The Good and The Bad: Tax Task Force Narrows Down Policies for Consideration

The Tax Reform and Relief Task force continued to pare down the long list of potential tax changes this week. These changes will ultimately comprise their final recommendations, due in September of this year. Some good ideas made it past this step. The group voted to further investigate the adoption of a state EITC and a proposal to reverse capital gains exemptions. Not everything was good though; some bad ideas also made it past this round. Those include: tax triggers, expensive personal income tax bracket changes that benefit the wealthy, and various corporate income tax breaks that are especially gratuitous given the windfall corporations just received from federal tax changes this year. The Tax Task force also missed an opportunity to further study combined reporting – a popular, simple way to close corporate tax loopholes that disadvantage smaller local businesses.

The Task Force was reminded by the Chairman multiple times that the measures selected for further review are not necessarily going to end up in the group’s final recommendations. With that in mind, here are the highlights of what made it past this week’s round of deliberations:

A state Earned Income Tax Credit (good) – This is the best tax-change proposal that moved forward this week. It’s a straightforward way to lower the tax burden for people who are low on the income tax bracket. It is cleverly designed to avoid both complicated paperwork and inadvertent handouts to the rich – a tough needle to thread for progressive tax policy. A state Earned Income Tax Credit (EITC) would be fantastic news, especially for low- and middle-income families in Arkansas who were left out of just about every tax cut passed during the past three legislative sessions (and who are also left out of most of the remaining proposals the Tax Task Force is going over, for that matter). The group is looking into a 5 percent and 10 percent EITC, which would put between $40 and $77 million back into the pockets of working families across Arkansas. More on details of that policy here.

Some of the best hope for getting an EITC passed in 2019 comes from its bipartisan appeal. During this week’s meetings, a representative from the Tax Foundation (a typically conservative think tank) praised the EITC for its simplicity in offsetting other less progressive tax changes. In other words, it’s a good salve for some of the more popular ideas that would end up burning low-income people in our state.

Reversing capital gains exemptions (good) – Some of the most shockingly bad tax policies to make it out of the Arkansas capitol in recent years have been changes to tax treatment of capital gains income. This income is usually earned by rich people (from investments in things like stock portfolios and real estate). Being lenient toward tax bills for capital gains income is synonymous with being lenient toward upper-income taxpayers. How lenient have we become? Those in Arkansas who are lucky enough to have capital gains income above $10 million don’t have to pay taxes on that income. That rule affects about 12 (yes 12) people in Arkansas. If you’re well-off enough to have capital gains income, but not THAT well-off, you still get a half-off discount on your tax liability for those earnings. These rules cost our state about $54 million a year in tax revenue. For context, if we got rid of these rules, we would have more than enough for a 5 percent entry-level EITC.

Tax Triggers (bad) – Tax Triggers set up a mechanism to automatically enact a tax cut once revenue hits a certain level. The result is an autopilot tax system that acts like a snake, slowly constricting our state’s ability to pay for roads and schools. That being said, it’s understandable why lawmakers who are eager to cut tax rates, but know we don’t have enough revenue to do it, would see this as an appealing strategy. That’s because tax triggers mean that a legislator can take credit for cutting taxes now, and not necessarily face the consequences when the trigger is “pulled” at some future date. One good question about tax triggers came up in the discussion this week: what happens if we cut revenues to the bone because we trip the tax cut “triggers” and then we get into a recession? Would there be a reversal of these triggers to pull us out of a revenue disaster? Here’s the short answer: no.

Personal Income Tax Cuts for the rich (bad) – A variety of different proposals for a new personal income tax bracket structure were proposed. All had price tags that would be detrimental to the state budget (from a dangerous $225 million to a staggering $947 million, or about 15 percent of our annual state general revenue). As is typically unavoidable with personal income tax cuts, these proposals also heavily favor those who are already wealthy. The economic literature is clear that these types of cuts, in addition to being expensive, have a terrible track record of improving state economies.

Corporate tax erosion (bad) – A handful of policy proposals would eat away at corporate revenue in Arkansans, some by widening loopholes. Corporate tax policy can be complex, but the key takeaway is this: Multi-state corporations just received a massive windfall from the federal Tax Cuts and Jobs Act this year. This is no time to cut their rates, or make it easier for them to hide their profits with loopholes. You can read more about how corporate tax policy works in Arkansas here.

One of the proposals that moved forward would benefit some multi-state entities by changing how they count their profits in each state (known as apportionment). Moving to a “single sales factor” apportionment would cost Arkansas about $8.8 million a year, with no evidence that it would improve our economy.

Another costly proposal is to remove Arkansas’s “throwback rule,” which would cost $24.5 million a year. Our “throwback rule” forces multi-state entities to pay taxes on income that would otherwise be totally untaxed or “hidden” from all the states they operate in.

One corporate tax policy, combined reporting, would have been a welcome change but failed to move forward. Combined reporting is a popular and common-sense way for states to make sure that multi-state entities are not hiding profits in other states. This measure simply asks large corporations to file all entities on one form.

The Tax Task Force is nearing its September 1st deadline for final recommendations. These recommendations will inform policy decisions that will be made during the next legislative session that begins in January 2019. The next Tax Task Force meeting is scheduled for June 20th, 2018. You can stay tuned for more updates by following AACF on Twitter and Facebook, or signing up for our legislative alerts.