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Tax cut bills approved by Arkansas House, Senate

GOP seeks to wrap up, others seek more time by Michael R. Wickline, Stephen Simpson | August 11, 2022 at 7:14 a.m.
Sen. Keith Ingram raises a question about federal American Rescue Plan funds Wednesday during debate in the Senate on the tax cut bill. At right is Sen. Joyce Elliott, D-Little Rock. (Arkansas Democrat-Gazette/Thomas Metthe)

Identical tax cut bills that would accelerate the implementation of the cut in the state's top individual income tax rate from 5.5% to 4.9%, retroactive to Jan. 1, 2022, zipped through the Arkansas House of Representatives and Senate on Wednesday.

The measures also would accelerate the implementation of the reduction in the state's top corporate income tax rate from 5.9% to 5.3%, effective Jan. 1, 2023.

In addition, the tax cut bills would grant 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, and enable the state to adopt a federal depreciation schedule for businesses.

The House and Senate's approval of the identical tax cut measures came on the second day of a special session called by Gov. Asa Hutchinson to consider the four-pronged tax cut package agreed upon by the Republican governor and Republican legislative leaders and to provide $50 million in surplus funds to a reserve fund for a school safety grant program that hasn't been developed yet.

"This has been a good day for the taxpayers of Arkansas with the passage of the $500 million tax relief bills in both the House and the Senate with $400 million going to individuals this year," Hutchinson said late Wednesday afternoon in a written statement.

He said he is grateful for the overwhelming support of the General Assembly, and "it could not come at a better time with the continued challenge of high food and gas prices."

Republican legislative leaders said they hope to wrap up the special session this morning.

Democrats in the House and Senate said they intend to seek a two-thirds vote in the 100-member House and 35-member Senate this morning to extend the special session to consider several bills such as measures to increase teacher pay, to change state law that allows abortions only to save the life of the mother in a medical emergency in order to allow abortions in case of rape, incest or terminal fetal abnormality, and an alternative to the Republican tax cut measures.

"We are hopeful, but not confident that we will get the two-thirds votes in each chamber to extend the session," said Sen. Clarke Tucker, D-Little Rock.

Hutchinson declined to put teacher raises on the call for the special session, citing the lack of support in the Republican-dominated Legislature for considering teacher pay raises in the special session, after he floated proposals to boost teacher salaries in the special session.

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 identical tax cut bills are House Bill 1002 by Rep. Joe Jett, R-Success, and Senate Bill 1 by Sen. Jonathan Dismang, R-Searcy.

The measures are projected to reduce state general revenue by $500.1 million in fiscal 2023 that started July 1, $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.

The state Department of Finance and Administration projected a general revenue surplus of $914 million in fiscal 2023.

The enactment of HB1002 would leave the state with a projected general revenue surplus of about $400 million in fiscal 2023, Jett told the House Revenue and Taxation Committee on Tuesday. The state's general revenue budget is $6.02 billion in fiscal 2023.

The state's general revenue surplus totaled $1.628 billion in fiscal 2022 that ended June 30. The state's general revenue budget totaled $5.84 billion in fiscal 2022.

On Wednesday, the House of Representatives voted 81-14 to approve the tax cut bill -- House Bill 1002 by Rep. Joe Jett, R-Success. The Senate Revenue and Taxation Committee later recommended the Senate approve the bill. The Senate will consider the bill this morning.

Seventy-seven House Republicans voted for the bill, along with Democratic state Reps. David Fielding of Magnolia, Deborah Ferguson of West Memphis, Steve Magie of Conway, and Milton Nicks of Marion. Fourteen House Democrats voted against the bill, and four Democrats and a Republican representative didn't vote on the bill.

The Senate voted 29-5 to approve Senate Bill 1. The House Revenue and Taxation Committee later recommended the House approve the bill. The House will consider the bill this morning.

Twenty seven Senate Republicans voted for the bill, along with Democratic Sen. Larry Teague of Nashville and independent Sen. Jim Hendren of Sulphur Springs. Five other Senate Democrats voted against the bill and one Senate Democrat was absent.

More than 1.6 million taxpayers who pay income tax would receive an income tax reduction under the measures, according to the state Department of Finance and Administration.

In the Dec. 7-9 special session, the Legislature and Hutchinson enacted several tax cuts that the finance department projected would reduce state general revenue by $132.25 million in fiscal 2022 that ended June 30 and the amount would gradually increase to nearly $497 million in fiscal 2026.

Under Senate Bill 1 and House Bill 1002, the tax cut 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 dropped from 5.9% to 5.5% on 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 the state law enacted in the December special session.

This proposal is the most expensive part of the tax cut package. The finance department projects 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 the state law enacted in the December special session.

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, dubbed an inflationary relief income tax credit, 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 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 more in fiscal 2027.

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, according to 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 Jan. 1, 2009, and the dollar limitation on the deduction is $25,000 and the dollar-for-dollar phase-out starts at $200,000, according to Hardin. The federal limitation is adjusted for inflation each year.

In the House on Wednesday, Jett told colleagues the elephant in the room that he has received the most calls about is the possibility the federal government could claw back several hundred million dollars in federal American Rescue Plan funds from Arkansas if the proposed tax cuts are enacted.

Jett said his understanding is that as long as federal American Rescue Plan funds are not used to offset tax cuts, the state should be in good standing with the federal government.

"No money that has been used from the [American Rescue Plan Act] has been used to offset anything in our budget regardless of what anybody read, heard or said," he said.

