Arkansas House Backs $140M in Tax Cuts; Mike Beebe to Sign

LITTLE ROCK - A package of tax cuts that's expected to eventually cost the state more than $140 million a year headed to Gov. Mike Beebe's desk Friday, winning legislative approval despite Beebe's concerns about its future costs and complaints by some Republican that it won't cut enough immediately.

The House approved a dozen bills Friday that include cuts to the state's taxes on income, capital gains and manufacturers' utility bills. The package also includes tax breaks for farmers, volunteer firefighters and armed service members.

The proposals won support two days after the Legislature approved a health insurance expansion that state officials say will help pay for most of the tax cuts. The total package will cost the state $10.7 million in the fiscal year that begins July 1, nearly $97 million the following year and more than $140 million by July 2015.

The wide-ranging package was negotiated by leaders of the House and Senate as lawmakers near the end of this year's session and move closer toward approving the state's $4.9 billion budget for the coming year. Republicans won control of the Arkansas Legislature in November for the first time since Reconstruction, with many GOP lawmakers running on a tax-cutting vow.

"What we needed to do and what we want to do is put together a program can help the state of Arkansas help create jobs and reflect a lot of those different elements," House Revenue and Taxation Committee Chairman Charlie Collins, R-Fayetteville, told lawmakers as he urged them to pass the cuts.

Beebe, a Democrat, told reporters he planned to sign the cuts into law and believed the state could afford the reductions over the next two years. Beebe, however, said he was worried about the eventual impact the cuts will have on the state's budget and had expressed those fears to legislative leaders.

"I think they've made some assumptions for 2016, long after I'm gone, the third fiscal year from now, that are awful ambitious and rely on some pretty good revenue growth," Beebe, who has reached his term limit and can't run for re-election next year, told reporters earlier Friday. "Their answer is they think it will be there, but if it's not they're going to be in regular session in 2015 and they can make adjustments."

The largest of the reductions is a proposal to phase in a .1 percent income tax cut for all income brackets over the next three years. That measure is expected to cost the state $2.5 million in the coming fiscal year, $30.4 million the following year and $55.7 million by July 2015.

The capital gains tax proposal would also raise the standard deduction for taxpayers by $200. It would cost the state $24.5 million by July 2015. The cut on the sales and use tax manufacturers pay for electricity and natural gas would cost $27.4 million by July 2015. The package also includes a proposal to exempt armed service members' pay from state income tax, a break that is expected to cost the state about $7.2 million a year.

In addition to the tax cut package, lawmakers have also approved 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 believes the triggered approach was the only way to assure the tax would eventually be cut without hurting state services.

The cuts were passed two days 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 passage of the tax cuts was one of the last pieces of unfinished business for lawmakers, who are expected to wrap up this year's session on Tuesday. A legislative panel endorsed legislation outlining the state's $4.9 billion budget for the coming week, and identical versions of the bill are expected to go before the House and Senate early next week.

Some Republicans, however, have complained that the size of the cuts taxpayers will see in the coming year is small, especially when compared to plans to divide up the state's expected $300 million surplus for various one-time needs.

"I just believe that with a $4.9 billion budget we could have done much more this year to help give some relief to those Arkansas taxpayers," said Rep. David Meeks, R-Conway.

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