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Tax proposals laid out last week in Gov. Asa Hutchinson’s proposed budget, including a temporary income tax break for residents moving into the state, drew enthusiastic responses from business leaders and tax attorneys.
“It’s extraordinary that the state is in a position to talk about possible tax rate reductions in this environment,” Arkansas State Chamber of Commerce CEO Randy Zook told Arkansas Business. “It’s a tribute to the governor’s leadership and the Legislature’s effective steps in the past that we have a surplus allowing us to add to the rainy day fund and to consider appropriate tax cuts to improve our competitive position in relation to other states.”
Hutchinson described his ideas to lawmakers on Tuesday, laying out a $5.9 billion budget plan that detailed a possible $50 million in tax reductions. State revenue has held up well during the coronavirus pandemic, topping projections regularly.
Though immediate headlines featured the governor’s plan to give state newcomers a lower 4.9% income tax rate for five years, Zook and tax attorney Matthew Boch of Dover Dixon Horne PLLC in Little Rock focused on Hutchinson’s multi-year goal of cutting the state’s top income tax rate to 4.9%.
Boch said a five-year plan to hit that 4.9% target would encourage high earners to locate and remain in the state. “There is something psychologically important about that 5% threshold where getting below it will help us no longer seem like a high-tax state for individuals.”
He believes corporate rates should be reduced similarly. “Arkansas continues to be considered to have an outdated tax code that hurts our competitiveness,” Boch added. “The Tax Foundation ranked us 46th, near states like New York and California. Tax policy commentator David Brunori observed that Arkansas is among a few Southern states ‘plagued by antiquated, complicated systems.’”
Zook said Arkansas has already taken significant steps in tax policy to make the state more competitive for residency. “We had a significant reduction in the capital gains tax, and that was important,” he told Arkansas Business in a telephone interview.
“Very often a liquidity event like selling a business or a major piece of property in a family has led people to leave Arkansas residency,” Zook said. “With a high capital gains tax, these taxpayers would lose a sizable chunk of the proceeds, so moving was not an irrational act. In many cases it was a smart move. But as I said, we’ve taken real steps to improve that, and those cases are much less common.”
Another element of Hutchinson’s tax plan would reduce sales taxes on vehicles priced less than $10,000 from 6.5% to 3.5%, which Boch called “a reasonable way to reduce double-taxation since these vehicles already were subject to sales tax when first purchased. It will help working Arkansans afford transportation.” The governor said his proposal would also set aside $50 million in tax relief for Arkansans in low- and middle-income brackets.
There are signs that some legislators, including the governor’s fellow Republicans, are wary of some aspects of the budget — including the tax cut for new residents.
State Rep. Lane Jean, R-Magnolia, told the Arkansas Democrat-Gazette in a story that appeared Sunday that the plan has “got serious trouble.”
“How do you go back to your district and people been working 30, 40, 50 years and you have got a newcomer in and they get a better rate than they get? That just doesn’t make sense,” Jean, a co-chairman of the Joint Budget Committee, told reporter Michael Wickline.
More to Do
Zook, who leads the chamber as well as the Associated Industries of Arkansas, said several other items are “crying out for attention” as the General Assembly plans for its regular session in January. Meanwhile, he’s urging common sense as the pandemic surges again in Arkansas.
He predicted a rough time before the United States can get vaccine doses distributed next year, perhaps in the second quarter. “We can see light at the end of the tunnel,” Zook said. “But in the meantime the health system is facing serious challenges, so we all have to do our part. We can’t relax, and we have to do common-sense things like wear a mask, keep your distance and wash your hands.”
Looking farther ahead, Boch suggested that the state implement several recommendations of last year’s Tax Reform and Relief Legislative Task Force. One concern repealing the “throwback rule,” he said, describing it as “essentially a special income tax on Arkansas jobs and investment for companies that sell goods into other states.” He also favors a credit to offset property tax on inventory. “Only a handful of states tax business inventory, which is a big part of why you don’t see many regional distribution centers in Arkansas.”