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New laws create largest tax cut in Arkansas history, help state make pitch for steel mill expansion

by Michael R. Wickline | December 10, 2021 at 7:12 a.m.
Gov. Asa Hutchinson shakes hands with legislators Thursday after signing the tax-cut bills at the state Capitol in Little Rock. Hutchinson said the cuts give more people more control over their money and their lives. More photos at arkansasonline.com/1210lege/. (Arkansas Democrat-Gazette/Staci Vandagriff)


The state Legislature finished its special session work Thursday morning, and in the early afternoon, Gov. Asa Hutchinson signed bills that authorize the largest tax cut in the state's history and that help Arkansas in its pitch for a proposed $3 billion U.S. Steel expansion project.

Surrounded by legislative leaders and other lawmakers in the state Capital rotunda, the Republican governor signed identical versions of the individual and corporate income tax cut legislation -- House Bill 1001 by Rep. John Maddox, R-Mena, and Senate Bill 1 by Sen. Jonathan Dismang, R-Searcy.

HB1001 is now Act 1 and SB1 is Act 2, according to the General Assembly's website. They are the latest in a series of income tax cut laws.

"Back in the spring in the regular session, we said we wanted to come back and we wanted to do broad-based income tax reduction, and we have done that," House Speaker Matthew Shepherd, R-El Dorado, said before Hutchinson signed the bills. "We have delivered on that for all Arkansans, from top to bottom. We have done that. That is something that I think is very important.

"I think this is another step that we have shown over the past four years of responsible reduction in taxes while still bringing the services to the people of Arkansas," he said.

On Thursday morning, the Senate voted 29-4 to send HB1001 to the governor. The House voted 82-16 to approve it Wednesday.

On the other side of the Capitol on Thursday morning, the House voted 80-14 to send SB1 to the governor. The Senate approved the bill 30-4 the day before. The special session started Tuesday.

The laws will gradually reduce the state's top individual and corporate income tax rates; consolidate the state's low- and middle-income tax tables; create a nonrefundable income tax credit for low-income taxpayers; rename the state's long-term reserve fund as the catastrophic reserve fund; and block the last two scheduled individual and corporate income tax rate reductions if the state has to tap the catastrophic reserve fund.

The income tax cuts are projected by the state Department of Finance and Administration to reduce state general revenue by $135.25 million in fiscal 2022, which ends June 30, and gradually increasing that amount to $497.9 million in fiscal 2026. The tax cut will start midway through fiscal 2022.

IMPACT OF CUTS

Hutchinson noted that the top individual income tax rate was 7% when he became governor in 2015. That individual rate, which is now 5.9%, will drop to 5.5% on Jan. 1 and then to 5.3% on Jan. 1, 2023, potentially going to 4.9% under the bills he signed into law.

The income tax cut will mean $474 more in the pockets of a couple each making $42,000 a year and allow them to buy a new set of tires or have a more enjoyable Christmas, he said.

Hutchinson said the income tax cuts also will mean more than 100,000 taxpayers will no longer pay income taxes.

A total of 104,881 taxpayers will no longer have any state income tax liability because their net taxable income is under $7,700 a year, said Scott Hardin, a spokesman for the state Department of Finance and Administration.

A leading foe of the tax cut measure, Arkansas Advocates for Children and Families, said the advocacy group is extremely disappointed with the Legislature's decision Thursday to approve more than $500 million in income tax cuts that will disproportionately benefit the wealthy and profitable corporations.

"Arkansans are still hurting from the pandemic, especially families with low incomes," the group said.

"We should be investing in our communities by hiring caseworkers for the underfunded foster care system, helping the thousands of Arkansans who have been waiting for home and community-based care for years, helping Arkansans afford the child care they need to be able to get back to work, making sure Arkansas workers have the skills to compete in a global economy and so much more."

Asked whether it would be more impactful to low-income people for state government to reinvest the money planned for income tax cuts in state services, Hutchinson said, "they are making the case that they would rather trust government to spend the money wisely versus putting it in the pockets of individuals.

"I disagree with that philosophically," the governor said. "We ought to give more people more control over their money and their lives, and that's what we are doing on these tax cuts. They make the case that they would rather have $500 million instead of tax cuts, let's put it in more government programs, and I don't believe that fosters independence. I don't believe it fosters work. I don't believe it helps us to improve education. We are investing in those separately. Let's don't take $500 million arbitrarily and say let's put it in more government programs."

YEARS OF REDUCTION

In the 2015, 2017 and 2019 sessions, the Republican-dominated Legislature enacted Hutchinson's income tax cuts that have been collectively projected by state officials to reduce general revenue by about $250 million a year.

