Arkansas Senate Approves $140M Tax Cut Package

LITTLE ROCK, Ark. (AP) - Arkansas lawmakers moved closer Thursday toward finalizing a package of tax cuts that will eventually cost the state about $140 million a year, a day after approving a health insurance expansion that officials say will provide savings to help pay for the reductions.

The Senate passed a dozen bills that included proposals to reduce the state's taxes on income, capital gains and manufacturers' utility bills. The package also includes tax cuts for armed service members and some farmers. A House panel later endorsed the proposals, sending them to that chamber for a vote Friday.

"Hopefully, everybody will see some relief and we did enough to incentivize and help create jobs as we move forward in a very tough job creating climate," Sen. Jake Files, the chairman of the Senate Revenue and Taxation Committee, said after the vote.

The proposals are expected to cost the state $10.7 million in the budget year that begins July 1 and the annual cost will grow to $140 million by July 1, 2015.

The largest of the tax cuts is a proposal to reduce state income taxes, a measure that will cost the state $2.5 million in the coming year and eventually cost nearly $56 million a year.

The reduction in sales taxes that manufacturers pay for electricity and natural gas is expected to cost $27.4 million by the fiscal year that begins July 2015. The capital gains tax cut proposal - which also includes a proposal to raise the standard deduction for taxpayers by $200 - will cost $24.5 million by that time.

The Senate also gave final approval to Gov. Mike Beebe's proposal to cut the state's sales tax on groceries from 1.5 percent to 0.125 percent, but only if the state's bond obligations or desegregation payments to three Little Rock area school districts decrease by $35 million over a six-month period. Beebe has said he believed the triggered approach was the only way to assure the tax would eventually be cut without hurting state services.

The votes came a day after the Legislature gave final approval to using federal Medicaid dollars for purchasing private insurance for low-income Arkansans. Beebe has said the savings from the proposal cutting down on hospitals' uncompensated care costs could pay for some tax reductions, but he has said the state won't see those savings until the budget year that begins July 2014.

The eventual cost of the tax cuts could be a problem later, Beebe warned.

"(Fiscal year 2016) could be a major problem if revenue growth doesn't accommodate it like they hope it will," Beebe, a Democrat, told reporters. "They need to know that now and they need to be cognizant of that because in fiscal 15 if their assumptions aren't true they're going to need to fix that before fiscal 16."

Legislative leaders said they believed there would be enough growth in state revenues to pay for the cuts later on.

"I don't think we're just taking it and putting it out of circulation," said House Speaker Davy Carter, R-Cabot. "It's still real money and people have it and spend it. It's their money."

The tax cuts advanced after a November election where Republicans won control of the state Legislature, with many GOP candidates running on an anti-tax vow.

Some Republicans, however, complained that the size of the tax cuts that will take effect in the coming year was too small. Sen. Bart Hester, R-Cave Springs, said the $10 million in reductions paled in comparison to a $125 million financing package the state approved to help build a steel mill. He said the number could have been larger if the Legislature didn't plan on using a portion of the state's projected $300 million surplus for projects he derided as "pork barrel" spending.

"I support any tax cuts, but I think the decimal point should be more to the right," Hester said.

Advocacy groups said they feared that the larger reductions that will come eventually will be at the expense of some state services that have remained flat over the past few years. Rich Huddleston, executive director of Arkansas Advocates for Children and Families, said the move was "risky."

"I think in terms of children and vulnerable families, these tax cuts could really jeopardize funding of critical programs two or three years down the road," Huddleston said. "Maybe not this first year, but the cumulative impact of these tax bills they're going to pass out add up to big, big bucks."

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