In a special session starting Tuesday, the Arkansas General Assembly will consider granting a temporary nonrefundable income tax credit of $150 for individual taxpayers with net income up to $87,000 and of $300 for married taxpayers filing jointly with net income up to $174,000 as a part of a four-pronged tax cut measure.
The temporary tax credit is dubbed an inflationary relief income tax credit in a draft bill.
Lawmakers also will consider accelerating the implementation of cuts in the state's top individual and corporate income tax rates that are scheduled to be phased in the next few years under current state law, and adopting a federal depreciation schedule for businesses in the tax cut legislation. They also will weigh providing $50 million in state funds to a reserve fund for a school safety grant program.
Republican Gov. Asa Hutchinson declined to put teacher raises on the call for the special session that he issued late Friday afternoon, citing the lack of support in the Republican-dominated Legislature for considering teacher pay raises in the special session. This action came after the governor, who is weighing a possible bid for president in 2024, surprised some lawmakers by floating proposals to boost teacher salaries in the special session.
House and Senate Democrats said they favor increasing teacher salaries in the special session, but it's unclear whether there will be an attempt to seek a two-thirds vote in the House to extend the special session to consider other issues such as teacher pay raises. A two-thirds vote in both chambers is required to extend the special session.
"We have to do much more to ensure that we are recruiting and retaining great teachers," House Democratic leader Tippi McCullough of Little Rock said. "That starts with a fair salary."
Republican legislative leaders said they want lawmakers to consider increasing teacher pay during the 2023 regular session, starting Jan. 9, after the House and Senate education committees complete their biennial educational adequacy review this fall.
The four-pronged tax cut package that Hutchinson and Republican legislative leaders have agreed upon for the special session is projected to reduce state general revenue by $500.1 million in fiscal 2023, $166.6 million more in fiscal 2024, $69.5 million more in fiscal 2025, $18.4 million more in fiscal 2026 and $8.4 million more in fiscal 2027, according to the state Department of Finance and Administration.
Asked why the proposed tax credit for low and moderate-income taxpayers would be temporary, while the proposed acceleration of the implementation of the cut in the state's top individual income tax would be permanent in next week's special session, Sen. Jonathan Dismang, R-Searcy, said that's because the income tax relief package enacted in the December special session was "front-loaded for middle- and low-income" taxpayers, effective Jan. 1, 2022.
He noted that reducing the top individual income tax rate to 4.9%, effective Jan. 1, 2022, would "have an impact" for taxpayers with net income of up to $87,000 on their income beyond $24,300.
In the December special session, the Legislature and Hutchinson enacted laws to gradually reduce the state's top individual and corporate income tax rates; consolidate the state's low- and middle-income tax tables; require the state to increase the standard deduction by the cost-of-living adjustment; create a nonrefundable income tax credit of $60 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.
Those tax cuts were projected by the state Department of Finance and Administration to reduce state general revenue by $135.25 million in fiscal 2022, which ended June 30, and gradually increase that amount to nearly $497.9 million in fiscal 2026. The tax cut started midway through fiscal 2022.
Asked why the proposed tax credit for low and moderate income taxpayers would be temporary while the proposed acceleration of the implementation of the cut in the state's top individual income tax rate would be permanent in next week's special session, Hutchinson said, Friday in a written statement, that "While hundreds of millions of dollars remain in the pockets of Arkansans each year because of previous tax cuts, my goal with this special session is to provide quick relief to taxpayers to offset challenges related to inflation.
"The $156 million tax credit accomplishes this objective," he said.
TOP INDIVIDUAL, CORPORATE RATES
Arkansas' top individual income tax rate is now 5.5%.
According to the finance department, the current top individual income tax rate is 5.4% in Missouri, 5% in Mississippi, 4.75% in Oklahoma, 4.25% in Louisiana and zero in Tennessee and Texas.
The top individual income tax rate is scheduled to drop to 4.7% in Mississippi in 2024 and to 4.4% in 2025, according to the finance department.
Arkansas' top corporate income tax is now 5.9%. The tax-cut legislation would trim that to 5.3%, effective Jan. 1, 2023.
