Arkansas Tax Reform and Relief Legislative Task Force members discussed three tax credits for possible elimination on Monday, October 29th.

The three insurance premium tax credits include the New Market Tax Credit ($16 M), the Low-Income Housing Tax Credit ($1 M) and the Home Office Tax Credit ($61 M). In total, these three credits cost the state approximately $78 million annually, according to the .

Insurance Premium Tax Credits

Task force members have spent the last year searching for credits and exemptions across the tax code to help raise revenue to help fund a broad tax reform package for the upcoming legislative session. Members heard from two experts last Monday about three insurance premium tax credits.

Arkansas currently has a . The insurance premium tax is a tax paid by insurance companies doing business in Arkansas.

Both speakers at the meeting agreed the revenue lost from these credits could be put to other uses, but differed on their solutions.

Arkansas Insurance Department Commissioner Allen Kerr said revenue savings from credit elimination or reform should go towards reducing the insurance premium tax rate in the state to better attract insurance businesses to the state.

Kerr said:

In order to draw business to Arkansas one of the best ways to do it is to reduce your overall (insurance premium) tax rate. If a state like Texas has a 1.75 percent tax rate for instance, there’s going to be a lot of companies build home offices in Texas.”

Nicole Kaeding, Director of Federal Projects at the Tax Foundation, said there was an “economic impact” from higher insurance premium tax rates, but these effects were “much lower” than taxes that are relatively high such as individual and corporate income taxes in Arkansas.

Kaeding is a co-author with BT����Assistant Professor of Economics ACRE Scholar Jeremy Horpedahl and other Tax Foundation experts in their book, ‘.’

Kaeding said:

I’d rather see you mitigate the more harmful taxes than the one that is less harmful. I think that these credits could easily be eliminated and that money could be spent elsewhere. I’m always thinking about how do we maximize economic growth. I think here the literature tells us that the Insurance Premium Tax is not as harmful as other taxes and if you can use these credits to offset other taxes that would be a better trade.”

Kaeding said both the New Market and Low-Income Tax Credits duplicate other programs, are complicated, and don’t tend to benefit low-income areas.

Kaeding said:

The literature is pretty clear that these credits are not effective. They tend to go to projects that probably would’ve been completed anyways.”

Task force co-chair Sen. Jim Hendren said after the meeting that the task force would decide in the next two months whether to make no changes or use the revenue savings to reduce taxes.

Tax Reform vs. Tax Incentives

In other task force news, Mike Preston, executive director of the Arkansas Economic Development Commission, discussed how Arkansas’s tax structure places it at a “competitive disadvantage” when competing for jobs nationwide. Among the areas Preston mentioned, were Arkansas’s top individual income tax rate of 6.9 percent and a corporate tax rate of 6.5 percent.

Preston said:

If you can correct the tax policy, you can lessen the amount of incentives we’d need.We have incentives that kind of help offset our tax policy. The way we stay competitive is we have to offer incentives to do that. That’s why we’ve been able to compete on projects. If we could find a way to bring that a little lower, that would lessen the emphasis that we’re putting on the incentives to make up that tax policy.”

Bills for 2019 Legislative Session

The task force also discussed seven bills to possibly be considered in the 2019 legislative session based on some previous task force policy recommendations.

as follows:

• An act to require biennial reports of tax exemptions, deductions, discounts, exclusions, credits, deductions, special accounting treatments and special rates relating to income tax, sales tax and use tax.
• An act to repeal certain sales tax exemptions for named entities and to create sales tax exemptions for various types of organizations.
• An act to reduce the corporate income tax rate on net income exceeding $100,000 from 6.5 percent to 5.9 percent.
• An act to provide for guidelines and penalties related to assessments for purposes of property taxes and to require the Assessment Coordination Department to establish mandatory guidelines for counties.
• An act to transfer the administration and collection of the franchise tax to the Department of Finance and Administration and to eliminate the franchise tax penalty on closed businesses.
• An act to provide for the annual indexing of motor fuel taxes and special fuel taxes to the consumer price index.
• An act to impose an additional registration fee on electric vehicles and hybrid vehicles. Revenues from these fees will be dedicated to highway funding.

Next Meeting

Task force members will meet again on 9 a.m., November 27th.

The Arkansas Tax Reform and Relief Legislative Task Force during the 2017 legislative session to:

• Modernize and simplify the Arkansas tax code
• Make the Arkansas tax laws competitive with other states in order to attract businesses to the states
• Create jobs for Arkansans
• Ensure fairness to all individuals and entities impacted by the tax laws of the State of Arkansas

More of ACRE’s research on taxation can be found here.

And then there were three.

Three tax reform proposals were selected by the Arkansas Tax Reform & Relief Task Force as worthy of further study by outside consultants on June 26th.

Income Tax Proposals

The three proposals include a plan previously announced by Gov. Asa Hutchinson and two new plans. Hutchinson’s plan includes a reduction in the top individual income tax rate from 6.9 percent to 6 percent. The two other proposals include reducing the top individual income tax rate while also simplifying the tax code by reducing the number of individual income tax tables from three to one. The “Option A” proposal would cut the top individual income tax rate from 6.9 percent to 6 percent. The “Option B” proposal would cut the rate from 6.9 percent to 6.5 and include an earned income tax credit. There could also be various changes to the corporate income tax, and not just lowering the rate. Possible changes include modifications to net operating losses (how many years a business can carry forward losses), the throwback rule, and corporate income tax apportionment (these last two apply to businesses operating in more than one state).

