Tax Reform Task Force Keeps Income Tax Proposals Rolling, Identifies Property Tax Proposals, and Mulls Incentives Testimony

The Arkansas Tax Reform and Relief Legislative Task Force met yet again May 23 - 24, as efforts intensify to push toward substantive recommendations. There were three main parts to the meeting: (1) voting on income tax proposals for further consideration, (2) property tax testimony and initial nomination of proposals for study, and (3) economic development incentives testimony from the Arkansas Economic Development Commission. The Task Force Co-Chairs also explained their plans for narrowing the issues under consideration and for working on legislation after the Task Force's Final Report is concluded and ahead of the 2019 legislative session.

Task Force Process and Next Steps: Time to Prioritize

At the outset of the meeting on May 23, Co-Chair Senator Hendren discussed the Task Force process going forward. At the June meetings he expects Task Force members to prioritize tax reforms that they would like to focus on, and particularly those to get the limited slots for outside dynamic revenue modeling. (The June meetings are the 20, 21, and potentially 27.) Hendren observed that the Task Force members have identified around $1 billion of revenue cuts associated with reform ideas, a total which is clearly infeasible from a revenue impact perspective. He further noted that Governor Hutchinson had proposed a $180 million tax cut for the next session and posed to the Task Force members to prioritize whether the best way to reform taxes with such a cut was further income tax cuts, an earned income tax credit, or some other sort of reforms. The Task Force's deadline to submit proposals for dynamic scoring is July 2, 2018.

Senator Hendren also announced that the final report due September 1, 2018, would not be the end of the Task Force. The Task Force intends to continue meeting into the fall in order to prepare legislation for the 2019 legislative session that will commence in January.

Income Tax Proposals

The income tax portion of the meeting reviewed a number of income tax proposals that had been nominated at the May 10 meeting. Most proposals were approved by voice votes for inclusion in the final packet for further consideration. The Department of Finance and Administration (DFA) and the Bureau of Legislative Research (BLR) generally explained the proposals. Where applicable, representatives of the Arkansas Economic Development Commission (AEDC), the Arkansas State Chamber of Commerce, and the Tax Foundation also testified. Where there where multiple proposals on a single topic, the Co-Chairs urged the relevant nominating Task Force members to work together with the BLR to arrive at a single, specific proposal for further consideration. Highlights of the proceedings include further consideration of rate cuts, apportionment reform, NOL extension, accelerated depreciation / expensing, and a SALT workaround passthrough entity tax, as well as the failure of a combined reporting proposal. To take the proposals in order:

