Tax Reform Task Force Sees Draft Bills, Scrutinizes Credit Programs, and Weighs Tax Triggers and Revenue Projections

The Arkansas Tax Reform and Relief Legislative Task Force convened again on September 26 and 27 to hear additional testimony and refine its proposals.  It was an eventful day-and-a-half:  Draft bills for some Task Force proposals were introduced.  The Task Force scrutinized tax credit programs with an eye toward raising revenue.  And Task Force members debated how to structure long-term implementation of the Task Force's planned cuts and reforms.

Draft Bills Offered for Consideration

Once the Task Force report was final, the Bureau of Legislative Research (BLR) began drafting bills to implement the Task Force's recommendations.  BLR has not yet had time to work on all of them.  The first batch of bills are as follows:

  1.  Omnibus sales tax legislation: This bill includes the following Task Force sales tax recommendations:
    1. Remote seller (Wayfair) legislation: It would copy South Dakota style economic nexus thresholds.  (Section 3.)  The old click-through and affiliate nexus provisions also would be repealed.  (Section 2.)  At this time the bill language does not include marketplace collection provisions.  Economic nexus would not "be applied retroactively."  The drafted effective date is refers to tax years beginning after January 1, 2019.  Presumably BLR was moving fast and it will be revised to something more consistent with monthly sales tax reporting periods.  But expect the remote seller collection obligation to kick in sometime in early-to-mid 2019. 
    2. Repeal of the weekly periodicals (magazine) exemption.  (Section 5.)
    3. Administration of the ATV sales tax exemption as a rebate instead of a normal exemption.  (Section 6.)
    4. Expansion of the car wash sales tax exclusion (Section 4) and imposition of the new car wash water fee (Section 7).
    5. Local sales tax caps of 3% for counties and 4% for cities.  (Section 8.)
  2. Income tax apportionment reform: Single sales factor adoption and throwback rule repeal legislation.  
  3. NOL extension legislation.  This would phase-in a 20-year net operating loss (NOL) carryforward in 3-year increments from the current 5-year limit.  It would begin with an 8-year carryforward for NOLs generated in tax years beginning on or after January 1, 2019.  The phase-in would be complete at 20 years for tax years beginning on or after January 1, 2023.
  4. Repeal of the capital gains exclusion for capital gains in excess of $10 million.
  5. Repeal of the political contribution tax credit.
  6. Creation of an income tax credit for personal property taxes paid on inventory.

It seemed that the Task Force had not had a chance to review the bills ahead of the meeting.  There were some questions, and particularly on the risk of abuse of an income tax credit for inventory property taxes paid. 

These bills comprise about half of the Task Force's recommendations.  BLR is to have another batch of bills ready to share in the next meeting on October 29.

In addition to the BLR draft Task Force recommendation bills, the Task Force heard from Senator Clark about his proposal to provide a sales and use tax exemption for withdrawals from stock that are donated to charities, churches, schools, disaster relief efforts, etc.  This bill is similar to bills that he has sponsored in previous legislative sessions.  Task Force members seemed surprised that the donation of such items incurred sales and use tax, but they also wondered whether the benefit of income tax deductions made up for it.

Specialized Tax Credits Under Scrutiny

With the Task Force having identified hundreds of millions of dollars of desired tax cuts and reforms, it is now scrutinizing tax credit programs for potential revenue offsets.  The Task Force went through essentially all of the major specialized state tax credit programs, with a skeptical eye about whether the programs are justified by competitiveness or other policy concerns.  

The Department of Finance and Administration led off with its survey of state tax credit programs for DFA-administered taxes (income, sales/use, etc.), and not including the Consolidated Incentive Act credits that had been covered back in May.  It proceeded in order of dollar amounts: recycling equipment credits, tourism development credits, "angel" equity investor credits, historic rehabilitation credits, water resource conservation credits, and low income housing credits.  (There also are several smaller credit programs that were not included in DFA's presentation.)

The Department of Insurance presented on the credits claimed against Arkansas premium tax.  It turns out that these premium tax credits total almost $80 million, which is a similar magnitude to the DFA-administered credits.  They include the "home office" salary credit, the state new markets tax credit, low income housing credits, historic rehabilitation credits, and "angel" equity investor credits, as well as insurance-specific life and health guarantee fund credits, retaliatory tax credits, and regulatory fees tax credits.  Task force members seemed especially interested in the home office salary credit, which is a dollar-for-dollar tax credit for salaries paid to Arkansas-based employees of certain insurance companies.

These presentations and subsequent discussions involved lively question-and-answer between Task Force members and representatives of DFA, the Insurance Department, the Arkansas Economic Development Commission (AEDC), the Tax Foundation, and the Arkansas State Chamber of Commerce.  The fundamental question is whether a given credit is justified by policy considerations or is just a "giveaway."  The Task Force wants to keep looking at credits at its October 29 meeting, and stakeholders involved with specific credits should consider whether and how to respond to the Task Force's interest.

The Big Picture: Revenue Forecasting, Modeling, and Tax Triggers

The Task Force also continued to consider the overall fiscal structure of its proposed reforms.  The Task Force's planned reforms have too great of a revenue impact to be enacted in a single legislative biennium, and Task Force members want to avoid the fiscal problems of nearby Kansas, Oklahoma, and Louisiana.  So the Task Force needs to decide whether to recommend (1) enactment of the entire plan subject to triggered tax cuts, (2) enactment of the entire plan with long-term phase-ins, or (3) partial enactment leaving the rest to future legislatures.

The answer to this question is not clear.  The Task Force heard from DFA, BLR, and the Tax Foundation on these questions of how to design the overall package.  The expressed preference of DFA Director Walther is for long-term phase-ins without tax triggers.  But there is concern that this approach could cause a revenue shortfall if Arkansas hits a recession.  A thoughtful discussion between Director Walther and Task Force members ensued with no firm conclusion about the best approach.

As it plans the overall fiscal structure of the reforms, the Task Force also received updated revenue modeling estimates.  The numbers on the "2-4-5.9/6.5% plan" (see previous coverage), now labeled "Governor's Proposal #2," show a long term approximately $186 million annual revenue cost.  This proposal continues to seem to be the favored individual income tax cuts plan, subject to the political consideration of needing a 75% supermajority in the General Assembly.  The Task Force also received written comments from the Institute for Tax and Economic Policy (ITEP).  Nicole Kaeding from the Tax Foundation presented her analysis showing her preference for the Governor's Proposal #2 over the Option A cuts.  She also discussed the Tax Foundation's tax business climate rankings and the potential impact of Task Force proposals, which seemed to discourage Tax Force members since the reform package would only improve the state's ranking by a few slots.

The Task Force also heard from DFA with an updated estimate for the apportionment reforms of single sales factor and throwback repeal.  These increased the estimated cost of the reforms by almost 50%, to $57 million, due to using a less favorable multiyear average revenue impact for single sales factor (now basically a wash instead of an $8 million gain) and to a more complex DFA modeling approach to throwback repeal.

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