The Arkansas House and Senate tax committees on Tuesday advanced identical bills that would cut the state's top individual and corporate income tax rates, consolidate low- and middle-income tax tables, and create a nonrefundable low income tax credit.
Without any audible dissenting votes, the House and Senate Revenue and Taxation Committees recommended House and Senate approval of House Bill 1001 by Rep. Ken Maddox, R-Mena, and Senate Bill 1 by Sen. Jonathan Dismang, R-Searcy, respectively.
The committees also endorsed identical bills aimed persuading U.S. Steel to expand in Mississippi County. The bills are House Bill 1007 by Rep. Joe Jett, R-Success, and Senate Bill 10 by Sen. David Wallace, R-Leachville, respectively.
Arkansas is competing against Alabama and Mississippi for the proposed $3 billion project and "we're in the driver's seat and we're in the lead," Wallace told the Senate tax committee.
This legislation "keeps us in the game" and gives the state an opportunity to win the project that would create 900 jobs with an average annual salary of $106,000, state Department of Commerce Secretary Mike Preston told the House tax committee.
The committees' actions came on the first day of the special session called by Republican Gov. Asa Hutchinson primarily to enact what potentially would be the largest tax cut in the state's history.
The state Department of Finance and Administration projects that HB1001 and SB1 would each reduce state general revenue by $135.25 million in fiscal year 2022; $307.4 million in fiscal 2023; $383.2 million in fiscal 2024; $459 million in fiscal 2025; and $497.9 million in fiscal 2006.
Dismang told the Senate committee that SB1 would foster income tax fairness, simplification and competitiveness, and benefit every taxpayer.
"I believe the plan strikes a fair balance between working Arkansans and also job creators," he told the Senate tax committee. The state has the most complicated income tax structure in the nation, he said.
Dismang said Arkansas is falling behind its neighboring states with its tax structure and reducing the top individual income tax rate from 5.9% to 4.9% in the next four years would help close that gap. Tennessee and Texas don't have state income tax.
Robert Brech, the state budget director, told the House committee that state officials expect to have $128 million in surplus general revenue in fiscal 2022 and $120 million in surplus revenue in fiscal 2023, even with the tax cuts.
"It looks like for the foreseeable future we can afford these tax cuts," he said.
But Rich Huddleston, executive director of Arkansas Advocates for Children and Families, said the individual income tax cuts largely benefit higher-income people and the corporate income tax cuts largely benefit out-of-state shareholders.
"The impact on the state budget is the big issue," he said, citing estimates by the Washington, D.C.-based Institute on Taxation and Economic Policy that the cuts eventually would reduce revenue by about $600 million a year.
Huddleston said too many items in the state budget are underfunded or not funded, ranging from reducing the waiting list for care for the developmentally disabled to the shortage of Department of Human Services caseworkers.
But Rep. Jim Wooten, R-Beebe, said, "I hope the tax cut is $600 million.
"We are doing the best we can," he told Huddleston. "You are never satisfied. Tell us how much you want."
Huddleston said his first suggestion would be for the Legislature not to approve the cuts.
SB1 and HB1001 would reduce the three current tax tables to two by combining the lower- and middle-income tables, effective Jan. 1. The new table would apply to taxpayers with net taxable income up to $84,500, while the high income tax table would apply to those with net taxable incomes above $84,500.
The top individual income tax rate would be cut from 5.9% to 5.5% on Jan. 1, and then to 5.3% a year later. The top rate would apply to the net taxable income between $39,700 and $84,500 for people in the combined low- and middle-income table, and to the incomes of at least $8,501 for people in the high income table, effective Jan. 1.
The top rate would drop to 5.1% on Jan. 1, 2024, and to 4.9% on Jan. 1, 2025, only if no funds are transferred out of the long-term reserve fund during certain periods, which would become known as the catastrophic reserve fund.
The current top corporate income tax rate of 6.2% will drop to 5.9% on Jan. 1, under a 2019 state law. The special session's bill would cut the top corporate rate from 5.9% to 5.7% on Jan. 1, 2023. That rate would drop to 5.5% on Jan. 1, 2024, and then to 5.3% on Jan. 1, 2025, but only if no funds are transferred during certain periods from the catastrophic reserve fund.
The measures would create a nonrefundable income tax credit for taxpayers with net income up to $24,700 who file their income tax returns on time. Taxpayers with net income up to $23,600 would receive a $60 tax credit against their income tax due, with the credit reduced for each $100 of additional income income.
U.S. STEEL EXPANSION
The identical bills aimed at persuading U.S. Steel to expand in Mississippi County would create a new project type for steel manufacturers to qualify for an income tax credit for waste reduction, reuse or recycling equipment.
State law now provides an income tax credit for 30% of the purchase price of waste reduction, reuse or recycling equipment for a qualified manufacturer of steel.
To qualify for the tax credit under SB10 and HB1007, a project would be required to have common ownership with and be located on the site of or adjacent to an existing qualified manufacturer of steel; have a total investment of at least $2 billion; create 700 new direct positions with an average annual wage of $120,000; and create 200 new independent direct positions with an average annual wage of $60,000, according to the state Department of Finance and Administration.
The project also would be required to have a positive cost-benefit analysis from the Arkansas Economic Development Commission and the Department of Finance and Administration; an incentive agreement with the commission with performance and clawback provisions; begin on or after Jan. 1, 2021; and a closing date of necessary debt and equity financing before July 1, 2023.
The income tax credits could be for up to $11 million a year for 14 years and the state could purchase them back at a 20% discount, or $8.8 million a year, said Wallace.
A qualified project that has a public retirement system as an owner or shareholder will divide their tax credits between the credits that can be sold to the state and the credits that will be claimed on the taxpayer's return, according to the finance department.
The public retirement system would have possession of the monetized credits and $11 million of the monetized credits may be sold to the state at 80% of their face value or $8.8 million a year. If the state does not purchase the tax credits, the taxpayer may sell the $11 million in credits to another taxpayer.
The taxpayer making the purchase of the equipment will have possession of the remaining tax credits that can only be claimed on the taxpayer's return and the measures place a $27.5 million cap on the amount of the credits that can be claimed on the taxpayer's return per year, according to the finance department.
The Joint Budget Committee on Tuesday morning endorsed Senate Bill 5 by Senate President Pro Tempore Jimmy Hickey, R-Texarkana, and House Bill 1002 by House Speaker Matthew Shepherd, R-El Dorado, that would allow the transfer of up to $50 million from the general revenue allotment reserve fund to the Quick Action Closing Fund for economic development investment incentives to a qualified steel manufacturer.
The $50 million would provide infrastructure for the site of the U.S. Steel expansion, said Rep. Lane Jean, R-Magnolia.