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Tax-table changes explained

Plan slightly favors lower, middle earners, lawmakers told by Michael R. Wickline | October 10, 2021 at 12:00 a.m.

A proposal that would reduce the state's top individual income tax rate from 5.9% to 5.5% and consolidate the lower- and middle-income tax tables would provide slightly more relief over the next 10 years to those in that combined table than to high-income taxpayers, a consultant told lawmakers Tuesday.

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 those making more than $82,000.

This proposal would consolidate the tables for low- and middle-income taxpayers.

The proposal also would make marginal changes for smoothing the tax cliff between the tax tables, according to New York-based Moody's Analytics Inc.'s report to the House and Senate Revenue and Taxation Committees.

The top rate would apply to the net taxable income between $39,000 and $82,000 for taxpayers in the proposed consolidated income tax table and to the net taxable income above $8,300 for those in the high-income table.

The proposal would simplify the state's income tax code and is projected to reduce general revenue tax collections by about $250 million a year, starting in fiscal 2023, which starts July 1, 2022.

The total reduction would be about $2.6 billion over 10 years after factoring in inflation, said Dan White, director of government consulting and fiscal policy research at Moody's Analytics.

The proposed cut would go into effect on Jan. 1, 2022 -- halfway through fiscal 2022 -- and would reduce state general revenue tax collections by $125.6 million in fiscal 2022, Moody's Analytics said in its report.

The report shows that under the proposal, $1.38 billion of the tax relief would go to the taxpayers in the consolidated low- and middle-income tax table over the next 10 years and $1.25 billion would go to taxpayers in the high-income tax table.

Middle income cut

The proposal could be classified as a middle-class tax income cut with taxpayers between $20,000 to $80,000 in net taxable income getting a larger percentage of their taxes cut than other taxpayers, White said. That's due in large part to the consolidation of the tables, according to Moody's Analytics' report.

Taxpayers with less than $20,000 a year in taxable income would receive smaller tax cuts than other taxpayers, White acknowledged.

With the state's minimum wage at $11 an hour, full-time workers will earn nearly $23,000 in income a year, he noted.

Taxpayers making less than $22,000 a year are probably working part-time and receiving significant assistance from the state and federal government through programs such as Medicaid and welfare, so their taxable income may not be the best way to judge their overall well-being, he said.

Sen. Joyce Elliott, D-Little Rock, questioned what evidence exists to show that income tax breaks for high-income earners creates jobs, adding she doesn't know that that has been proven over the years. She said she also is interested in an equitable impact from income tax cuts.

Sen. Jonathan Dismang, R-Searcy, who has an income tax cut proposal similar to the one reviewed by Moody's Analytics, said Arkansas "can become a magnet for retirees" through the combination of lowering the state's income tax rates and keeping property taxes low.

"To me, this strikes the right balance of making sure that we are providing tax relief [and] simplification to working families, and then also showing that we are willing to be competitive on income taxes with our neighbors," he said.

Spending cut impact

Two of Arkansas' neighbors -- Tennessee and Texas -- don't have state income taxes.

White said people and businesses that are considering relocating to other states check out a state's overall tax burden, not just individual income taxes, and other factors such as the quality of life.

He said Moody's Analytics projects that Arkansas' economy would expand by almost $1 billion over the next 10 years with the help of this income tax cut proposal.

That assumes the proposed cuts are financed through surplus state tax revenue and potentially reserve funds, not major spending cuts, he said.

If the state makes major spending cuts to finance these cuts, the projected positive effect on the state's economy could be lower, he said.

Ask what happens if the state's economy goes into recession, Dismang said that's why it's critical for the state to have a long-term reserve fund equal to about 20% of the general revenue budget a year as a backstop so essential state services aren't gutted.

"I think that most people here are going to understand that this is fairly aggressive tax cut," Senate President Pro Tempore Jimmy Hickey, R-Texarkana, said.

"But we have been fortunate due to what the legislative and executive branch have done to get" about $1.2 billion into the state's Long-Term Reserve Fund, he said.

The Long Term Reserve Fund, which Gov. Asa Hutchinson has called the state's savings account, has been the primary beneficiary of a record general revenue surplus of $945.7 million in fiscal 2021.

"To the degree that you have that savings account to fall back on for times of economic distress, that is a huge plus for overall credit and fiscal well-being of the state going forward," White said.

Emily Mandel, an economist for Moody's Analytics, said the state collected $9.1 billion from individual income and sales and use taxes during six quarters from January 2020 through June 2021, and the covid-19 pandemic cost the state about $100 million in revenue from those taxes.

But, without the federal covid-19 stimulus funds, the state would have collected about $1.09 billion less in those taxes than it did in that period, she said.

Moody's hiring

In July, legislative panels signed off on hiring Moody's Analytics to assess the impact of federal covid-19 stimulus payments and state income tax cuts on Arkansas' economy and tax revenue in preparation for a possible special legislative session on income tax cuts.

Moody's will be paid up to $288,000 by the Bureau of Legislative Research under its contract that runs through Dec. 31.

Rep. Lane Jean, R-Magnolia, and Dismang said Wednesday that legislative leaders and Hutchinson also are weighing proposals to further reduce the top individual income tax rate to 4.9% while also providing more low-income tax relief, with an eye toward reaching a consensus for a special session. Neither cut was included in Moody's Analytics report.

Asked about prospective timing of a special session on income tax cuts, Dismang said Wednesday, "I would say emotions are pretty high now and I would assume that would play into timing." The Legislature has been in session for a week, working on congressional redistricting and covid-related matters.

Asked about his reaction to the Moody's report and the timing of a special session, Hutchinson said in a written statement, "The Moody's economic outlook presented to the General Assembly makes the same point as the analysts at [the Department of Finance and Administration] that our revenue projections into the future are more than sufficient to allow another round of tax cuts.

"I will continue to work with the legislature to build a consensus around lowering the individual income tax rate," the Republican governor said.

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