Governor Hutchinson today sent a letter to the legislative task force on taxes stating his opposition to raising the grocery tax. The task force had passed a motion last week agreeing to look at the possibility alongside the possibility of an earned income tax credit (EITC), or similar credit, that would provide targeted relief to low-income Arkansans.
Hutchinson has faced criticism for not speaking out forcefully against the idea before now, both by Democratic candidate Jared Henderson and his Republican primary opponent Jan Morgan. In his letter, Hutchinson offered praise to the task force for exploring options but heavily implied that the partial sales tax exemption for groceries should not be on the table. “I do not support raising the sales tax on groceries,” Hutchinson stated in his letter, calling himself “a longtime and consistent supporter of eliminating the sales tax on groceries.”
My guess is that this letter spells the death of the idea of raising the grocery tax any time soon. Keeping the sales tax on groceries lower is, on its own, good news for lower-income Arkansans. 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. 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.
However, Hutchinson’s letter has to be viewed in the overall context of his tax-cut promises for higher earners, as well as Republican opposition to giving low-income earners targeted relief via an income tax credit such as the EITC. From that lens, the picture doesn’t look so rosy for lower-income Arkansans, while the wealthy are slated to make out very well indeed.
The task force calls itself “Tax Reform and Relief” but the reason it was created in the first place was to hunt for ways to cut income taxes on higher earners, 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.
Soaking up all that revenue will eventually mean that public investments in areas like child welfare, pre-k, and social safety net spending will take a hit. That will disproportionately hurt lower-income Arkansans.
Then there’s the income tax credit, a powerful poverty-reducing measure that Democrats have unsuccessfully pushed for in the legislature for years. There are any number of ways to design such a tax credit (the federal EITC is designed to encourage work), but the core idea is that a credit available to low-income people either reduces their income taxes or increases their refund check. An EITC already exists on the federal level and a state credit could be added on top; see this post for more explanation of the policy. If Hutchinson and Republican legislators were interested in providing relief to those struggling to make ends meet, this would be the most efficient mechanism to do it. Unfortunately, their focus is elsewhere on the income scale and I fear that the task force, which voted to consider an income tax credit along with the grocery tax exemption, may abandon the idea.
Those two policies — the partial exemption for the sales tax on groceries and a tax credit that would provide targeted relief to put money directly in the pockets of those at the bottom of the income scale — don’t really have anything to do with each other, other than that they both benefit lower-income Arkansans. Why did the task force tie them together? I’ll have another post forthcoming that gets into more of the policy details but here’s the gist of the wonky backstory:
The dogged efforts of progressive legislators to push the EITC have been stymied again and again in the legislature by Republicans like Rep. Charlie Collins — who disparaged the program as “welfare.” However, in the context of this task force, some Republicans, even including Collins, have shown openness to some version of the targeted tax credit concept. But such a tax credit would cost money, which will be in short supply if the task force recommends lavishing a tax cut on the rich.
Faced with this quandary (of their own making!), some on the task force landed on the idea of paying for an income tax credit by eliminating some or all of the sales tax exemption on groceries, which could raise quite a lot of revenue. They were no doubt motivated by testimony given to the task force by both a right-leaning and a left-leaning think tank that for the same cost, tax credits could deliver more relief to lower-income Arkansans than lower sales taxes. It all comes down to the details but, in general, it’s true that a properly designed and funded tax credit could be the best possible deal for poor Arkansans and the most efficient way to put more money in the pockets of those who need it most. That’s because the grocery tax applies to anyone who buys groceries, regardless of income, so some of the revenues soaked up by the grocery sales tax exemption end up benefiting wealthy grocery shoppers (or tourists) — whereas all of the revenue spent on an income tax credit goes directly to low-income Arkansans.
Task force leaders presented this as a tradeoff of sorts — raising the grocery tax would hurt those at the bottom of the income scale, but that could be offset by an income tax credit. But this is a perverse choice: Republicans were essentially saying they would only be willing to consider offering this relief to the poor if it was paid for by raising a tax that would disproportionately hurt the poor. The legislature could keep the grocery tax low and offer a tax credit for low-wage workers living paycheck to paycheck. The reason there’s not enough money to do that is because GOP lawmakers are instead planning the largest tax cut in the history of the state, with absolutely every cent going to the state’s highest earners.
