To catch up on the Tax Reform Task Force proceedings from two weeks ago, essentially the Task Force continued the work of the prior month: (1) releasing draft bills for Task Force recommendations, (2) scrutinizing incentives, and (3) determining how to phase in the tax cuts and reforms.
The next meeting will be on November 27, with a goal of how to group the bills into legislative packages. The subsequent, and likely final meeting of the Task Force will be on December 12.
Bills, Bills, Bills
Much as at the prior meeting, the meeting on October 29 included a new batch of bills prepared by BLR and intended to implement the Task Force's recommendations. They are as follows:
- Tax credit and exemption evaluation by DFA: One of the recommendations of the task force is regular evaluation of credits and exemptions to see if they are working as intended. The draft bill proposes a comprehensive evaluation system, perhaps one that is too comprehensive. It calls for a biennial report by the Department of Finance and Administration (DFA) "on the effect of each exemption, discount, exclusion, credit, deduction, special accounting treatment, or special rate relating to state income tax and state sales and use taxes." Query why it does not extend to the various miscellaneous and excise taxes administered by DFA, or to local sales/use taxes and their revenue impacts. For major tax provisions that reduce revenue by more than 1% of the revenue from that tax, DFA must also include a distributional analysis.
- Nonprofit exemption simplification: The Arkansas sales tax has sales tax exemptions for sales to certain specifically named nonprofits. This bill changes exemptions to broader classifications. It does not go so far as providing a general exemption for 501(c)(3) tax-exempt entities or a general charitable exemption. Nonprofits and their stakeholders need to check to see how their organizations will be treated under this proposal.
- Corporate income tax rate reductions: This bill reduces the $75k-$100k corporate rate from 6.0% to 5.9% and provides a phased-in reduction of the top 6.5% rate to 5.9%. The exact phase-in of the top rate reduction is still-to-be-determined.
- Assessment Coordination Department mandatory guidelines: This would require the Assessment Coordination Department (ACD) to establish mandatory guidelines and rules for applying exemptions from ad valorem property taxation and for assessing business inventory. In considering this proposal, bear in mind that the Governor's proposed governmental reorganization would make ACD part of DFA, which generally adopts strict and narrow interpretation of tax exemptions.
- Transfer of Franchise Tax Administration to DFA: This bill would transfer corporate franchise tax administration to DFA and would integrate reporting with the income tax return. Assuming this goes through, expect DFA to be more active in auditing and enforcing franchise tax. The bill also would allow waiver of fees, penalty, and interest for dissolving "zombie" corporations that have ceased operation but which have not formally dissolved.
- Indexing motor fuel taxes: If the General Assembly cannot find the courage to raise fuel taxes to pay for roads, at least it can index current taxes to inflation to prevent further erosion of fuel tax revenue. This would be effective July 1, 2019, and so we could see tax increases as early as January 2020.
- Electric vehicle and hybrid registration fees: Annual extra registration fees of $100 per electric vehicle and $50 per hybrid vehicle would go to the highway fund.
Bills (JLL 057 and JLL 058) implementing the "Option A" and Governor's 2%-4%-5.9% income tax cuts plans were also introduced but the bills do not appear to have been posted on the BLR website at this time.
Credits Still Under Scrutiny
Most of the Task Force proceedings focused on various tax credits the state offers and whether their benefits justify the associated revenue cost. DFA written testimony responded to questions from the prior proceedings about the amount of credits utilized, about the state new markets tax credits, and about what taxpayers are claiming and using credits. The DFA presentation compared Arkansas's major specialized credit programs against those of other states in the region.
The credit most under scrutiny continues to be the premium tax home office tax credit, which gives a dollar-for-dollar premium tax credit for qualifying employee compensation by life and health insurers in Arkansas. The Arkansas Insurance Department provided a comparison of Arkansas's premium tax and credits structure versus those of neighboring states and also consideration of home office jobs credit and state new markets tax credit. Nicole Kaeding from the Tax Foundation gave a brief presentation identifying the home office tax credit, low-income housing tax credit, and new markets tax credit as inefficient or ineffective premium tax credits. DFA also answered a technical question about whether eliminating the home office credit could cause Arkansas to lose its Arkansas Works Medicaid section 1115 waiver, which should not be the case so long as the repeal is properly structured. Overall, the Task Force seemed skeptical about the need for the home office tax credit.
Mike Preston from the Arkansas Economic Development Commission testified about tax policy and tax credits. He advocated for rate cuts, single sales factor apportionment, and throwback repeal as key policies to keep the state competitive for projects. He also defended the equity investment "angel" tax credit and the tourism development tax credit. Randy Zook from the Arkansas State Chamber followed Mr. Preston, largely agreeing with his testimony and also emphasizing the relative importance of net operating loss (NOL) carryforward extension to prevent double-taxation.
Phase-Ins and Triggers for the Package
The Task Force is still grappling with how to phase in its tax cuts package. The Bureau of Legislative Research provided one proposal, which would front-load individual income tax cuts and save the business tax reforms for a few years down the road. The proposal also offered some potential triggers that could be used. The Indiana automatic tax refund trigger was also considered.
Nicole Kaeding from the Tax Foundation also offered testimony about triggers and phase-ins, generally preferring triggers but recognizing either approach as valid. Her suggested approach would include the apportionment and NOL reforms in the first tranche of reforms to go into effect.