The Legislature enacted middle-income tax cuts projected at about $100 million a year in 2015, low-income tax cuts projected at about $50 million a year in 2017 and upper-income tax cuts projected about $100 million a year in 2019.

Acts 1 and 2 of this week's special session will reduce the three existing tax tables to two by combining the low- and middle-income tables, effective Jan. 1. The new table will apply to taxpayers with net taxable incomes of up to $84,500, while the high-income tax table will apply to those with net taxable income above $84,500.

The top individual income tax rate will be cut from 5.9% to 5.5% on Jan. 1, and then to 5.3% a year later.

The top rate will apply to net taxable incomes 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 will 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 will 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 will cut the top corporate rate from 5.9% to 5.7% on Jan. 1, 2023. That rate will 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 two new laws will create a nonrefundable income tax credit for taxpayers with net incomes up to $24,700 who file their income tax returns on time. Taxpayers with net incomes up to $23,600 will receive $60 tax credits against their income taxes due, with the credit reduced for each $100 of additional income.

The laws will require the state to increase the standard deduction by a cost-of-living adjustment each year.

The laws include some fiscal measures aimed at ensuring the renamed catastrophic reserve fund stays at 20% of the total amount of net general revenue allocated in the previous fiscal year. The long-term reserve fund balance now is about $1.2 billion.

RECYCLING TAX CREDITS

On Thursday, Hutchinson also signed identical bills that will change the state's recycling tax credit law with the aim of getting U.S. Steel to locate a proposed $3 billion project in Mississippi County.

"This puts us in the driver's seat and keeps us there," the governor said. "We don't want to lose that position, so we got the pole position if you like racing, so hopefully this will bring us to success."

The bills are House Bill 1007 by Sen. Joe Jett, R-Success, and Senate Bill 10 by Sen. David Wallace, R-Leachville. SB10 is now Act 3, and HB1007 is now Act 4, according to the General Assembly's website.

On Thursday morning, the House voted 91-4 to send SB10 to the governor, while the Senate voted 33-0 to do the same with HB1007.

Wallace said Wednesday that the proposed $3 billion expansion at U.S. Steel would be in addition to the company's existing $2.2 billion investment in Northeast Arkansas, and create 700 jobs paying an average of $120,000 a year and 200 jobs paying an average $60,000 a year. Arkansas is competing with Alabama and Mississippi for the project, he said.

The recycling income tax credits authorized under the bill would cost the state an average of $11 million a year for 14 years and $8.8 million a year if the state buys back the tax credits at a 20% discount, he said.

A spokesman for U.S. Steel, John Ambler, said Thursday that he expects the company to decide on a location for the project within the next month or two.

The Mississippi County site that the company is considering for the project is near the existing facility that employs about 650 people and pays an average wage of about $120,000 a year, he said.

"Arkansas is a great location, and we would be very happy if this ends up [being] the selection," Ambler said. "We are just not there."

Acts 3 and 4 will create a project type for steel manufacturers to qualify for income tax credits 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 Acts 3 and 4, a project will 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 average annual wages of $120,000; and create 200 independent direct positions with average annual wages of $60,000, according to the state Department of Finance and Administration.

The project also will 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.

A qualified growth project that has a public retirement system as an owner or shareholder will divide its tax credits between the tax credits that can be sold to the state and the tax credits that will be claimed on the taxpayer's return. The commission's incentive agreement will provide the amount of monetized credits that will be authorized.

The public retirement system will possess the monetized credits and $11 million of the monetized credits may be sold to the state at 80% of face value or $8.8 million under the bills, according to the finance department. If the state does not purchase the credits, the taxpayer may sell the $11 million in credits to another taxpayer.

The taxpayer purchasing the equipment will have possession of the remaining tax credits that can be claimed only on the taxpayer's return. The bills place a $27.5 million cap on the amount of credits that can be claimed on the taxpayer's return per year.

The Arkansas Teacher Retirement System owns one share of Big River Steel, a subsidiary of U.S. Steel, but no longer has a board position with the company, said Clint Rhoden, executive director of the teacher retirement system.

The retirement system has participated in two previous phases of recycling tax credits associated with Big River Steel, he said Thursday.

The first phase consists of about $240 million and is being sold at a rate of $16 million per year, he said. The sale of this phase began in 2017 and is expected to continue through 2032, he said.

The second phase consists of about $100 million, and the sale of this phase is expected to start around 2023 at a rate of $8.8 million per year for about 12 years, Rhoden said.

Information for this article was contributed by Rachel Herzog of the Arkansas Democrat-Gazette.





 Gallery: 120921 Legislative Session



Print Headline: Session ends; governor inks tax cuts

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