Tax Reform Task Force Members Nominate Excise Tax Proposals, Vote on Property Tax Proposals, and Prioritize $200 Million of Cuts and Reforms

(By Mike Parker and Matt BochThe Arkansas Tax Reform and Relief Legislative Task Force met again June 20  and 21. The extensive proceedings included consideration of property tax proposals, hearing excise tax testimony and nominating reform proposals, and having the members individually attempt to prioritize $200 million of tax reform and relief among current proposals. The Task Force will meet again this coming Tuesday and Wednesday, June 26 and 27, to work over the results of their individual rankings and to identify which proposals to submit for dynamic scoring.

Property Tax Proposals Identified for Further Study

Property taxes were first discussed in May, beginning with an overview of the Arkansas property tax system from representatives of the Arkansas Assessment Coordination Department (ACD). ACD primarily acts as a resource for local county tax assessors, with very limited oversight authority. ACD was joined by representatives of the Association of Arkansas Counties (AAC), representing assessors and other county officials at the Capitol, followed by input from representatives of other research and academic organizations. Franchise taxes were also touched on in May, although they received little attention at the May meetings.

Following the May presentations, Task Force members were given the opportunity to make specific property tax and franchise reform proposals, and the Bureau of Legislative Research (BLR) and Department of Finance and Administration were tasked with preparing written reports on the revenue impacts of the proposals and comparative tax treatments in selected states. Eleven proposals were submitted at the conclusion of the May meetings, which were “teed up” for additional consideration at the June meeting. The BLR/DFA reports on each are posted with the June 20 meeting.

Arkansas property taxes are among the lowest in the nation, driven even lower by several populist measures adopted in response to a budding property tax revolt when property values were rising rapidly in the late 1990s. These include a $350 homestead tax credit funded with a half-percent sales tax now dedicated to fund the credit; homestead valuation freezes for seniors and others receiving disability benefits; restrictions on valuation methods that may be used for residential, agricultural and timber property; and other measures. Several of these populist measures are embodied in Amendment 79 of the Arkansas Constitution adopted by voters in 2000. However local assessors are given broad discretion and authority as local elected officials in the Arkansas Constitution leading to (real or perceived) inconsistencies in administration, which was the subject of at least one of the proposals under consideration. There has historically been strong push-back from county assessors and AAC and against broadening the oversight authority of the ACD.

Franchise taxes are administered by the Arkansas Secretary of State and produce less than $30 million in funding for General Revenues and the Educational Adequacy Trust Fund. They are imposed on a range of business organizations, including limited liability companies, insurance companies, banks and business corporations, often as fixed or minimum annual fees of $150-$400. But publicly traded corporations and other organizations that are not organized to pay the minimum amounts due are assessed on a percentage of their outstanding stock. The taxes are criticized for a number of reasons, including discouraging capital formation, placing hardship on small businesses, and being administered outside of the mainstream of state or local tax administration.

On June 20 the Task Force adopted motions to continue working with BLR staff on 7 of the 11 proposals:

  • Proposal #2: To create an individual income or corporate income tax credit or deduction to offset the ad valorem personal property tax paid on business inventory.
  • Proposal #3: To repeal the Arkansas corporate franchise tax.
  • Proposal #4: To implement a tax deduction or tax credit to be taken against Arkansas individual income tax liability or corporate income tax liability to offset payments under the Arkansas corporate franchise tax.
  • Proposal #5: To reduce the rate of the Arkansas corporate franchise tax from three-tenths percent (0.3%) to one-tenth percent (0.1%) for corporations, banks, and mortgage loan corporations with outstanding capital stock.
  • Proposal #6: To amend Arkansas law to create uniform and transparent statewide guidelines for assessing property that is exempt from property taxation.
  • Proposal #7: To amend Arkansas law to transfer the Assessment Coordination Department (ACD) into the Department of Finance and Administration (DFA).
  • Proposal #10: To use the excess funds in the Property Tax Relief Trust Fund from the one-half cent (0.5¢) sales tax that are not used to fund the homestead tax credit under Arkansas Constitution Amendment 79 for other tax relief.

No motions were made at the June 20 meeting to continue consideration of the following additional proposals:

  • Proposal #1: To exempt business inventory from ad valorem personal property tax under the Arkansas Constitution, (which would require that a constitutional amendment be referred by the General Assembly from the 2019 Regular Session).
  • Proposal #8: To adopt a mechanism to abate property taxes on industrial development projects without the cost and complexities of requiring local industrial development revenue bonds (IDBs) and payment in lieu of taxes (PILOT) agreements as is necessary now. (Would also require public vote on a constitutional amendment referred by the General Assembly).
  • Proposal #9: To provide that reappraisal of property may occur only every five (5) years (instead of every three (3) years for counties with rapid appreciation).
  • Proposal #11: To generally impose a state property tax on Texarkana, Arkansas property owners equal to the property taxes paid by property owners in Bowie County, Texas, in lieu of the additional 1% state sales tax that these border city residents pay in return for their unique Texas-style income tax exemption.

