Individual Tax Cuts Pass; Time for the Highway Funding Bill

With the Governor's individual income tax cuts plan now passed by the Arkansas General Assembly and to be signed into law next week, the next big-ticket tax bill is for highway funding.  The package was announced on February 11, and legislation has now been introduced.  It is projected to raise $300 million annually for state highways and also $110 million for county and municipal roads.  The package will move forward with a bill containing most of the provisions, SB336 (update: and companion bill HB1495), and companion resolutions for the referred sales tax increase, HJR1018 and SJR14.  The components of the package are as follows:

Ballot Referral of Extension of Half-Cent Sales Tax: HJR1018 and SJR14 would refer a constitutional amendment to extend the half-cent Amendment 91 sales tax into an indefinite source of funding for the state highway fund and for the county and municipal road funds.  The Amendment 91 half-cent sales tax is currently servicing a previous round of highway improvements that was funded with a bond issuance.  Without this extension, it would sunset once the associated bonds are repaid.  Going forward the half-cent sales tax would be used for pay-as-you-go funding instead of bond service.  This extension will require voter approval.

New Wholesale Sales Tax on Fuel: Instead of increasing existing fuel taxes, SB336 imposes a new "wholesale sales tax on motor fuel."  This is an unusual tax.  Instead of a simple tax-per-gallon, the tax is calculated as 1.6% of the average wholesale fuel price for motor fuel (or 2.9 percent for diesel) in a year and then converted to a gallonage tax.  While in theory this would adjust with fuel prices, strict collars limit increases to a tenth of a cent per gallon annually and prohibit decreases entirely.  So effectively you have a 3-cents-per-gallon increase in gasoline taxes and a 6-cents-per-gallon increase in diesel tax, potentially with minor upward indexing going forward.  This tax structure may be an attempt to avoid issues associated with the article V, section 38 constitutional 75% supermajority required to increase rates for state excise taxes.

Hybrid and Electric Vehicle Fees: Following a recommendation of the Tax Reform and Relief Legislative Task Force, SB336 would impose annual fees of $200 for electric vehicles and $100 for hybrid vehicles.  The intent is for automobiles that do not pay much or any fuel tax to still pay their fair share of road funding costs.  While it is not a significant revenue source for now at a projected $2 million annually, this could become a more important revenue source as more drivers adopt electric and hybrid vehicles.

General Revenue Diversion: $35 million or more of revenue would be diverted to highways.  New casino gaming tax revenue (i.e., casino gaming tax revenue in excess of $31.2 million), will go to highway funding.  If that amount is less than $35 million, it will be made up by a transfer from the restricted reserve (rainy day) fund, so that the transfer will always be at least $35 million.

In sum, while the highways package involves substantial potential general revenue in the form of the $35+ million new casino gaming revenue and the $200+ million sales and use tax extension, the package did not divert sales and use tax on automotive-related products, as had been suggested by some.  With the individual tax cuts done and highway funding to be addressed under this framework, the General Assembly may soon turn to the business tax reform recommendations from the Tax Reform and Relief Legislative Task Force that are so important to the state's competitiveness.

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