These rate and table reductions are similar to the reform suggestions outlined by ACRE scholar Jeremy Horpedahl and Tax Foundation experts in their book, ‘.’ In the book they outlined two plans that would consolidate the income tax tables from three to one, reduce the top tax rate to either 5 or 6 percent, and lower other tax rates as well (see ).

According to the , “Option A” would cost the state $276 million in revenue annually while “Option B” would reduce revenue by $125 million. Both of these estimates are about $80 million more than previously estimated by the state’s Department of Finance and Administration. These two options and the Governor’s plan have been sent to Regional Economics Models Inc. at Amherst, Massachusetts to estimate of the economic effects of lowering taxes in these ways.

‘Arkansas: The Road Map to Tax Reform’ authors recommend repealing certain sales tax exemptions to mitigate the effects of lost revenue from possible income tax cuts, but the task force has so far been hesitant to propose any substantial exemptions for repeal.

Nicole Kaeding, Special Projects Director with the Tax Foundation, recommended task force members cut the top marginal income tax rate below 6 percent while also consolidating the state’s three income tax brackets.

Kaeding said in her presentation to the task force on June 21st:

I think it’s important because it will bring you closer in line to all of your neighboring states. You all at 6.9 for a top rate kind of stick out in the region.”

Kaeding will present to the task force this Friday, July 27th at their 9 a.m. meeting on Arkansas’s overall tax burden and tax triggers. You can read the agenda for the meeting .

While income tax changes have made the most headlines in tax reform news in recent weeks, task force members have also suggested property and excise taxes for further study.

Property Tax Proposals

The following is a list of property tax proposals approved for further study by the , but this list will be narrowed down at a future meeting:

• Create an individual income or corporate income tax credit or deduction to offset the ad valorem (assessed value) personal property tax paid on business inventory (Rep. Cavenaugh and Rep. Dotson)
• Repeal the Arkansas corporate franchise tax (Rep. Dotson, Rep. Johnson, and Sen. Irvin)
• Implement a tax deduction or tax credit to be taken against Arkansas individual income tax liability or corporate income tax liability to offset payments made under the Arkansas corporate franchise tax (Sen. Irvin)
• Reduce the rate of the Arkansas corporate franchise tax from three-tenths percent (0.3%) to one-tenth percent (0.1%) under Arkansas Code § 26-54-104 for corporations, banks, and mortgage loan corporations with outstanding capital stock (Rep. Cavenaugh)
• Amend Arkansas law to create uniform and transparent statewide guidelines for assessing property that is exempt from ad valorem (assessed value) taxation (Sen. Hendren, Sen. Elliott, Sen. Hester, and Sen. Irvin)
• Amend Arkansas law to transfer the Assessment Coordination Department (ACD) into the Department of Finance and Administration (DFA) (Sen. Irvin)
• Use the excess funds in the Property Tax Relief Trust Fund from the one-half cent (0.5¢) sales tax under Arkansas Code §§ 26-52-302(c) and 26-53-107(c) that are not used to fund the homestead tax credit under Arkansas Constitution (Sen. Hendren)

Excise and Miscellaneous Tax Proposals

The following is a list of excise and miscellaneous tax proposals approved for further study by the task force on :

Cigarettes, E-cigarettes, Alcoholic Beverages

• ��Create an e-cigarette tax (Sen. Wallace)
• Levy a tax on e-cigarettes that is equal to the tax on other tobacco products (Rep. Cavenaugh, Rep. Pitsch)
• Levy a tax on e-cigarettes that is “middle of the road” among other states (Sen. Irvin) Cigarette Taxes
• Increase the excise tax on cigarettes to $1.30 per pack and use resulting revenues to reduce income tax burden (Sen. Irvin)
• Increase the cigarette tax to $1.65 per pack (Sen. Wallace)
• Convert the excise taxes on alcoholic beverages from a volume-based tax to a percentage of the purchase price (Sen. Hendren)
• Increase the excise taxes on wine and beer (Sen. Wallace)
• Levy a special excise tax on alcoholic beverages, cigarettes, and other tobacco products (Rep. Johnson)

Fuel and Vehicle Tax Proposals

• Index the excise taxes on fuel using a combination of the Consumer Price Index, fuel efficiency, and income (Sen. Hendren)
• Index the excise taxes on fuel using several factors, such as the Consumer Price Index, population, personal income growth, and other indexes and implement a floor and ceiling on the tax (Sen. Irvin)
• Index the excise taxes on fuel using the inflation of construction costs (Rep. Johnson)
• Index the excise taxes on fuel using inflation (Rep. Pitsch, Sen. Wallace)
• Impose an indexed retail sales tax on fuel using Arkansas highway construction costs and to implement a floor and ceiling on the tax (Rep. Jett)
• Impose a road-user fee for electric/hybrid vehicles at the point of registration (Sen. Irvin)

Tax Reform in Arkansas

The Arkansas Tax Reform and Relief Legislative Task Force during the 2017 legislative session to:

• Modernize and simplify the Arkansas tax code
• Make the Arkansas tax laws competitive with other states in order to attract businesses to the states
• Create jobs for Arkansans
• Ensure fairness to all individuals and entities impacted by the tax laws of the State of Arkansas

Members of the task force have a September 1st deadline to submit a report to the Governor, Speaker of the House and President Pro Tempore of the Senate that contains the task force’s recommendations for tax reform.

For further information, you can read Learning from Other States’ Successes and Failures in Tax Reform by Horpedahl and Kaeding. Their op-ed on the same topic “Reform Taxes Now” in the Arkansas Democrat-Gazette on May 21st can be read . More of ACRE’s research on taxation can be found here.