Arkansas legislative leaders and Gov. Asa Hutchinson are tossing around proposals to reduce the state's top individual income tax rate from 5.9% to 5.5% by Jan. 1, 2023, and potentially a further cut to 4.9% depending on the impact on general revenue and the state budget.
They also are weighing whether to combine the state's low- and middle-income tax tables into one for people with net taxable income of up to $82,000 a year.
The state now has three tables, each giving the tax rates for different levels of net income: one for low-income taxpayers making less than $22,900; a second for middle-income individuals netting from $22,900 to $82,000; and a third for high-income taxpayers making more than $82,000.
Republican House and Senate leaders and the Republican governor said last week that they haven't reached a consensus on the tax cut package for a planned special session that could be sometime next month.
But they said they are moving closer to achieving a consensus, with the intent to make the state's individual income tax rates more competitive with surrounding states. Two of those -- Tennessee and Texas -- don't have individual income taxes.
GOAL: 5.5% CUT
Hutchinson said he set a goal to trim the top rate from 5.9% to 5.5%, and he directed the Department of Finance and Administration to work with legislators to incorporate their ideas into the proposal.
"I think there is a consensus now that we can move our tax rate to 5.5% and meet that objective," he said Wednesday in an interview. "There are some differences as to how that tax cut is allocated between low- and middle-income [taxpayers] and the exact cost of that."
In addition, Hutchinson said that numerous lawmakers, particularly in the state House of Representatives, "want to have some triggers to eventually get it to 4.9[%]."
"As long as the triggers are safe and does not jeopardize our education and the other essential services of the state, I am OK with that," he said.
"But my first priority is to get us to 5.5[%], and we have a consensus around that. We've just got some disagreement or some work to do on the specifics of the allocation."
The special legislative session would be the second meeting of the Legislature this fall.
House and Senate leaders said they intend to call the Legislature back to Little Rock to resume the now-recessed regular session for a few days starting Sept. 29, to redraw the boundaries of the state's four congressional districts based on the 2020 U.S. census data.
Hutchinson said he doesn't want to call a special session until "there is either a consensus or we define the debate as well on the tax cuts and we have an agreement on how we are going to proceed with it."
In "an ideal world," he said, he would call the Legislature into special session immediately after the end of the regular session to consider tax cuts or "whatever other issue we need to."
"But I'm not wed to that time frame and, if we need more time to prepare for it or to develop the right consensus, then we'll just have to do it later in October or whenever we arrive at that point," Hutchinson said. He said he expects to add a few additional items to the call for the special session because there have been a few measures identified that need correction from the regular session earlier this year.
Senate President Pro Tempore Jimmy Hickey, R-Texarkana, said, "I hate to say that there is a consensus out here" on individual income tax cuts.
"I think the consensus is that the General Assembly and the executive branch and everybody wants to do the tax cuts," he said in an interview. "It is just whether or not we combine the [low- and middle-income tax] tables. There is some benefit to combining those tables because, if I don't do that, it may get harder in the future because those [tax] cliffs may get larger and harder to [fix] in the future."
A tax cliff refers to a dramatic change in tax liability, typically with an increase in income to a higher tax rate.
House Speaker Matthew Shepherd, R-El Dorado, said, "At some point, we'll have to sit down among myself, Sen. Hickey and the governor and make sure we are all on the same page.
"There is some details to be worked out," he said in an interview.
"But I do feel like that we are narrowing in on what those two or three critical elements of the tax relief proposal are going to look like," he said.
Shepherd said he expects a special session "in the first part of October, but that is going to be the governor's call."
But state Rep. Denise Garner, D-Fayetteville, said, "We've not even done the minimum to keep our infrastructure, education and health care systems up to date.
"Proponents of these tax cuts, and therefore budget cuts, are ignoring the fact that these tax breaks take tax dollars away from necessary programs that draw businesses and their employees to our state and do very little to stimulate the economy," she said Friday.
In response to a recent Arkansas Freedom of Information Act request by the Arkansas Democrat-Gazette, the state Department of Finance and Administration provided copies of an individual income tax cut plan proposed by Sen. Jonathan Dismang, R-Searcy, and a different proposal drafted by the department.
