The Arkansas House, as well as the Senate Revenue and Tax committee, are taking up bills this afternoon to create a tax exemption for military retirement pay, part of Gov. Asa Hutchinson‘s proposed package of tax cuts.
The measure will surely pass because a tax break for veterans is understandably popular. But it will also include an entirely unrelated plan to enact a massive giveaway to the soft drink industry, paid for by raising taxes on unemployment benefits and digital downloads. That…might be less popular! So rather than trying to defend it on the merits, the governor’s team is sneaking it through under the cover of the military retirement pay tax exemption.
A little background: Lobbyists for the soft drink industry have fought tooth and nail against the wholesale-level tax on soft drink syrup since it was implemented by Gov. Jim Guy Tucker in 1992 (and approved by referendum in 1994 by a wide margin). Hutchinson is now set to deliver those lobbyists a $6 million tax cut.
Let’s leave aside the question of whether a tax break for military pensions is good policy. The governor and his allies have arranged this bill so that if legislators want to vote for that tax break, they also have to back the totally unrelated $6 million cut on soft drink syrup — paid for by a couple of small tax increases hitting the unemployed and consumers. Hutchinson and co. have aimed to bamboozle the legislature and the public with a misleading explanation of the pay-fors. But let’s be clear: There is no reason whatsoever that the tax exemption for the military necessitates a a tax hike on unemployment benefits and digital downloads or a giveaway to lobbyists for soda corporations.
Here are the numbers based on impact for fiscal year 2019:
* The exemption for military retirement benefits would cost around $13.4 million.
* The bill also includes an increased sales tax on candy and soft drinks which raises around…$13.8 million.
Catch that? The bill is already revenue neutral via the tax hike on candy and soft drink sales, without the inclusion of the tax increases on unemployment benefits and digital downloads (actually the state ends up coming out ahead by around $400,000 just based on the two measures above).
Many media outlets (and I think we’ve been guilty of this too) will, as a matter of shorthand, describe the unemployment benefits and digital downloads as a pay-for for the military benefits tax cut. But they’re not! They are only in the bill to pay for the giveaway to the soda industry. Worth noting, as Rep. Michael John Gray did in House committee last week, that in practice, on net, the bill raises taxes on consumers of soda while lowering taxes on corporations involved in wholesale sales.
Next batch of numbers (again, based on impact for fiscal year 2019):
* Removing the income tax exemption on unemployment compensation: approximately $3.1 million
* Imposing tax on digital downloads (this replaced the earlier idea of removing the sales tax exemption on mobile homes, which turned out to be politically untenable): $2.4 million
* Cutting the wholesale-level tax on soft drink syrup by 40 percent: $5.9 million
Now, if you’re scoring at home, this is essentially an entirely separate bill. Borrowing the $400,000 saved above, it’s also revenue neutral. But let’s think about how a bill like this might fly if it was introduced on its own merits. It’s a tax hike on unemployed people and on consumers who make purchases online (heavily impacting college students and their families who may be getting certain needed materials online according to testimony at the House Committee last week) — in order to pay for a $6-million handout to soda wholesalers. Hard to believe this would pass! But piggyback it on to a tax cut for the military nobody wants to vote against? That’ll do the trick. It’s an ugly bit of sausage making, a clever gambit to tax folks that are out of work and everyday consumers in order to give a break to corporate interests.
Recommended viewing: Gray calls the Hutchinson administration and the bill’s legislative backers out on this scam last Thursday, during the House committee meeting. He politely points out that they are clearly sticking in an irrelevant slate of policymaking into a bill — that the public probably wouldn’t stomach — to “ride the coattails” of the more popular idea of a military retirement benefits tax cut.
The governor’s staff and the bill’s backers basically admit to the ruse. As bill sponsor Sen. Jake Files put it, “In an ideal situation, these things wouldn’t have been joined together, but they are. … It is this way. … This was probably a way to achieve two goals at one time.”