Good roundup from the D-G’s Mike Wickline on possible changes to the state tax code that the legislature’s special task force on taxes plans to review. The task force calls itself “Tax Reform and Relief,” but the underlying aim here is to hunt for ways to cut income taxes on higher earners.
At its next meetings, on April 25 and 26, the task force will examine more than 40 sales tax exemptions that reduced state revenue by more than $1 billion last year. That includes the partial sales tax exemption on groceries. The sales tax on groceries was gradually reduced during the Beebe administration, from 6 percent down to 1.5 percent, and is slated to fall to 0.125 percent next year based on legislation passed in 2013.
In total, Arkansas currently has 101 sales tax exemptions, reducing revenue by $1.4 billion annually.
A number of members of the task force would no doubt like to re-route some of that money toward income tax cuts for the rich. Indeed, that’s the reason that the task force was created in the first place, under pressure from some GOP lawmakers who believe that higher-income Arkansans haven’t been gifted enough tax breaks under the Hutchinson administration. At the opening of the fiscal session in February, Hutchinson himself told the legislature, to applause, that in in the 2019 legislative session, he wants to see the top marginal income tax rate cut from 6.9 percent to 6 percent, which would be a $180 million tax cut, knocking down state revenues by 3 percent. Such a cut would impact individuals who make more than $75,000 or married couples making more than $150,000, with the benefits heavily weighted toward the very rich — less than 1 percent of taxpayers would get 12 percent of that proposed tax cut. It would be the largest tax cut in the state’s history, so the task force may be motivated to hunt for offsetting revenues.
While cutting income taxes seems to be the ultimate mission of this task force, it’s also possible that a reduction in exemptions and applying the sales tax to more services could lead to reducing the sales tax rates (in tax jargon, that’s broadening the base in order to lower the rates).
The few progressive voices on the task force have advocated for an earned-income tax credit (EITC) or a sales tax credit to give targeted relief to low-income Arkansans. That possibility will be discussed along with the various sales tax exemptions under review at the task force meeting later this month. If an EITC was large enough, it could potentially provide more directly targeted relief to lower wage earners than the current grocery tax exemption, which applies to anyone who buys groceries, regardless of income.
The list of 43 sales-tax exemptions to review was first developed at a March 20 meeting and was posted this week on the General Assembly website as an attachment to the agenda for the upcoming meetings. The list includes certain sales tax exemptions that apply to manufacturing, agriculture, fuel, medical services and equipment (including prescription drugs and nonprofit hospitals and nursing homes), billboards, newspapers and magazines, ticket sales by schools and colleges, and more. You can see the full list below.
This is a political minefield, as each exemption has interests — some with significant political muscle — that benefit from it. The task force will surely be hearing from the Farm Bureau, the manufacturing industry, hospitals, retailers and grocery stores, just to name a few.
The task force hasn’t made any recommendations on these items yet, but will discuss each one at its April meetings, giving time for public comment (this sounds to me like it’s going to take more than two meetings).
Because many sales taxes are regressive, broadening the base in order to keep rates relatively lower could benefit lower-income Arkansans, as Eleanor Wheeler, a senior policy analyst at Arkansas Advocates for Children and Families explained in a recent blog post. Many sales tax exemptions make sense for economic or policy reasons (or are required by federal law), Wheeler argued, but there is room for reform:
Broadening the sales tax base is a good idea for modernizing the Arkansas tax code. As our economy changes, so must our tax system. Arkansas, like the rest of the United States, has been shifting gradually from a “goods” economy to a “services” economy. Because services are less likely to be taxed (we tax a coffee cup but not your lawn service or accountant), that means our sales tax base is shrinking. When the base shrinks, we must choose between a higher sales tax or less money to pay for critical public services like education and public safety. Arkansas should broaden the sales tax when possible to include the taxing of services and eliminate unnecessary exemptions.
The question is what to do with the additional revenue raised. Arkansas Advocates proposes that the money go to targeted relief for low-wage workers, such as the EITC, or to needed investments in underfunded programs such as child welfare and pre-K. Republicans in the legislature would rather see the money go directly to tax cuts that benefit the rich.
If we expanded the sales tax base without also creating a state EITC to offset the sales tax burden, we would be shifting our tax structure in the wrong direction (toward low-wage workers). Any extra revenue should be put into a state EITC or put back into the budget to fund critical programs. The worst-case scenario would be to use the extra revenue from the sales tax to fund budget-busting tax cuts for upper-income earners. Unfortunately, this is an idea with legs.
As for the possibility of a tax hike on groceries, Wheeler writes, “Arkansas Advocates for Children and Families would be open to reconsidering the phase-out of the grocery tax, but only if the revenue savings were put into a targeted EITC for working families.”
(For more from Arkansas Advocates on the sales tax issue, see this earlier post from last November.)
The task force is required to issue a report to the governor and legislature by September 1, which will likely include recommendations for legislation for the 2019 session.
Here’s the full list of exemptions to be reviewed and discussed that the task force’s April meetings:
Recommendations/Requests for Information
From 3/20/18 Meeting About Sales and Use Tax
Food tax (grocery tax)
Newspaper sales tax
Used car $4000 smoothing? (possible change to $10,000)
Radio & TV services (media exemptions)
Federally chartered credit unions
Coin-operated car washes
4-wheelers or ATVs for farm use
EITC or STC
Sales of machinery & equipment used directly in manufacturing or processing
Partial sales tax exemptions on the use of natural gas and electricity by electric power
Sale of baling twine
Sales of fuel packaging material
Repeal any exemption less than $10,000 (energy, non-profit, religious)
Repeal sales of used property [or parts] if traded in
Sunset all “by name” exemptioned organizations (non-profit) [note: this is in referral to
DFA’s presentation that listed named organizations e.g. boy scouts, etc.]
Dyed diesel exemption
Sales of fuel to vessels, barges, other watercraft, and railroads
Sale or rental of ad space in newspapers & publications
Sales of raw products (Christmas trees, from farm/orchard/garden, farmers markets)
Sales of baby chickens
Sales of packaging materials used by cotton gins
Sales of cotton, seed cotton, lint cotton, or baled cotton
Sales of seed to be used in commercial production
Sales of feedstuffs used in commercial production of livestock or poultry
Sales of gas from “biomass”
Aircraft held for resale
Sales of new aircraft to a purchaser outside Arkansas
Sales tax exemption for gross receipts in excess of $9,150 for Class 5-8 trucks
Low income first 500 kilowatts
Medical exemptions—prescription drugs
Durable medical equipment
Sale of dental appliances
Sales by municipalities for tickets
Sales by public schools for tickets
Sales by colleges for tickets
Parking spaces charged by government (schools)
Admission to county fairs
Magazine/publications sold through subscription
Sales tax exemption for non-profit hospitals and nursing homes and federally chartered nursing homes