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State's biggest tax cut at hub of session call

Arkansas lawmakers eye chance to push their agendas in special session starting Tuesday on income tax cuts by Michael R. Wickline | December 6, 2021 at 12:00 a.m.

In the special session starting at 10 a.m. Tuesday, the Arkansas General Assembly will consider a bill that potentially represents the largest tax cut in the state's history.

But the wild card is how long the special session will last.

Under Article 6, Section 19, of the Arkansas Constitution, the governor sets the agenda for the special session when he issues the call for lawmakers to convene. Once they finish that business, a two-thirds vote of the 100-member House of Representatives and the 35-member Senate allows them to remain in session for up to 15 days to consider bills not in the call.

Several lawmakers said they plan to push to extend the special session to consider their bills.

The bills include measures that would couple a Texas-style civil cause of action with Arkansas' ban on abortion except to save the life of the mother; and that would ban the teaching of critical race theory in public schools. A federal judge has enjoined the abortion ban.

So far this year, the Legislature already has met in a 117-day regular session and a three-day special session.

The proposed income tax cut would be the largest in state history because there has never been a bill enacted that provides almost $500 million in annual tax relief when fully implemented, said Scott Hardin, a spokesman for the state Department of Finance and Administration.

Proponents of the income tax legislation said the measure will benefit all taxpayers and make the state's tax structure more competitive against other southern states. Two of Arkansas' surrounding states -- Texas and Tennessee -- don't have individual income taxes.

Opponents said the chief beneficiaries of the cut would be upper-income people, and the state would be better off investing the money by providing needed services.

ESTIMATED REDUCTION

The finance department projects that the proposed tax cut would reduce general revenue by $497 million in fiscal 2026 after being fully implemented.

But a report issued by a leading foe of the bill, Arkansas Advocates for Children and Families, estimates that the legislation eventually would reduce revenue by $602 million a year, based on an analysis by the Institute on Taxation and Economic Policy. The institute estimated that the proposed individual income tax cuts would reduce general revenue by $523 million a year and the proposed corporate income tax cuts would cut general revenue by an additional $79 million a year, after fully implemented.

Both estimates are far more than the finance department's total projected reduction of about $250 million a year from Hutchinson's individual income tax cuts that the Legislature enacted during the 2017, 2019 and 2021 regular sessions.

The 2015 income tax cuts targeted middle-income taxpayers; the 2017 cuts were for low-income taxpayers; and the 2019 income tax cuts benefited upper-income taxpayers.

The Arkansas Advocates report said the institute's estimate of the combined financial impact of the proposed cuts in individual and corporate income taxes is higher than the state's estimates because the institute's model assumes, based on recent history and empirical evidence, that incomes will continue to grow faster at the top of the income spectrum.

"Since those with the highest income will reap the biggest benefits, this has a big impact on the ultimate cost of the bill," the advocacy group said.

BUDGET SURPLUS

Earlier this year, the General Assembly and Hutchinson enacted a general revenue budget for fiscal 2022 totaling $5.8 billion, including a $17.1 million allocation to a restricted reserve fund.

On Oct. 19, in light of stronger-than-expected tax collections, the finance department increased its projection for net general revenue by $246.2 million, to $6.1 billion, in the current fiscal year, projecting a year-end surplus of $263.2 million above the fully funded Revenue Stabilization Act.

The Revenue Stabilization Act prioritizes the distribution of general revenue to state-supported programs.

On Oct. 19, the finance department also increased its projection for fiscal 2023 net general revenue by $298.5 million, to $6.4 billion.

The general revenue budget that Hutchinson has proposed for fiscal 2023 is $6.01 billion with an additional $54.9 million to transfer to the long-term reserve fund, according to the finance department.

Hardin has said the department's forecast doesn't show a fiscal 2023 surplus because the proposed general revenue budget hasn't been set yet. The General Assembly will consider enacting a 2023 general revenue budget in next year's fiscal session, which is to start in mid-February.

The finance department projects that the income tax cut bill would reduce general revenue by $135.25 million in fiscal 2022 (since the cuts would start halfway in the fiscal year) and $307.4 million in fiscal 2023, gradually rising to $497.9 million in fiscal 2026, if the cuts are fully implemented.

TAX CUT BENEFICIARIES

Beyond the income tax rate cuts, the proposal would merge the lower and middle-income tables, create a low-income tax credit, smooth the tax cliff between tax tables, index the standard deduction to the consumer price index, create triggers for some individual and corporate income tax rate cuts, and rename the state's long-term reserve fund as the catastrophic reserve fund.

Hardin said Friday that the finance department projects that 104,881 Arkansans at lower levels of income would have their tax liability reduced to zero, eliminating any state income tax burden under the bill.

"When fully implemented in 2026, the top rate of 4.9% will apply to every dollar of income at $23,600 and above," on the consolidated low and middle-income tax table, Hardin said.

The credit would be for taxpayers whose taxable incomes are up to $24,700 and who timely file tax returns. Those with net income tax up to $23,600 would receive a $60 credit, with the credit reduced with each $100 of additional net income.