  1. Net Operating Loss (NOL) Extension (Proposals 1A, 1B, 2, 3, and 4): These are various approaches to loosen Arkansas's extremely restrictive 5-year NOL carryforward limit. The proposals would take the NOL extension anywhere from 10 years to conformity with the federal rules providing unlimited carryforward and an 80% utilization limitation. There were a number of questions about what NOLs are and how to arrive at a principled policy. The motion for the sponsors to arrive at a common proposal to be considered for further study was approved.
  2. Individual Income Tax Rate Cuts and Simplification (Proposals 5, 6, 7A, 7B, 8): These are various proposals to lower rates and also to simplify back to a single progressive rate tax table rather than keeping the current three different rate tables. The motion for the sponsors to arrive at a common proposal to be considered for further study was approved.
  3. Corporate Income Tax Rate Cuts (Proposals 9 and 10): Similarly, the Task Force considered proposals for cuts to the corporate income tax rates. On the corporate income tax side, a major question is whether the better reforms would be rate reductions or other changes such as apportionment reform and NOL extension. There also were questions about the Workforce 2000 fund, under which part of the corporate income tax revenue stream goes to a designated fund for vocational education. In any event, the motion for the sponsors to arrive at a common proposal to be considered for further study was approved.
  4. Systematic Review of Tax Exemptions (Proposal 11): On a recommendation from Rep. Dotson, the Task Force unanimously approved the proposal to have an ongoing, systematic exemption review process. Presumably this includes both income tax and sales tax exemptions. Note that this does not appear to have been a vote for further study, but rather approval outright for inclusion in the final report. 
  5. Earned Income Tax Credits (Proposals 12 and 13): These are proposals to create some form of tax credit to benefit low-income, working Arkansans. There was some discussion about whether rate cuts or tax credits were the better policy for helping Arkansans. The motion for the sponsors to arrive at a common proposal to be considered for further study was approved.
  6. Standard Deduction Changes (Proposals 14, 15, and 16): These were proposals to increase Arkansas's standard deduction or to replace it with a personal exemption. The motion for the sponsors to arrive at a common proposal to be considered for further study was approved.
  7. Tax Triggers (Proposals 17 and 18): These were proposals to consider triggered tax cuts as Arkansas met certain revenue targets. Proposal 18 was particularly notable insofar as it integrated triggered tax cuts with the Revenue Stabilization Act. The motion for further consideration was approved.
  8. Throwback Rule Repeal (Proposal 19): After limited discussion, the motion for further consideration was approved. There was some further discussion in connection with Proposal 20, single sales factor apportionment.
  9. Single Sales Factor Apportionment Adoption (Proposal 20): This proposal would move Arkansas from a 3-factor, double-weighted sales apportionment formula to a single sales factor formula. Both AEDC and the State Chamber testified in support of the proposal. It was approved by the Task Force for further study. (Note that while throwback repeal and single sales factor formula are under consideration by the Task Force, there has not, to date, been a Task Force proposal for adopting market-based sourcing of services and intangibles. There is a decent chance that DFA will continue to push for market sourcing in 2019, much as it did in the 2017 session, and it is possible that the issue may come up at the Task Force as it considers apportionment reforms.)
  10. Elimination of Exclusion of Capital Gains in Excess of $10 Million (Proposal 21): Arkansas currently offers a complete exclusion from tax for capital gains in excess of $10 million. This proposal would repeal it and subject such gains to tax at the 50% exemption generally applicable to capital gains. Apparently only 10 taxpayers used this benefit in the last year for which DFA had statistics. The Task Force moved in favor of further study of this provision. 
  11. Accelerated Depreciation and/or Expensing (Proposals 22 and 23): These would adopt some or all of the expensing and accelerated depreciation provided in the federal tax reform act. The motion for further consideration was approved.
  12. Elimination of Windmill Manufacturer Exemption (Proposal 24): This would repeal a tax exemption that had been enacted to help bring a windmill blade manufacturer to Little Rock. That venture is no longer in business, and so the exemption is no longer needed. There was some criticism among Task Force members about industry- and company-specific tax exemptions more generally. The motion for further consideration was approved.
  13. Elimination of Organ Donor Deduction (Proposal 25): Arkansas allows a taxpayer to deduct expenses associated with organ donation. Senators Hendren and Elliott expressed support for the exemption. This proposal died; there was no motion for further study.
  14. Elimination of Income Tax Exemption for Telephone Co-Ops (Proposal 26): This proposal was withdrawn by Rep. Cavenaugh in advance of the Task Force meeting.
  15. Taxation of Churches on Business Income (Proposal 27): This proposal was to tax passive investments by churches. The intent seemed to be situations where churches are competing with businesses. It dovetailed with some of the property tax exemption concerns of Task Force members. The Task Force agreed to postpone any vote so that the proposal could be refined. It was not reconsidered on May 24; query whether the proposal will be considered again at a later meeting.
  16. Increase Gaming Winnings Tax (Proposal 28): Arkansas imposes a 3% special tax on winnings from electronic games of skill. This would increase the tax by 0.5%. The proposal died for want of a motion for further consideration.
  17. Repeal the Political Contribution Credit (Proposal 29): Unique among neighboring states, Arkansas gives a credit of up to $50 for political contributions. The motion for further consideration passed with limited opposition.
  18. Pass-Through Entity SALT Deduction Tax (Proposal 30): Under this proposal, Arkansas would adopt an elective, Connecticut-style passthrough entity income tax in lieu of partner-level taxation. The intent would be a workaround to shelter passthrough entity owners from the federal SALT deduction limitation. Jennifer Bell of Bell and Company explained the proposal, accompanied by former DFA Commissioner Tim Leathers who is now Vice President of Consulting with inVeritas. The motion for further consideration of this proposal was approved.
  19. Combined Reporting (Proposal 31): This proposal was for Arkansas to adopt some form of mandatory combined reporting. There was no motion for further study, and so presumably this proposal is dead. Ahead of the meeting, the Council on State Taxation (COST) had sent a letter to the Task Force outlining its members' opposition to combined reporting.