The proposal by Dismang, who is co-chairman of the Joint Budget Committee, would merge the low- and middle-income tax tables so the state would have a "base" income tax bracket set (income of up to $82,000) and a high-income tax bracket set (income greater than $82,000).
His plan would reduce the top individual income tax rate from 5.9% to 5.7% on Jan. 1, 2022, and then to 5.5% on Jan. 1, 2023, and would fix the income tax cliffs between the tax brackets.
The top rate would apply to the net taxable income between $39,000 and $82,000 for people in the proposed base income tax table and to the income above $8,300 for people in the high income tax table.
Dismang's proposal also envisions reducing the top rate each Jan. 1 to 5.3% in 2024; to 5.1% in 2025; and to 4.9% in 2026.
He said the proposal reflects his work with House leaders.
Shepherd said there are many representatives who are interested in making a significant reduction in the state's top individual income tax rate.
The finance department projects this proposal would cumulatively reduce state general revenue by about:
• $96 million in fiscal 2022.
• $219.5 million in fiscal 2023.
• $274.3 million in fiscal 2024.
• $329.1 million in fiscal 2025.
• $383.9 million in fiscal 2026.
• $411.3 million in fiscal 2027.
Fiscal years start July 1, in the middle of the tax year.
Hutchinson is in his second four-year term and because of term limits will leave office in January 2023.
Asked whether the state can afford Dismang's proposal, finance department Secretary Larry Walther said, "We are probably going to be able to afford it.
"We already are $86 million above forecast for two months [in fiscal 2022]," he said.
The state projects a $17 million general revenue surplus in fiscal 2022.
Hickey said legislative leaders want Moody's Analytics Inc. to "calculate all the excess money that is coming in through the [federal coronavirus funding] stimulus."
"The one thing we got to know is exactly how much true money we got out there to spend, so, in other words, money that has not been created by these extraordinary items such as the pandemic funds, the stimulus funds, and the PPP [the Paycheck Protection Program] loans, the whole thing," he said. "We just want to make sure we are being diligent with those numbers."
Hickey said, "There is some thought that we may want to go ahead and factor in trying to get to a 4.9%.
"But we want to look at it from the basis that the money is there that we can do it," he said. "So we have toyed around doing a few things either like triggers or some of the members have even talked about somehow factoring that into the RSA [Revenue Stabilization Act] to have a category out there that shows the money that is parked out there to do that."
The Revenue Stabilization Act distributes state general revenue to state-supported programs and prevents deficit spending when general revenue collections drop too much.
Dismang said the state will be able to tap money from its long-term reserve fund to make up the difference if the general tax revenue dips below a certain threshold, "so there is a backstop."
"We are not going to find ourselves in a position like Kansas because of the long-term reserve [fund]," he said.
The state's long-term reserve fund balance totals $1.2 billion, said state Department of Finance and Administration spokesman Scott Hardin.
Asked whether the state can afford to cut the top individual income tax rate to 4.9%, Dismang said, "That's really something that we are going to have to wait and see how the economy moves.
"Part of the House's recommendation is to make sure we have some triggers, some safeguards or rails in place to ensure we can afford that greater cut in future years," he said.
The finance department's proposal would keep the three income tax tables and would:
• Reduce the top rate from 5.9% to 5.7% on Jan. 1, 2022, and then to 5.5% in 2023.
• Adjust the income tax brackets in the low-income tax bracket set.
• Trim the 5% rate level to 4.5% in the part of the middle-income tax table for people whose net income is between $22,900 and $38,499.
• Fix the income tax cliffs between the low- and middle-income tax bracket sets.
The finance department projects its proposal would cumulatively reduce state general revenue by:
• $70.9 million in fiscal 2022.
• $169.2 million in fiscal 2023.
• $196.6 million in fiscal 2024.
Revenue Commissioner Charlie Collins said the department's proposal "starts with the governor's 5.9[%] to 5.5[%], and then it kind of reflects where we have been along this journey of getting different ideas" from lawmakers.
"It's not like DF&A is saying this what we have to go do," he said.
Collins, a former legislator, said Dismang's proposal "does more for that group of people [who have net income of] $23,000 to $39,000 than the DF&A proposal."