The credit would reduce taxes for more than 535,000 Arkansans, Hardin said.

The Arkansas Advocates for Children and Families' report said the tax credit would be aimed at distributing some of the tax cut to lower-income Arkansans, "but the cut to the top personal income tax rate is so deep that it overwhelms these changes."

The advocacy group said the Institute on Taxation and Tax Policy estimates the average Arkansan in the top 1% -- those making $503,000 or more -- would see their taxes go down by more than $10,000 under the legislation.

The Arkansas Advocates for Children and Families' report said the institute estimates that the average Arkansan in the bottom 20% -- those making less than $22,000 a year -- would see their taxes go down by less than $20.

Under the bill, the tax savings in tax year 2022 would be $69 for people with net taxable income of $23,500; $250 for people with net taxable income of $23,600; $196 for people with net taxable income of $40,000 and $236 for people with net taxable income of $50,000, based on the finance department's estimates, he said.

The number of returns for people having $500,000 or more in taxable income is 15,600 and the number of returns having $23,600 or less in taxable income is 598,500, according to Paul Gehring, an assistant revenue commissioner in the finance department.

The finance department projected that about 535,000 taxpayers with incomes between $4,700 and $22,900 a year would get total income tax cuts of $22.8 million, and about 338,000 taxpayers with income between $22,901 and $38,500 would receive total income tax cuts of $53.3 million under the bill. (About 236,000 people with incomes of $4,699 or less don't currently pay state income taxes, the department projection shows.)

The department projected that about 483,000 taxpayers with incomes between $38,501 and $82,000 would get total income tax cuts of $125.7 million, and about 289,000 taxpayers with incomes of at least $82,001 would get total income tax cuts of $229.1 million.

TAX TABLES

The bill would reduce the three regular tax tables to two by combining the lower- and middle-income tax tables, effective Jan. 1. The new table would apply to taxpayers with net taxable incomes up to $84,500, while the high income tax table would apply to those with net taxable incomes above $84,500.

The top individual income tax rate would be cut from 5.9% to 5.5% on Jan. 1, and then to 5.3% on Jan. 1, 2023, under the bill.

The top rate would apply to the net taxable incomes between $39,700 and $84,500 for people in the combined low- and middle-income tax table, and to the incomes of at least $8,501 for people in the high income tax table, effective Jan. 1.

The top rate would drop to 5.1% on Jan. 1, 2024, and to 4.9% on Jan. 1, 2025, only if no funds are transferred out of the long-term reserve fund during certain periods, which would become known as the state's catastrophic reserve fund under the bill.

The current top corporate income tax rate of 6.2% will drop to 5.9% on Jan. 1, under a 2019 state law. The special session's bill would cut the top corporate rate from 5.9% to 5.7% on Jan. 1, 2023. That rate would drop to 5.5% on Jan. 1, 2024, and then to 5.3% on Jan. 1, 2025, but only if no funds are transferred in the previous year from the catastrophic reserve fund.

The proposal includes some fiscal measures aimed at ensuring the renamed catastrophic reserve fund stays at 20% of net general revenue disbursed, according to the bill.

The long-term reserve fund balance now is about $1.2 billion.

RECYCLING TAX CREDITS

Hutchinson included in his call legislation that changes the income tax credit for waste reduction, reuse or recycling equipment to allow for the use of those income tax credits by a qualified growth project and to clarify the distribution of those income tax credits.

Hutchinson spokeswoman Shealyn Sowers said Friday afternoon that the governor isn't ready to say what the legislation is for.

Several lawmakers said the bill is linked to an expansion at Big River Steel.

LAW ENFORCEMENT

Sen. Jason Rapert, R-Conway, said Friday that he plans to pursue every parliamentary option available to persuade lawmakers to consider legislation enacting a Texas-style civil cause of action abortion measure, as well as a bill to grant full-time law enforcement officers a $3,000 annual income tax credit.

The finance department projects that the tax credit bill would reduce state general revenue by about $25 million a year.

Rapert said he has rounded up 44 lawmakers so far as co-sponsors for his bill to grant this tax credit to the law enforcement officers.

END OF SESSION

Senate President Pro Tempore Jimmy Hickey, R-Texarkana, on Friday filed Senate Resolution 1 for the Senate to adjourn the special session upon completing consideration of the bills on the governor's call for the special session, and for the House to adjourn the special session at a time and a date of its choosing.

Asked how long he expects the session to last, a Legislative Council co-chairman, Rep. Jeff Wardlaw, R-Hermitage, said Friday, "I'll know more Monday.

"The worst scenario is Christmas," he said. "I'm not exaggerating. I'm being serious. That's two weeks."

But the council's other co-chairman, Sen. Terry Rice, R-Waldron, said Friday, "I just feel like there are enough of my colleagues that want to do what's on the call, and we'll be back in February to address other issues."

The fiscal legislative session is to start Feb. 14. A two-thirds vote in the House and Senate is required to consider non-appropriation bills in a fiscal session.

Print Headline: State's biggest tax cut at hub of session call

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