Committee.
Senate Democratic leader Keith Ingram of West Memphis expressed a similar sentiment.
"I have got to talk to the governor [about that proposal] because I am trying to figure out how I go home and tell my people that have lived here and paid income taxes for many years that 'Hey, we are going to give some new folks that are going to move here a break on the income tax.'
"I applaud the thought of trying to get the income tax down over a number of years down to that 4.9% level, [but] I just don't want to get trapped into the idea of thinking that all of our services that we provide are fully funded because they are not."
A Finance Department revenue impact projects that a tax rate reduction from 5.9% to 4.9% over a five-year period, beginning in 2023, would cause an overall reduction in state general revenue of $275.6 million a year when fully implemented, said Scott Hardin, a spokesman for the department.
On Tuesday, Hutchinson also proposed an individual income tax table "cliff adjustment" that is projected by state officials to reduce state tax revenue by $2.75 million in fiscal 2022 and $5.5 million in fiscal 2023.
Collins said the state has low, middle and high income tax tables, and "in order not to have a funky situation where your income goes up, but your disposable income goes down, we have a cliff adjustment."
"This cliff adjustment amount basically smooths the stair stepping from the low-income tax table to the middle- income tax table and from the middle-income tax table to the high-income tax table," he said.
Hutchinson recommended income tax cuts for low- and moderate-income people that would reduce tax revenue by $25 million in fiscal 2022 and $50 million in fiscal 2023.
Rather than creating a state earned income tax cut for low- and middle-income people, Jean said he would "rather us do some type of income tax cut for the middle income or the lower, or go ahead and whittle some more off the top" individual income tax rate.
Jett said the governor's plan to provide $50 million a year in income tax cuts to low- and moderate-income people is "really not enough." He said he plans to introduce legislation to eliminate the state's low-income tax table to provide about $80 million a year in income tax relief.
Ingram said creating a state earned income tax credit is a proven way to put money in the pockets of low- and moderate-income residents, and he touted Jett's proposal.
Hutchinson also proposed transferring $4.1 million of the unallocated surplus to the state's Medicaid trust fund in fiscal 2022.
Budget Director Jake Bleed said the state's soft drink tax is earmarked for the state's Medicaid trust fund. The governor proposed the transfer of $4.1 million of the surplus funds to that trust fund in order to offset the loss of $4.1 million from the beginning of a phased-in elimination of the state's soda tax, he said.
The soft drink tax raises about $39.4 million a year in tax revenue, according to the Finance Department.