Arkansas House Panel Advances Cuts to Income Tax, Capital Gains

LITTLE ROCK — Proposals to cut Arkansas' income and capital gains taxes won a House panel's support Tuesday, as legislative leaders say they're nearing agreement on a $100 million package of reductions that may depend in part on approving an expansion of health insurance for low-income workers.

The House Revenue and Taxation Committee endorsed the proposals by voice votes, sending them to the full House for consideration. They're among several tax cut proposals lawmakers are considering after Republicans won control of the Legislature last year.

Democratic Gov. Mike Beebe has warned lawmakers there's no room in his budget proposal for additional tax cuts but said some reductions may be funded by savings created from the health insurance proposal. The proposal would use federal funds to purchase private insurance for residents newly eligible for Medicaid under the federal health care law.

"If you do tax cuts without that, you're cutting into a lot of essential services," Beebe told reporters.

House Speaker Davy Carter said there are other areas that could fund the tax cuts, such as the state's revenue growth.

"Yes, they're related, but it's not the only source of money on the table," said Carter, R-Cabot.

Legislative leaders have said they want to deal with the tax cuts and the insurance issue in tandem before April 19, when the Legislature is scheduled to recess.

"I want to get the $100 million tax cut and I want to get the private option done," said Senate President Michael Lamoureux, R-Russellville. "I don't want to say we can't do one without the other, but I think it's very difficult to do any of these big things in isolation."

The income tax proposal, which will cost the state about $57 million a year, is expected to be the largest piece of the tax cut package being negotiated. The proposal would lower the top income tax rate from 7 percent to 6.875 percent and increase the minimum income it applies to from $34,000 to $44,000. The reduction would take effect for the 2014 tax year. The lawmaker behind the idea said it would help Arkansas generate jobs by making its tax rate more competitive with surrounding states.

"While eliminating the income tax is not realistic for us in any kind of near term, getting ourselves into a more competitive position will help Arkansans get jobs," said Rep. Charlie Collins, R-Fayetteville, who also chairs the tax committee.

Opponents of the cut, however, pointed to a study by the Institute on Taxation and Economic Policy that said Arkansas taxpayers who making more than $155,000 a year would receive half of the total benefits resulting from the cut.

"This bill would just exacerbate the current overall regressivity of the system," said Rich Huddleston, executive director of Arkansas Advocates for Children and Families.

The panel tabled a separate proposal backed by Huddleston's group that would have created a state Earned Income Tax Credit for low-income Arkansans. That measure would have cost the state about $40 million a year.

The panel also endorsed Carter's proposal to increase the income tax exemption on capital gains of at least $5 million from 30 percent to 70 percent. It would also create a 70 percent exemption for any net capital gains relating to the sale of Arkansas property acquired after Jan. 1, 2014.

State finance officials estimated the cut would cost the state $3.1 million next year, and said that figure would grow to nearly $28 million by 2017.

The Arkansas Department of Finance and Administration, however, warned that the figure could grow if Carter's proposal is challenged in court for giving preferential treatment to Arkansas property. In a fiscal impact statement submitted to lawmakers, the department said that treatment likely violates the commerce clause of the U.S. Constitution. If that challenge is successful, the revenue loss from the cut could reach $60.4 million by 2017, the statement said.

Carter said he'll look at changes to address that concern but said he wasn't sure whether the department's legal analysis was correct. Carter said the intention of his bill was to help spur investment in Arkansas.

"We have to have job creators in this state, and I respectfully submit that passing this law will help advance job creators in Arkansas," Carter told the panel.

Other tax cut proposals that lawmakers have backed in recent weeks include a Senate-backed proposal to exempt military pay from income taxes and a House-backed exemption for farmers on sales taxes on utilities for several types of agricultural buildings.

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