According to the Tax Foundation, the top corporate income tax rate is 7.5% in Louisiana, 6.5% in Tennessee, 5% in Mississippi, 4% in Missouri and Oklahoma and zero in Texas, which instead has a tax on businesses' gross receipts.
Dismang said reducing Arkansas' top individual income tax rate to 4.9% is a "recruitment tool."
"It prevents is us from falling further behind our neighbors," he said.
Hutchinson said that accelerating the reductions in the state's top individual income tax rate make Arkansas' tax rate "very competitive with our surrounding states.
"Even though Texas and Tennessee have 0% income tax rate they have other tax differences," he said. "Arkansas is competitive with this reduction."
Rep. Andrew Collins, D-Little Rock, said Friday he plans on filing legislation under the call for the special session "as an alternative to the Republican bill that reflects our support for middle-class and working-class tax relief and business investment.
"Our bill doubles their inflationary relief tax credit and makes it refundable," he said in a written statement. "It makes an identical change to Section 179 depreciation [for businesses]. It leaves the top tax rates alone because we believe giving teachers a raise should be a higher priority than another tax cut for top earners."
Collins said he projects his bill would reduce state general revenue by about $367 million in fiscal year 2023.
In tax year 2020, there were 291,022 taxpayers with net income of at least $87,001 who paid $2.009 billion in individual income taxes, 420,531 taxpayers with net income of between $40,000 and $87,000 who paid $708.8 million in individual income taxes, and 1,210,787 taxpayers with net income of up to $40,000 who paid $327.9 million in individual incomes taxes, according to the finance department.
The tax package includes:
• Accelerating the implementation of cutting the state's top individual income tax rate from 5.5% to 4.9%, retroactive to Jan. 1, 2022. The state's top individual income tax rate is scheduled to be cut to 5.3% on Jan. 1, 2023, to 5.1% on Jan. 1, 2024, and to 4.9% on Jan. 1, 2025, under current state law.
The finance department projects that this proposal would reduce state general revenue by $295.9 million in fiscal 2023, $114 million more in fiscal 2024 and $39.15 million more in fiscal 2025 to eventually provide tax relief totaling $449 million a year.
• Accelerating the reduction in the state's top corporate income tax rate to 5.3% on Jan. 1, 2023. Arkansas' top corporate income tax rate of 6.2% dropped to 5.9% on Jan. 1, 2022. The rate is scheduled to drop to 5.7% on Jan. 1, 2023, to 5.5% on Jan. 1, 2024, and to 5.3% on Jan. 1, 2025, under current state law.
The finance department projects this proposal would reduce general revenue by $18.5 million in fiscal 2023, $27.8 million more in fiscal 2024, and $9.2 million more in fiscal 2025 to eventually provide $55.6 million a year in total tax relief.
• Granting a temporary nonrefundable income tax credit of $150 for individual taxpayers with net income up to $87,000 -- with a phase out of the credit for filers having net income of up to $101,000 for tax year 2022 -- and of $300 for married taxpayers filing jointly with net income up to $174,000 -- with a phase out of the credit for filers having net income up to $202,000 for tax year 2022. These taxpayers will be required to be full-time residents of Arkansas to receive the tax credit.
The finance department projects this proposal will reduce general revenue by $156.3 million in fiscal 2023.
• Adopting the 2022 federal Section 179 depreciation schedule as it existed Jan. 1, 2022, which provides an income tax reduction for the expensing of certain property.
The federal Section 179 depreciation schedule allows businesses to deduct the entire purchase price of new or used equipment up to $1.08 million in 2022 rather than capitalizing and depreciating the asset over the designated useful life of the asset, said finance department spokesman Scott Hardin. The $1.08 million deduction is reduced dollar for dollar if asset purchases exceed $2.7 million for 2022, he said.
Arkansas previously adopted Section 179 as it existed on Jan. 1, 2009, and the dollar limitation on the deduction is $25,000 and the dollar-for-dollar phase-out starts at $200,000, he said. The federal limitation is adjusted for inflation each year, he said. Arkansas doesn't plan on adopting federal bonus depreciation, which also allows 100% of the cost of equipment purchases to be written off when purchased, but does not have a maximum dollar limitation, he said.
The finance department projects this proposal would reduce general revenue by $29.4 million in fiscal 2023, $24.8 million more in fiscal year 2024, $21.1 million more in fiscal 2025, $18.4 million more in fiscal 2026 and $8.4 million in fiscal 2027.
