With March more than halfway over, a surprising amount of tax legislation is still on the agenda for the General Assembly. In addition to the recently-filed major business tax reforms of SB 576, other significant tax bills that have been introduced include: (1) the Tax Reform Task Force administrative reforms (SB 561), an independent Tax Appeals Commission (SB 560), and a low-income tax cut paid for by taxes on cigarettes and e-cigarettes (SB 571). The state government transformation (reorganization) bill (HB 1763) also has implications for taxpayers. And we have not yet seen an Internal Revenue Code conformity bill. Interested stakeholders need to monitor the unpredictable weeks ahead.
Background: a Back-Loaded Session for Tax Legislation
This hectic end of session for tax bills results from several factors. First, the Tax Reform and Relief Legislative Task Force proceedings in 2017-2018 inspired significant tax legislation, including both Task Force recommendations and also ideas that seem inspired by Task Force proceedings. Second, most tax bills were held while the Governor's individual tax cut (Act 182) and highway plan (Act 416 and HJR 1018) were enacted. This basically took the first two months of session. Third, the rules for the House and Senate changed to eliminate the bill filing deadline, which means that bills can continue to be filed until the end of session.
The result is a flurry of tax bills large and small. These bills need to move quickly: there have been comments that session should end in early-to-mid April, leaving only a few weeks for bills to move through the legislative process.
This post covers only major bills and only at a high level (in addition to our detailed analysis of the major business tax reform and passthrough tax bills in previous posts). Stakeholders with significant interests should monitor the situation more closely. We will provide summaries of enacted tax laws on this blog once the legislative session concludes.
Tax Reform Task Force Administrative Reforms
The administrative tax reforms recommended by the Tax Reform and Relief Legislative Task Force have been bundled into SB 561. This would implement the following recommendations of the Task Force:
- Transfer administration of the franchise tax to the Department of Finance and Administration (DFA): Arkansas imposes a franchise (capital stock) tax on corporations. It is administered by the Secretary of State. This would transfer administration to DFA, which would enforce the tax in conjunction with the corporate income tax, yielding administrative efficiencies as well as increased enforcement.
- Biennial review of credits and exemptions: DFA will have to provide a biennial report of the fiscal impact and policy effectiveness of all credits and incentives. Such an undertaking by DFA will be substantial and will require multiple personnel. Taxpayers will need to be continually concerned about defending credits and exemptions. In general, the Tax Reform Task Force did not recommend cutting many credits or exemptions, but that may not always be the case for subsequent legislative bodies.
- Property tax assessment rules and guidelines: The Assessment Coordination Department (ACD) would establish rules and guidelines for assessors with respect to exemption determinations and also with respect to assessment of business inventory. These issues had been a significant concern in testimony to the Task Force.
- Additional paperwork documentation and certification requirements for claiming the farm equipment exemption for ATVs.
- An exemption for advertisements on public transit buses, which are currently taxed as leases of tangible personal property.
Most of these changes are administrative in nature, and the overall fiscal impact should be minor.
Independent Tax Appeals Commission
SB 560 would establish an independent five-person Arkansas Tax Appeals Commission to replace DFA's Office of Hearings and Appeals.
Instead of protesting a proposed assessment, aggrieved taxpayers would petition the Tax Appeals Commission. Practice before the commission would be more formal than the current hearings process, with a detailed petition, answer, and reply process at the outset of the case. Limited, informal discovery would be allowed, followed by a hearing with relaxed rules of evidence. Proceedings would be public, as opposed to the currently confidential proceedings before DFA Hearings & Appeals.
In addition to the formal process, the Commission could set up a small claims division. This would be critically needed for adjudicating the individual and small business cases that currently take up a large part of the Office of Hearings and Appeals docket.
The commissioners would include at least two lawyers and at least two non-lawyers. Pay would be at the level of district judges (approximately $147k). At least one of the current DFA administrative law judges would be made a commissioner.
Three commissioners would hear and decide a case de novo under relaxed rules of evidence. Proceedings would be public. The decision would be in writing and would be published. Appeal would continue to be de novo to circuit (trial) court.
In general, an independent tax appeals tribunal would be a positive development for Arkansas taxpayers. The published DFA administrative hearing decisions reveal that taxpayers rarely prevail. There are some good reasons for this: many taxpayers pursue meritless claims, and DFA is often reasonable about settling disputes. At the end of the day, however, DFA Hearings and Appeals will usually rule for the state on a close legal issue. The Tax Appeals Commission may be more balanced on close legal issues. (Other states' experiences seem to depend on the background of individuals appointed to independent tax appeals commissions.)
One concern with the current proposal is that seems too formal too fast. A taxpayer would have 90 days from the proposed assessment to file the petition with a detailed pleading. Current practice with DFA Hearings & Appeals is looser. It would be an improvement to provide some sort of informal and confidential DFA internal appeal mechanism to let the parties give issues a second look before embarking on the formal Tax Appeals Commission proceedings.
Low-Income Tax Benefits and Tobacco Tax Increases
SB 571 would impose new tobacco taxes to pay for tax cuts primarily benefiting low-income individuals.
There are three income tax benefits:
- Increasing the standard deduction to $3,300. This is a positive change potentially benefiting all taxpayers. Arkansas is out of sync with the increased federal standard deduction. The gap creates enforcement problems because DFA largely relies on the Internal Revenue Service (IRS) to enforce itemized deduction compliance. While this change does not close the gap, it is a move in a positive direction.
- Eliminating the 2% bracket in the low-income tax bracket schedule. For low-income taxpayers, income up to $8,899 would now be subject to a 0% rate.
- Establishing a small earned-income tax credit (EITC) equal to 5% of the federal EITC.
These benefits would be paid for by a new special 20% excise tax for cigarettes (estimated at about 80 cents per pack) and also taxing e-cigarettes at the same rate as other tobacco products.
This proposal is inspired by Tax Reform Task Force hearings about tobacco taxation and the cost to the state from medical care driven by tobacco use, which was reported to exceed tax revenue by several multiples. However there is also concern about a tax increase increasing cigarette smuggling, and particularly from low-tobacco-tax Missouri.
Administrative Transformation: ACD to DFA
The big overall drama in the legislature is the Transformation and Efficiencies Act, which will subject the state's multiplicity of agencies and commissions to several cabinet-level secretaries. The voluminous bill is HB 1763. DFA would have a cabinet-level secretary under the reorganization, and ACD would become part of DFA. This would mean that DFA would be involved in almost all aspects of Arkansas tax administration. Query whether an ACD that is part of DFA would take a different approach to taxpayer-assessor property tax questions compared with the status quo of an independent ACD.
The Arkansas Economic Development Commission would become part of the Department of Commerce under the reorganization. Given the close relationship between AEDC and the Governor's office in economic development projects, this change may be of limited practical effect except perhaps in adding a Secretary of Commerce who could be involved in economic development.
No Internal Revenue Code (IRC) Conformity Yet
No general IRC conformity and technical income tax bill has yet been introduced. With the enactment of the federal Tax Cuts and Jobs Act (TCJA), there is much speculation as to what provisions Arkansas might conform to. As a "building block" state with an independent definition of income, Arkansas only conforms to specific parts of the Internal Revenue Code as of specific dates. Indeed, Arkansas does not have to conform to any TCJA provisions; conceivably DFA could skip doing a conformity update bill this year since there are so many other tax bills in play.