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Plan to modify state's tax rates making rounds

Bid calls for cuts in top tier, merged middle, low tables by Michael R. Wickline | November 22, 2021 at 12:00 a.m.

A draft bill that would cut the state's top individual and corporate income tax rates and consolidate low-income and middle-income tax tables is being circulated among state lawmakers to gain their support.

Rep. Joe Jett, R-Success, and Sen. Jonathan Dismang, R-Searcy, said they are aiming to get a majority of members of the state House of Representatives and state Senate to sign up as co-sponsors of the proposal to enable Gov. Asa Hutchinson to call a special legislative session to consider the measure.

The proposal also would create a nonrefundable low-income tax credit, make adjustments to 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.

The draft bill reflects an agreement between Hutchinson and Republican legislative leaders.

The state Department of Finance and Administration has projected that the proposal would reduce state general revenue by $135.25 million in fiscal 2022, which started July 1. The reduction in general revenue is projected to increase in fiscal years 2023-25 up to potentially $497.9 million in fiscal 2026.

"The tax cut bill is an agreed upon plan to lower our tax rates and simplify our tax filing," Hutchinson said Friday in a written statement.

"The plan meets my goal of lowering our individual income tax rate down to 5.3% over time and providing balanced tax relief for all Arkansans," he said. "I will not formally call a special session of the General Assembly until the bill is agreed to by a majority of legislators."

During Friday's Legislative Council meeting, Rep. Lane Jean, R-Magnolia, referred to the possibility of the Republican-dominated Legislature meeting in a special session in the week that starts Dec. 5.

Hutchinson spokeswoman Shealyn Sowers said Friday that "no date has been set." Jett said he rounded up 38 signatures from Republicans in the House to co-sponsor the draft bill in a short period of time Friday, and he wouldn't be surprised to sign up 70 total by Tuesday afternoon.

The House consists of 78 Republicans and 22 Democrats. Jett said Friday that he plans to present the proposal to House Democrats soon.

Dismang said Friday that he will reach out to senators to sign up as co-sponsors soon.

"I really feel we'll have broad support among the members," said Dismang, a co-chairman of the Joint Budget Committee who serves on the Senate Revenue and Taxation Committee. The Senate consists of 26 Republicans, seven Democrats and an independent. There is one vacancy because of the resignation of Sen. Lance Eads, R-Springdale.

RATE CUT

According to a summary of the draft bill provided by Jett, the proposal 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 income up to $84,500.

The high income tax table would apply to those with net taxable income above $84,500.

The state now has three tables, each giving the tax rates for different levels of net income: one for low-income taxpayers making less than $22,900; a second for middle-income individuals netting from $22,900 to $82,000; and a third for high-income taxpayers making more than $82,000.

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 this draft bill.

According to the summary of the proposal, the top rate would apply to the net taxable income between $39,700 and $84,500 for people in the combined low- and middle-income tax table, and to the income 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, which would become known as the state's catastrophic reserve fund, according to the summary of the draft bill.

"If such a transfer is made between January 1, 2022, and December 31, 2023 inclusive, then the 5.1% and 4.9% rate cuts wouldn't just be paused, they'd never occur," the proposal's summary states. "If such a transfer is made between January 1, 2024, and December 31, 2024 inclusive, then the 5.1% rate would remain and the 4.9% rate cut wouldn't just be paused, but would never occur."

Two of Arkansas' surrounding states -- Texas and Tennessee -- don't have individual income taxes.

The draft bill includes provisions to smooth the tax cliff for those taxpayers whose incomes are barely above the tax threshold that bumps them into the high income tax table for taxpayers with net taxable income above $84,500. The cliff refers to the impact a relatively small rise in income has on the accompanying increase in taxes.

CORPORATE CUT

The current top corporate income tax rate of 6.2% will drop to 5.9% on Jan. 1, under a 2019 state law.

The summary of the draft bill states that the proposal would cut the top corporate rate from 5.9% to 5.7% on Jan. 1, 2023.

The top corporate rate would drop to 5.5% on Jan. 1, 2024, and then to 5.3% on Jan. 1, 2025, under the draft bill, but, as with the individual rate cuts for those dates, only if no funds are transferred in the prior year from the catastrophic reserve fund.

TAX CREDIT

The draft bill also would grant Arkansans whose taxable incomes are at or below $23,600 and who timely file tax returns a $60 nonrefundable income tax credit. The $60 credit would phase out in $5 increments for every additional $100 in taxable income over the $23,600 threshold until the credit would be exhausted at $24,700.

The income tax thresholds that determine the amount of the credit would be indexed to inflation under this proposal.

The proposal includes some fiscal measures aimed at ensuring the renamed catastrophic reserve fund stays at 20% of net general revenue disbursed, according to a summary of the draft bill. The long-term reserve fund balance now is about $1.2 billion.

REVENUE REDUCTION

The finance department projects that the draft bill would reduce general revenue by $135.25 million in fiscal 2022, $307.4 million in fiscal 2023, $383.2 million in fiscal 2024, $459 million in fiscal 2025 and $497.9 million in fiscal 2026, as long as the tax cut triggers are met.

A month ago, Hutchinson and some lawmakers said they believe that Arkansas can afford to cut individual income taxes by more than $300 million over the next two years without negatively affecting critical state services in light of new revenue projections.

Some said that would go too far. Others said it wasn't enough.

Senate Democratic leader Keith Ingram of West Memphis said last month that he doesn't want to lull the public into believing that the state has excess state general revenue without "real needs" to fill, such as reducing the waiting list for people with developmental disabilities to get care and expanding access to pre-kindergarten programs.

A month ago, 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, finance department Secretary Larry Walther said in a letter to lawmakers. The Revenue Stabilization Act prioritizes the distribution of general revenue to state-supported programs.

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.

The finance department a month ago 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.

Finance department spokesman Scott 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 Feb. 14.

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