The legislative task force on taxes, reviewing possible changes to the state tax code yesterday, okayed a motion yesterday to study the possibility of raising the grocery tax and creating an income tax credit to provide targeted relief to low-income workers. Here’s a good report from the D-G’s Mike Wickline, who was at the meeting.

Will this end up being a good deal for lower-income Arkansans? That depends on the details. Given the body charged with coming up with those details, I’d say we plenty of reason to be leery.

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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. 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.

However, the few progressive voices on the tax force have been pushing for a state earned-income tax credit (EITC), which would put money directly into the hands of lower-income workers. The federal EITC is available to working families with children who have annual incomes below about $40,000 to $55,000 (depending on the family size) and working people who have no children but have incomes below $15,270 for an individual, or $20,950 for a couple. The program is designed to encourage work and is a “refundable” credit — meaning that workers can receive the benefit from the federal government even if it exceeds their income tax liability. In other words, this can increase the size of refund checks, which then get spent on vital necessities for these workers and working families, research shows. The federal EITC benefited 26 million working families and individuals, lifting 5.8 million of them out of poverty, including about 3 million children.

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Rep. Warwick Sabin has doggedly pushed legislation that would enact a state-level EITC which would give lower-income workers a tax credit of 5 percent of the value of their federal credit. It’s a far more efficient approach than Hutchinson’s much smaller tax cuts for lower-income workers that passed last year; the EITC would have cost significantly less but given significantly more relief to lower-income workers. Unfortunately, Republicans in the legislature rejected the state EITC and the notion was punted to the task force. Ronald Reagan was a supporter of the EITC approach, a fact often pointed out by Democrats; however, Reagan’s acolytes, such as Rep. Charlie Collins, have disparaged the EITC during past legislative debates as “welfare.”

While the legislature has been reluctant to okay this sort of targeted relief for the poor, the task force yesterday agreed to look at the possibility of an EITC, or other targeted income tax credit, as a way to offset a potential increase in the sales tax applied to groceries. The task force, in a divided vote, approved a motion from its co-chairman Rep. Lane Jean to study these options for consideration in August.

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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. This was a long effort of heavy political lifting to reduce the burden on all Arkansans purchasing groceries — and the reduced sales tax on groceries is now extremely popular — so it’s jarring to see the task force put reversing that effort on the table.

Sales taxes are generally regressive — because the tax rate is the same for everyone, poor people end up spending a higher proportion of their incomes on these taxes than rich people (income taxes, on the other hand, typically aim to be progressive by charging higher rates for higher incomes). So raising the grocery tax would hit lower-income Arkansans especially hard  —and would hit them hard specifically by increasing the cost of goods that are literally necessary for survival (important political side note: it would also hit senior citizens, who might no longer have much taxable income but still buy groceries).

That said, a tradeoff like the one suggested by Jean’s proposal for study could potentially help lower-income workers on net. If an EITC or similar income tax credit was large enough, it could 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. In other words: Some of the revenues soaked up by the grocery sales tax exemption end up benefiting wealthy grocery shoppers, whereas all of the EITC costs go directly into the pockets of low-income workers.

But there’s no guarantee that the task force would recommend that all of the revenues brought in by raising the sales tax on groceries would go toward an income tax credit that helps the poor. Raising the grocery tax could raise a couple hundred millions of dollars per year. Let’s remember the context that this task force is operating in: At the opening of the fiscal session in February, Hutchinson 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.

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It would be the largest tax cut in the state’s history, so the task force is highly motivated to hunt for offsetting revenues. If I was a progressive on the task force, I would be at least a little worried about the endgame if raising the grocery tax is on the table.

Rich Huddleston of Arkansas Advocates for Children and Families provided the following statement:

Just about everyone seems to agree that broadening the sales tax base is a good idea for modernizing the Arkansas tax code. There is also rare consensus on some cautions to that approach: don’t tax business inputs and be mindful of the regressive nature of the sales tax. Arkansas should broaden the sales tax when possible to include the taxing of services and eliminating unnecessary exemptions.  We need to be careful not to tax business inputs for economic competitiveness reasons.

Sales taxes are harder on low-wage workers, and that the best way to offset that burden is with a targeted tax credit, such as a state earned income tax credit or EITC. We 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 and back into the budget to fund critical programs for children and families.

AACF believes the worst-case scenario for Arkansas’s low-income children and families would be if we expanded the sales tax base, but failed to create a state EITC to offset their sales tax burden or put the savings back into the budget to fund critical programs, and instead used that money to fund budget-busting tax cuts for upper income earners.

Among the ideas floated by task force members have been variations on the earned income tax credit, such as a grocery tax credit or gasoline tax credit (such credits would ultimately still have to be administered through the income tax system to target low-income workers). Part of what you are seeing, I suspect, is an effort to put an Arkansas-specific brand on an idea, the EITC, that has become associated with nationally with Democrats or liberals. You might recall that Arkansas Republicans became more open to Medicaid expansion when they could call it something else.

And as with Medicaid expansion, some of this potential Republican revision would make for bad policy and harm the people the program is meant to help. For example, some lawmakers would like an EITC that is non-refundable, meaning that it could reduce tax liability but not actually put additional dollars into the pockets of low-income workers.

“If a state EITC is created, it has to be refundable,” Huddleston said. “That is, if the EITC the family is eligible for is greater than the state income taxes they owe, they should receive the difference back in the form of a cash refund. The reason for this is clear. Many low-income families don’t owe state income taxes because of policy changes enacted over the past decade. However, they still have a higher overall state and local tax burden because of their higher sales tax burden relative to their income. A refundable EITC would help reduce that high sales tax burden.”

The discussion about the grocery tax is happening as part of a broader discussion by the task force about sales tax exemptions. In total, Arkansas currently has 101 sales tax exemptions, reducing revenue by $1.4 billion annually. The list of 43 sales-tax exemptions to review was first developed at a March 20 meeting. The list included 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.

The legislature is reviewing that list this week and yesterday has voted to give additional study to a half a dozen exemptions in addition to the exemption on the grocery sales tax (including sales of magazines and publications sold through subscription; the back-to-school tax holiday for school supplies and clothing; coin-operated carwashes; and four-wheelers and all-terrain vehicles for farm use).

It’s 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). Because most 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 for Arkansas Advocates, explained in a recent blog post. It could also raise revenues that could 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.

However, this task force has other ideas and made its intentions clear yesterday, approving a motion from Sen. Bart Hester that revenues raised from eliminating sales tax exemptions would be directed toward future income tax cuts. Happy news for high earners! The specific grocery tax exemption was placed in a slightly different category, as lawmakers signaled yesterday that at least some of those revenues would go toward an EITC to offset its impact on the poor (otherwise that would be a pretty bad look, hiking grocery taxes just to lower taxes on the rich). But when asked by Wickline whether revenues raised from raising the grocery tax could also go toward cutting income taxes, Jean responded, “There is no plan right now.”

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Wheeler wrote about the worst-case scenario for Arkansas Advocates:

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.

Eliminating sales tax exemptions 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 grocery stores, for example. The fact that the task force has decided to study these various ideas doesn’t mean it will actually recommend them, or that the legislature would act on such recommendations. However it shakes out, I will hazard the guess that the wealthiest Arkansans will be well taken care of.

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.