In sum there seems to be potential for recommending statutory franchise tax and inventory property tax relief but there does not seem to be an appetite for a property tax reform constitutional amendment. The property tax administration proposals could also have a significant impact if pursued.

Excise & Miscellaneous Tax Testimony and Proposal Nominations

The second part of the Tax Reform Task Force's agenda was hearing testimony and making policy nominations for excise and miscellaneous taxes, much as has been done previously with sales/use, income, and property taxes.

For the educational component before proposals were made, on June 20 the Task Force heard presentations by DFA summarizing excise and taxes on a variety of sales and services, including liquor, beer, wine and alcoholic beverages, soft drinks, and tobacco; and miscellaneous taxes on activities such as charitable bingo; severance of oil, natural gas, and other natural resources; gaming; amusement devices; real property transfer taxes; vending machines; and others (including beauty pageants). On June 21 the Task Force heard differing viewpoints from the Tax Foundation and from the Institute on Tax and Economic Policy (ITEP) about excise tax policy.   

Following the June 21 meeting, Task Force Members nominated excise and miscellaneous tax reform proposals for further consideration next week. The list is as follows:

  • Create an electronic cigarette tax (Sen. Wallace)
    • Rate equal to or related to tobacco tax (Rep. Cavenaugh, Rep. Pitsch)
    • Rate that is “middle of the road” among other states (Sen. Irvin)
  • Alcohol taxes
    • Change to a percentage of the price instead of volume (Sen. Hendren)
    • Increase wine and beer tax (Sen. Wallace)
  • Special sales tax on alcohol and cigarettes (Rep. Johnson)
  • Increase soda tax (Sen. Wallace)
  • Fuel taxes
    • Index gas/fuels by using CPI, fuel efficiency, income (Sen. Hendren)
    • Change gas tax from a flat amount for a percent variable rate based on several factors, such as CPI, population, personal income growth, and other indexes, in addition, utilize floors/ceilings (Sen. Irvin)
    • Indexing for highways (Rep. Jett)
    • Variable gas tax tied to construction cost inflation (Rep. Johnson)
    • Increased gasoline tax by percentage with inflation clause (Rep. Pitsch, Sen. Wallace)
  • Road usage fee for electric/hybrid vehicles at point of registration or sale as determined by ease of administration (Sen. Irvin)
  • Cigarette taxes
    • Increase tax on cigarettes only from $1.15 to $1.30 with funds generated to reduce income tax burden (Sen. Irvin)
    • Increased cigarette tax (Sen. Wallace)
  • Wagering revenues from electronic games of skill—including percent levied for games of skill (Rep. Ferguson)

Prioritization of Tax Reform Proposals

Perhaps most importantly, the Task Force members began getting to the heart of their challenge: how to prioritize among worthy given proposals given the limited allowable revenue losses. On June 21 the Task Force heard from both the Tax Foundation and ITEP.

The Tax Foundation suggested priorities in the following order:

  1. Cut the top individual income tax rate to 6.5 percent;
  2. Business income tax apportionment reforms (single sales factor and throwback repeal) and also expansion of net operating loss (NOL) utilization rules;
  3. Repeal of two sales tax exemptions (coin-operated car washes and magazine sales) and an income tax credit (for political contributions);*
  4. Repeal the franchise and inventory taxes; and
  5. Utilize tax triggers to lower the individual and corporate income tax rates to 5.9 percent.

(* The Tax Foundation would advocate for elimination of more exemptions, credits, and deductions but limited its recommendations to proposals actually under consideration by the Task Force.)

The Arkansas State Chamber of Commerce had submitted similar priorities to the Task Force, and State Chamber President Randy Zook testified to the Task Force that that the Chamber's priorities were essentially identical to those of the Tax Foundation.

ITEP also testified as to suggested priorities, essentially advocating to avoid cutting corporate taxes and instead to target any tax relief to the least well off through an earned income tax credit and potentially to the middle class through an increased standard deduction.

After hearing testimony, the Task Force members completed a worksheet to identify how to allocate $200 million to their preferred reforms. The results are being compiled and will be shared next week, likely ahead of the Task Force meetings.

 


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