Despite the ugliness of this swap, some progressive advocates and legislators were open to discussing it, because gaining a tax credit could potentially be a better outcome on net for low-income Arkansans. That’s why groups like Arkansas Advocates said they would be open to a phaseout of the grocery tax exemption, but only if those revenues were redirected toward an income tax credit. Or why a senator like Joyce Elliot was willing to vote for the motion to continue the discussion on the two policies. They’re trying to squeeze out whatever lemonade they can out of this lemon of a task force.
There would be a lot of details to sort out: Progressives would want to make sure that some help was also provided to those who don’t qualify for a traditional EITC, such as the elderly or those on disability; they would insist that it was “refundable,” meaning that people can receive the benefit from the government even if it exceeds their income tax liability (in practice, this means leading to larger refund checks); they would need to make sure that it was sufficiently funded and efficiently designed, particularly if it was happening alongside any sort of significant hike in the grocery tax.
Left to their own devices in a policy lab, liberal lawmakers could probably come up with a plan that enacted an income-based tax credit, paid for by a small increase in the grocery tax, that benefited low-income Arkansans on net. Given the makeup of this task force, however, there was always reason to be leery. Remember, Republicans are eagerly hunting for revenues to help pay for a tax cut for the rich. Once the grocery tax — a very big pot of potential revenues — is on the table, what if they start pulling some of those revenues to pay for their big income tax cut? Or what about a worst-case reverse-Robin Hood scenario — they raise the tax on groceries, lower income taxes on high earners, let revenues fall for public spending to help those who need it most, and forget about the income-based tax credit altogether?
Should progressives, who fought for years to lower the grocery tax, be willing to roll back some of that sales tax exemption back if it’s the only possible way to get an income tax credit? My guess is that the politics are going to make that question moot. The sales tax exemption for groceries is incredibly popular, it’s a good policy, and it’s simple. Here’s a story that’s easy to tell: The task force is considering raising taxes on groceries. That’s bad! Now try explaining how an unrelated policy involving income-based tax refunds could provide more targeted relief than a broad sales tax exemption. Not much of a campaign ad. Not to mention the fact that Democrats, all things being equal, really don’t want to raise the tax on groceries.
We saw the politics play out this week. Jared Henderson, a Democratic candidate for governor, slammed Hutchinson on the issue:
Raising the grocery tax should never even be up for discussion and as Governor you can bet I would fight any attempt to raise this tax that hits our working families the hardest. Even more disappointing is Asa Hutchinson’s lack of leadership on this issue. Asa Hutchinson wants to cut taxes for the state’s top earners, but he stands silent as the General Assembly toys with the idea of making it more expensive for working families to buy groceries.
Perhaps of more concern to Hutchinson, he also took significant heat from his primary opponent Morgan and his right flank over the issue.
Initially, Hutchinson tried to deflect. “I have been a consistent supporter of eliminating the sales tax on groceries,” he said in a statement on Tuesday. “My position has not changed. The legislative task force has made no recommendations at this point.” He said that legislative review and debate was appropriate and no further comment was necessary until a proposal emerges.
Just two days later, apparently, he decided to nip the issue in the bud. “I have chosen to stay out of much of the debate with regard to the elimination of certain tax exemptions,” the governor wrote in his letter today. “I do not wish to impede your progress. However, as the grocery tax exemption remains a topic of continued debate, it is important for me to inform you of where I stand on this important issue.”
The grocery sales tax exemption, then, appears to be safe for now. But that doesn’t change the big picture: Hutchinson and the legislature are preparing to enact a massive tax cut for the state’s highest earners, which will drain revenues that go to public investments that benefit those most in need. Will there be any corresponding relief for Arkansans at the bottom of the income scale? I asked the governor’s office what his position was on income tax credits and he did not respond.
If the grocery tax ends up being taken off the table, will Republicans be willing to continue discussing income-based tax credits?
“I promise you, the [EITC] is going to be on the table,” Elliot said. “Because I will beat this drum to death. We’re going to have this conversation.”