The state collected a record general revenue surplus of $1.628 billion in fiscal year 2022 that ended June 30, and the finance department is projecting a $914 million general revenue surplus in fiscal 2023, which started July 1 and ends June 30, 2023.
Last month, $1.378 billion of the $1.628 billion general revenue surplus in fiscal 2022 was transferred to the general-revenue allotment reserve fund, and the other $250 million of the general revenue surplus was distributed to other funds as authorized by the governor and the Legislature, according to Hardin. He said $150 million was transferred to a restricted reserve fund for various improvements and projects, including a proposed prison expansion, that require a majority vote of the Legislative Council to fund, $50 million to the law enforcement officers' stipend grant fund, and $50 million to the state highway and transportation fund to match federal highway funds.
Hardin said last week the state's general revenue allotment reserve balance is $1.37 billion, and the state's catastrophic reserve fund balance is $1.21 billion. The state's restricted reserve fund balance is $187.3 million, and the state's rainy-day fund balance is $6.1 million, he said.
While proponents of cutting the state's top individual income tax rate say they want to make the state more competitive with surrounding states, supporters for raising teacher pay in the special session said they want Arkansas to provide teacher salaries that are more competitive with surrounding states.
Asked whether making the state's income tax rates competitive with surrounding states or making teachers' salaries competitive with surrounding states is more important, Hutchinson said Friday in a written statement that "Both are important."
State Department of Education Secretary Johnny Key has pointed out that going into the 2022-23 school year, base salaries in Oklahoma, Missouri, Tennessee and Mississippi are all higher than Arkansas, and Mississippi just increased its base salary to $41,500 along with an approximately $5,000 salary increase for every teacher.
Under Act 170 of 2019, the minimum teacher salary in Arkansas was $34,900 in the 2021-2022 school year and increases to $36,000 in the 2022-2023 school year.
Hutchinson initially proposed raising teacher salaries to a minimum of $46,000 and implementing at least a $4,000 salary increase at a projected cost of $333 million. After some lawmakers balked at the cost of his initial proposal, the governor subsequently trimmed it to increase the minimum teacher salary to $42,000 a year and provide a $4,000 increase to every teacher for the 2022-2023 school year.
The trimmed-down proposal's total cost of $150 million for fiscal 2023 would come out of the fiscal 2022 surplus, and the public school fund would need $140 million in ongoing general revenue in fiscal 2024 under this proposal. The $60 million in additional needed funds would come from combined growth in the educational adequacy fund, educational excellence trust fund, and uniform rate of tax, according to Key.
Several days ago, House and Senate Democrats released a proposal patterned after Hutchinson's trimmed-down proposal to raise teacher salaries by $4,000 and raise the minimum teacher salary from $36,000 to $42,000.
They said their Raising Arkansas's Investment in Schools and Educators (RAISE) Act would use $600 million from the state's $1.6 billion surplus to create a fund that will allow the raises to be indefinitely sustainable based on current projections, and urged Hutchinson to include their proposed legislation in the August special session. Hutchinson declined to do so, saying, "The House and Senate leadership has indicated that there is insufficient support among the members for a teacher pay increase in a special session."
House Speaker Matthew Shepherd, R-El Dorado, said last week he doesn't support boosting teacher pay in a special session out of state surplus funds.
"I anticipate there will be increases in teacher pay as we move forward," and historically the best way to do that is through the House and Senate education committee's educational adequacy review, he said.
Key noted the General Assembly has taken action to increase teacher pay in every session from 2015 to 2021, "and I don't know a single legislator opposed to higher pay for teachers.
"Clearly, however, we must take additional action to increase teacher pay for Arkansas to attract and retain teachers and remain competitive with surrounding states," he said in a written statement.
"I am optimistic that we can still be a leader in the region for teacher salaries, and I am committed to working with Sen. [Missy] Irvin, Rep. [Bruce ] Cozart, and the education committees through the adequacy process to develop a plan that will accomplish that goal," Key said.
Irvin, a Republican from Mountain View, chairs the Senate Education Committee. Cozart, a Republican from Hot Springs, chairs the House Education Committee.