Gov. Asa Hutchinson detailed his proposal for a $50 million income tax cut over the next two years, the legislature willing. It’s solely directed at low-income taxpayers. The governor alsoannounced a plan to exempt military retiree income from the income tax, paid with what would be tax increases for the unemployed, mobile home buyers and candy and soft drink buyers.
Low-income taxpayers were omitted from his last tax cut. It also includes a tax break for veterans’ retirement benefits.
The cut would take effect in the budget year beginning July 1, 2018. That means it could be altered in the fiscal session that year should events require.
Hutchinson said his goals were greater fairness and simplicity, along with competitiveness with other states. He says his ideas are “growth-oriented.” He has a goal eventually of a top 5 percent tax bracket, now just under 7 percent, but said that isn’t possible now. He said the cut he plans could be absorbed by expected revenue growth. He characterized existing revenue as “strong” as evidenced by the state having absorbed a previous $100 million tax cut.
He said it was fair for this tax cut to be focused on the lowest-income categories, families making less than $21,000, since they’d been left out of the last cut. This category has the greatest possibility to expand consumer spending and sales tax revenue, he noted. He said that cut will affect about 650,000 taxpayers.
Hutchinson said he also proposed to eliminate the income tax on retired military pension benefits. They currently enjoy a $6,000 exemption. This can’t be absorbed in growth. He said other exemptions must be removed to pay the estimated $13 million cost. “It has to be offset,” he said
Hutchinson was joined by Lt. Gov. Tim Griffin as advocate for the vets’ tax cut. This cut has some opposition in legislative ranks, including Republicans. Hutchinson said he was convinced Arkansas could bring more military retirees with the exemption.
He’d come up with the money this way: $3.1 million in removing an income tax exemption on unemployment compensation: $2.1 million by removing the sales tax exemption on mobile homes; imposing a full state sales tax of 6.5 percent, not the lower 1.5 percent now applied to all food, on candy and soft drinks, for $13 million. That $19 million in higher taxes would pay for the vets benefit and also provide $6.3 million to reduce the wholesale-level tax on soft drink syrup by 40 percent. The soft drink industry fought this tax when Gov. Jim Guy Tucker passed it to shore up Medicaid after he took office in late 1992 and hasn’t quit trying to stop it. Their lobbying help will be significant for the governor. Note that the voters of Arkansas approved this tax at a referendum in 1994 by a wide margin.
You could look at this plan as a give and take for the poor. An income tax exemption — but unemployed, trailer owners and candy and soft drink buyers will pay for a tax break for retired military pensioners.
Hutchinson said he expected a vigorous debate and a push for a tax cut for higher income taxpayers. But he said cutting in lower brackets had a much greater impact on the state than an equivalent cut in higher income brackets. The next round of tax cutting will target the “job creators,” he said.
He said his plan was “cautious and conservative” given the need to also meet government services such as education.
A rollback of the soda tax is a giant give to special interests. Tucker noted in 2013 that the money went into the Medicaid Trust Fund. By 2013, that fund had more than $267 million fund, all dollars that went to the benefit of the sick and elderly. It was a pioneer of efforts to tax soft drinks nationwide.
UPDATE: As expected, some Republicans don’t like the plan because they’d prefer to give tax cuts to higher income people. Rep. Warwick Sabin, a Democrat, says he’ll push ahead with an earned income tax credit which he says is a better economic stimulus and more benefit to the working poor than a tax cut, but that idea faces a big uphill climb in the Republican legislature, particularly after hard feelings produced by the Democratic Party effort to stack the House Revenue and Taxation Committee.
Here’s the governor’s prepared release:
Governor Asa Hutchinson today laid out the details of his income tax cut of more than $50 million. The Governor’s plan will focus on lower income Arkansans who earn between $0 and $20,999 annually. The plan will also reduce the lowest rate in the middle income tax table in order to alleviate the “cliff” effect that occurs when an increase in a taxpayer’s income causes a shift to the middle income table.
The total price tag for the tax cut is $50,517,296—the bulk of which (approximately $46 million) will substantively affect an estimated 657,000 Arkansans. Of that 657,000 (44% of the roughly 1.5 million individual income taxpayers in the state), approximately 120,000 taxpayers in the lowest bracket will be taken off the tax rolls completely.
In addition to his tax cut proposal, Governor Hutchinson also announced Tuesday afternoon his support for exempting all retirement benefits of retired military service members from state income tax—a $13 million reduction in General Revenue. This exemption, consistent with the Governor’s approach to additional tax reductions, must be offset with the repeal of other tax exemptions as outlined here.
Gov. Hutchinson issued the following statement:
“I am excited to unveil this new round of tax cuts as a part of my continued commitment to flattening the state income tax. This cut moves the state toward that goal by removing the tax burden on the lowest income Arkansans.
“In addition, this plan also eliminates the tax on the retirement benefits of our retired service men and women. I believe that reducing the tax burden on our veterans is the right thing to do, provided that we can make up for the loss of revenue. That is why I am asking the legislature to take action to make the necessary offsets so that these cuts are budget neutral. I am confident that this conservative approach to tax cuts will increase fairness and spur economic development by keeping more money in the pockets of the everyday Arkansans who need it the most.”
In 2015, Governor Hutchinson proposed—and the legislature passed—his $100 million Middle Class Tax Cut, the largest income tax cut in Arkansas history. That tax cut provided substantive tax relief to approximately 688,000 Arkansans (46% of the state’s individual income taxpayers). If this latest proposal is passed, approximately 90%—or 1.3 million—of the state’s individual income taxpayers will have benefited from substantive tax relief legislation since 2015.