Property Tax Testimony and Proposals

The Task Force meetings also included property tax testimony as well as members' nomination of tax reform issues. John Nichols from the Assessment Coordination Department (ACD) testified with an overview of major property tax issues, much of which touched on issues that the Task Force had heard before. There was particular interest in reforming property taxes on inventory. The Tax Foundation and Arkansas Center for Research in Economics also testified about the state's property tax system's strengths and weaknesses.

Property tax exemption determinations for churches, schools, and charities (including hospitals) also drew substantial discussion. The ACD, BLR, and several local assessors testified about the challenges in making property tax exemption determinations consistently and evenhandedly. There seemed to be some interest in a state-level body or more state guidance on making exemption determinations.

At the second day of the meeting, Task Force members submitted nominations for property tax issues. The official list is here, including sponsors. To summarize:

  1. Repeal or reduce the franchise tax.
  2. Repeal the inventory property tax or provide some sort of state tax credit offset.
  3. Create guidelines for uniformity and transparent property tax assessment and exemption determinations.
  4. Along these lines, make the ACD a part of DFA.
  5. Give the AEDC power to abate up to 100% of property taxes as a business recruitment tool.
  6. Consider potential changes to the 5-year property tax reassessment cycle.
  7. Consider using excess sales tax revenue from the homestead credit for other tax relief instead of further increasing the credit.
  8. Compare Texarkana Arkansas and Texas property tax rates.

The proposals will be voted on for further consideration at the June meeting.

AEDC Testifies on Economic Development Incentives & Tax Policy

Executive Director Mike Preston, head of the Arkansas Economic Development Commission kicked off the second day (May 24) with testimony focused on competitiveness in tax policy and economic development incentives. He was assisted by Kurt Naumann, Director of Strategic Planning and Research, and General Counsel Kenneth Burleson.

The presentation walked the Task Force through all of the various incentives programs that the state offers. Preston emphasized the diligence of AEDC in evaluating projects and ensuring high returns-on-investment to the state.

Among other questions, Co-Chair Senator Hendren probed AEDC about incentives compliance difficulties based in part on the concerns raised by Leisa Cagle from McKee Foods back in April. There also were concerns from Task Force members about geographical equity and too much of the incentives going to businesses in the more prosperous areas of the state (presumably in large part Northwest Arkansas). Preston's testimony on recent efforts to land an auto assembly plant also catalyzed a holistic discussion about tax policy and other ways to make the state more competitive. Topics included property tax incentives, corporate income tax reform, and reduced income tax rates. In general, the Task Force members seemed to be receptive and understanding about the need for at least some incentives to make the state competitive for major projects.

Arkansas Beverage Association Excise Tax Testimony Against Soda Tax

Also, early on May 23, Dennis Farmer from the Arkansas Beverage Association testified on soft drink taxes, essentially advocating the repeal or reduction of the state's excise tax on soft drinks. He explained how Arkansas's soft drink tax is an outlier and is almost unique among states. He also emphasized the economic and community development benefits that the soft drink industry brings to the state.

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