On February 1, 2017, Gov. Hutchinson signed into law a tax cut for Arkansans who earned less than $21,000 in annual income. Most folks like income tax cuts, but then the bill comes due and the General Assembly must figure out how to pay for the tax cut that is now law. One would think that before a tax cut is proposed and passed that the problem of paying for the tax cut would have been thought out and that State budget cuts could be utilized to pay for an income tax cut.
Rep. Joe Jett, Republican-District 56, and Chairman of the House Tax and Revenue Committee instructed the committee members on how bills would be placed on the agenda for the 91st Legislative Session.
“The same precedence is going to take pace like it did last session. We do the Governor’s tax cut package and then we hold everything up that’s got a negative impact towards the end of the session, usually called the negotiated package, and then we start working through that depending upon the budget process, depending on how much money is left out there. Obviously, that’s going to cause some heartburn for some members. If we put all those tax cuts out, something that’s going to cost the state money, you guys know what that’s going to do to the budget. We are the first line of defense to protect the budget for the State of Arkansas.”
The Governor’s tax cut goes on the agenda first and then the General Assembly finds a way to replace the “revenue” that will “cost the state money”. Note that this rule doesn’t apply to everyone else’s tax cut proposals. This is where “revenue neutrality” (sometimes termed as “budget neutrality”) factors into the equation of how to pay for a tax cut. Politicians are never comfortable in making budget cuts. It’s just not the way to get votes for re-election.
“Revenue neutrality” is achieved by using the Substitution Method of mathematics. This method is used when you have two equations and two unknowns. The two equations in the budget process would be to find out 1) how much money is left in the budget if a $50.5 Million tax cut is applied to the budget and 2) how much revenue is needed to sustain state government? You find the result in the first equation and substitute that number in the second equation. One equation is a benefit to the taxpayer, but the other equation could result in a tax increase.
Tax increase bills were introduced on January 12th in the Senate and House , both entitled, “To Amend Arkansas Tax Law Concerning Income Tax, Sales and Use Taxes, and the Soft Drink Tax; and to Supplement the Arkansas Medicaid Program Trust Fund to Offset Decreased Deposits from Tax Revenues”. The Governor’s tax cut will be paid by increasing taxes on everyone, including those making under $21,000 in annual income.
Initially, the tax bills included a tax on those who purchase a manufactured home. There was major blow back from low-income earners on this proposal, so the General Assembly had to return to the drawing board. They substituted the language “a manufactured or modular home” with “specified digital products and digital codes” on January 24th. The tax bills also include a tax increase in personal property taxes and a new tax on soft drinks and candy, which were classified as food in the elimination of the grocery tax. Only the new soft drink and candy taxes will supplement the Arkansas Medicaid Program Trust fund.
The definition of “specified digital products and digital codes” are ringtones downloaded to a device “used to alert the customer with respect to a communication”; “digital audio works” like MP3 or Internet music downloads; “digital audio-visual works” like presentations with audio components; and “digital books” like Kindle or Nook downloads. Do persons making less than $21,000 in yearly income purchase these products? Yes, they do.
To make it more palatable to the taxpayers, the tax bills also included a tax cut for veterans and their survivors who are receiving military retirement benefits, but for those veterans who aren’t receiving retirement benefits, they will pay the new taxes. Anyone who opposes the new taxes, well, are just not patriotic and don’t support our veterans.
The Senate passed SB120 with 30 Yeas. Senator Missy Irvin, who represents Cleburne County, voted for the bill to pass. The House passed HB1162 with 75 Yeas. Rep. Josh Miller and Rep. John Payton, who represent Cleburne County, voted No on the bill. Both bills have made their way to the Governor’s desk for signature.
It has been said that making legislation is like making sausage. In this case it’s a sham. The General Assembly should spend more time cutting out wasteful spending and eliminating redundant programs to pay for any tax cuts. Now, that would be a great law to pass!
(Jacque Martin contributes ‘Just to the Right’ each month for The Sun Times.)