Dismang said, "The folks in that income level really haven't received much of a tax cut because of the multiple tables, and this would allow them to share in some of the tax cuts. And we smooth that cliff and get down to just two tables."
He said combining the low- and middle-income tax tables also would make the state income tax code simpler.
Hutchinson said Dismang's proposal costs $25 million more in fiscal 2022 than the finance department's proposal, and $50 million more in fiscal 2024 after it is fully implemented. That comparison doesn't factor in the cost of reducing the 5.5% rate to 4.9%.
"We have got to make sure those numbers are right," the governor said. "We have got some more work to do that issue."
In 2015, the Legislature enacted Hutchinson's plan to cut individual income taxes for people with between $21,000 and $75,000 in net taxable income. According to the finance department, the change was eventually projected to reduce general revenue by about $102 million a year.
In 2017, lawmakers approved the governor's plan to cut income taxes for people with up to $21,000 a year in taxable income. According to the finance department, this was eventually projected to reduce revenue by $50 million a year.
Then in 2019, the Legislature signed off on Hutchinson's plan to phase in a reduction in the top rate from 6.9% to 6.6% in 2020 and to 5.9% on Jan. 1 of this year. According to the finance department, this was eventually projected to reduce general revenue by about $97 million a year.
Under its contract with the Bureau of Legislative Research, Moody's Analytics is supposed to deliver its report by Sept. 30, Hickey said. The consultant is scheduled to present its report Oct. 5. to the Senate and House Revenue and Taxation Committees, he said.
AXING INCOME TAX
Republican gubernatorial candidates Leslie Rutledge and Sarah Sanders have said they favor getting rid of the individual income tax.
In late July, Rutledge said she would try to qualify for the general election ballot a proposed constitutional amendment to eliminate the state individual income tax. She also signed a pledge not to raise taxes. Last month, she said she wants to eliminate the individual income tax over an eight-year period. She said that over the next few months, she will roll out details of her plans to reduce budgets in parts of state government to finance that.
Rutledge hasn't yet announced a formation of a ballot question committee for the proposed amendment, though her campaign manager Drew Evans said in late July that "a committee, separate from Attorney General's gubernatorial campaign will be announced in the coming days."
Asked why the formation of a committee hasn't been announced, Evans said last week that "the Attorney General has not made additional announcements regarding her plan to permanently eliminate the individual income tax through constitutional amendment."
He said that "the Attorney General believes that an aggressive plan to phase out the tax over an eight year period will allow lawmakers and taxpayers to shrink the size of government."
Asked over what period of time Sanders wants to eliminate the state's individual income tax, Sanders said in a written statement, "As governor, I will begin to phase out the state income tax to reward work, grow our economy, and create high paying jobs.
"This is a process that will take time, and it must be done responsibly."
During this year's regular session, state Sen. Trent Garner, R-El Dorado, introduced Senate Bill 522, which would have cut all individual income tax rates to zero, effective Jan. 1, 2022. Garner presented the bill to the Senate Revenue and Taxation Committee, but he didn't ask the committee to vote on it. He plans to pursue an interim study of the proposal.
Garner said, "I have strong concerns about decreasing taxes based on a surplus of funds that are due to one-time federal surplus monies."
SB522 would have led to a $3 billion reduction in state general revenue in fiscal 2023 based on net tax amounts reported on 2019 returns, according to a financial impact statement from the Department of Finance and Administration.
The general revenue budget that Hutchinson has proposed for fiscal 2023 is $6.01 billion with an additional $54.9 million to transfer to the long-term reserve fund, according to Hardin, the finance department spokesman. Most of the general revenue budget goes to help fund public schools, human service programs, colleges and universities, and public safety programs.
Asked about eliminating the state's individual income tax, Shepherd said, "I would love to see the day that we could get a zero state income tax.
"But I would always be concerned about what's the impact of that," he said. "We do have relatively low property tax rates. There are a lot of factors to this. I understand that we have neighbors that have no income tax, but their property tax is pretty high, so I understand that is a popular sentiment.
"At this point, you can do what you can do and what's responsible," Shepherd said.
Dismang said, "I think there is a great goal, but there is going to have to be a lot of work to be done to be able to get there."