The state has about $876 million in remaining federal American Rescue Plan funds, finance department Chief of Staff Alan McVey said afterward.

On the other side of state Capitol, Senate Democratic leader Keith Ingram of West Memphis told colleagues the state has accepted a total of $1.8 billion in federal American Rescue Plan funds under certain conditions, and the state could potentially lose its remaining federal American Rescue Plan funds with these proposed tax cuts.

"Why would we risk losing $800 million or $900 million in [American Rescue Plan] funds that will be used to fix infrastructure problems that we have struggled with for years?"

Dismang countered there is no question about the legality of passing the proposed tax cuts.

Paul Gehring, an assistant revenue commissioner for the state, told the Senate Revenue and Taxation Committee on Tuesday that any risk of recoupment of these federal funds from the state as a result of the tax cut bill is "minimal or close to zero."

Dismang said he has been a leading critic of the finance department and provided oversight of the finance department, but he agrees with the department's' analysis about this matter.

"I feel fairly confident that there will be no clawback," he said.

The state is able to afford to cut taxes because inflation is driving up the state's general revenue tax collections and inflation is hurting Arkansans, so the state should return some of its inflated tax collections to taxpayers, he said.

Jett told colleagues in the House that HB1002 adopts the federal Section 179 depreciation schedule that would "absolutely benefit hard-working Arkansans that own businesses, farms and ranchers."

State Rep. Andrew Collins, D-Little Rock, who voted against HB1002, said he agrees with adopting the federal depreciation schedule.

But he said the bill represents a tax cut for the wealthy that wouldn't move the needle for the state in the ways that matter, and will be stimulus for the rich that would increase inflation.

He said a taxpayer with about $400,000 in net income could save about $2,000 under the bill, but he questioned whether that's going to cause this type of taxpayer to hire a bunch of employees, expand his business, change his spending habits or pay employees a living wage.

The temporary nonrefundable income tax credit of $150 for individual taxpayers with net income up to $87,000 is the only part of the bill that benefits the working class, lower-individual Arkansans, he said.

"One hundred and fifty dollars might get you two tanks of gas," he said.

But Jett countered that "we are going to have a honest conversation about who benefits from this bill [and] all Arkansans benefit from this.

"Why would we not include people who have been well off and been protected members of our society? Why would we not want to include them?"

Jett said taxpayers, who have net income up to $87,000, would pay a 4.9 % individual income tax rate on their net income of at least $23,600 under HB1002.

"Somebody go out to the public here in Arkansas and find somebody that is making $23,600 and you ask them if they are wealthy. I am telling you $23,600 is not a lot of money," he said. "Those folks are getting the benefit of what we are doing here today, so it's not just for the wealthy."

A taxpayer with net income of $26,526 would get a tax cut of $365 in tax year 2022, Jett said. That finance department estimate factors in the impact of the tax cuts enacted in the December special session and the proposed tax cuts agreed upon by the governor and legislative leaders in this week's special session.

The finance department estimates that a taxpayer with $250,000 in taxable income would save $2,417 in taxes in tax year 2022 as a result of the tax cuts enacted in the December special session and the proposed tax cuts, agreed upon by the governor and legislative leaders, in this week's special session.

But House Democratic leader Tippi McCullough of Little Rock said she would rather see the state's general revenue surplus used for teacher and support staff raises, a housing trust fund, mental health resources and more.

"We we have the money to fund our most essential state services but we refuse to do so and sit on our hands," she said. "We can hardly call that a surplus."

The state's general revenue allotment reserve fund balance totals $1.378 billion after that much of the state's $1.628 billion general revenue surplus in fiscal 2022, which ended June 30, was transferred to that reserve fund, and the other $250 million of the general revenue surplus was distributed to other funds as already authorized by the governor and the Legislature, according to the finance department.

The state's other reserve funds include the state's catastrophic reserve fund with a balance of $1.21 billion, the state's restricted reserve fund with a balance of $187.3 million, and the state's rainy-day fund with a balance of $6.1 million, according to the finance department.

Late Wednesday afternoon, Republican governor nominee Sarah Huckabee Sanders praised Hutchinson and House and Senate Republicans in a tweet "for providing much needed tax relief for Arkansans.

"Inflation under [President Joe] Biden is a pay cut for all, and when I'm governor, I'll continue to responsibly phase out the state income tax to give our workers a pay raise," Sanders said in her tweet.

Democratic gubernatorial candidate Chris Jones said Wednesday night in a written statement that this "accelerated tax cut ... provides some relief, but we could have gone further to ensure we are reducing the burden for working families first and foremost, and investing where Arkansans could really feel a difference.

"I'm particularly disappointed that our Legislature continues to hold back on standing up for our kids by closing the gaps on teacher pay," he said. "They still have time and I hope to see them act."


  photo  Rep. Michelle Gray (center), R-Melbourne, confers with colleagues DeAnn Vaught, R-Horatio, and John Maddox, R-Mena, during the House session Wednesday at the state Capitol. House and Senate approval of identical tax cut measures came on the second day of the special session. (Arkansas Democrat-Gazette/Thomas Metthe)
 
 


  photo  “No money that has been used from the [American Rescue Plan Act] has been used to offset anything in our budget regardless of what anybody read, heard or said,” Rep. Joe Jett said Wednesday on the House floor. (Arkansas Democrat-Gazette/Thomas Metthe)
 
 


  photo  2022 Tax brackets
 
 


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