The Arkansas Senate Revenue and Taxation Committee on Wednesday advanced legislation that would allow state income taxes to be withheld from unemployment benefit payments, starting as early as Jan. 1, 2022.
In a voice vote with no dissenters, the committee recommended Senate approval of House Bill 1049 by Rep. Joe Jett, R-Success.
In 2017, the Legislature enacted a law to begin collecting state income taxes on unemployment benefits to help pay for exempting military retirement benefits from those taxes.
Sen. Jonathan Dismang, R-Searcy, who is sponsoring HB1049, said the state Department of Finance and Administration doesn't have the ability to withhold state income taxes from unemployment benefits and the bill would give that authorization.
"I know that we may have a discussion at some other point about should unemployment [benefits] be taxed in the future," he told the committee.
The Legislature exempted unemployment benefits from state income taxes in 2020 and 2021 under Act 154 of 2021 because "we feel like it was an immediate need, something we need to address now," he said.
The finance department projected Act 154 will reduce state general revenue by about $51 million in fiscal 2021, which ends June 30, and at least $3 million in fiscal 2022. In its general revenue forecast, the department projected the state would collect $3 million a year in income taxes on unemployment benefits.
HB1049 would authorize the Division of Workforce Services to withhold the taxes if the person receiving state unemployment benefits elects to do so, according to the finance department. Those receiving unemployment benefits already can have federal income taxes withheld.
Under the bill, the withholding can occur after the division's director notifies the secretary of the finance department that the division's computer system is prepared to carry out the withholding.
Paul Gehring, an assistant revenue commissioner for the finance department, told the Senate tax committee that the U.S. Department of Labor approved the legislation, which meets a requirement in the bill.
The earliest that withholding could occur would be Jan. 1, 2022, because that is the day the bill relieves the current restrictions on the withdrawal of funds from Arkansas' account in the federal unemployment trust fund, the finance department said in its legislative impact statement on the bill.
Asked when the Division of Workforce Services expects to be able to withhold income taxes from unemployment benefits, Department of Commerce spokeswoman Alisha Curtis said Wednesday, "It will depend on when programming of the system will allow for withholding. IT resources are currently focused on supporting pandemic ... claims and will be for the foreseeable future."