Republicans Split On Tax Cut Strategy

Is it possible that no tax cuts could pass this legislative session?

Yes.

Right now, there are split factions on how to proceed with a tax cutting strategy in the 88th General Assembly, a hornet’s nest that may play well to Gov. Mike Beebe’s advantage.

Members of the Arkansas House have passed 4 tax cutting bills, which currently rest in the Senate. The upper chamber, in turn, has passed 3 tax cutting proposals now sitting in a House committee and, for now, negotiations are at an impasse.

To generalize, House Republicans want more long-term reform, while Senate Republicans are focused on shorter-term, more populist measures.

The tax cut bills passed in the House center on capital gains, manufacturers’ utility bills, a sales tax holiday on back-to-school items, and a housekeeping bill for low-income single heads of household.

The Senate’s three filings up the threshold for the used car tax to kick in, peel another three cents off the grocery tax, and includes a broader manufacturing tax break.

So how could it all play out?

There are three scenarios, maybe more – and at this juncture of the session – there is no consensus on what strategy wins out.

1) A compromise – Legislative leaders, especially Republicans in the two chambers, could come to an agreement on bills to support. Talks so far have failed to strike a deal, and in fact, have created a huge rift on how to move forward.

2) Do nothing and fund highways – This strategy doesn’t equate to giving up on tax cuts, but it recognizes that an agreement can’t be reached. Instead of cutting taxes, there could be a push to take the tax cut money – which is a portion of the Governor’s budgeted growth money – and earmark it for highways. That could eliminate one or both potential voter referrals to raise the sales tax by a half-cent and diesel fuel taxes by a nickel to fund highway improvements.

3) Alter income tax brackets – It has long been a goal of House Revenue and Tax Committee chairman Rep. Davy Carter (R-Cabot) to systematically over a multi-year period restructure the rates on personal income taxes. Carter and Sen. Jonathan Dismang (R-Searcy) are filing a bill on Wednesday to shift those brackets, Talk Business has learned.

While Carter confirms that the bill will be filed, he is resisting sharing additional details. However, a previous fiscal impact statement from the Dept. of Finance and Administration indicates that for every one-tenth reduction in the personal income tax rate – currently the top rate is 7% – the state expects a $20 million hit to its coffers.

The bill would likely have trigger points on revenue growth to kick in the changes and it could be the wild card alternative if the other two scenarios remain in limbo.

The disarray in the two chambers on tax cuts, primarily pushed by Republicans, could give Gov. Beebe a victory. The compromise is likely to be something Beebe could live with. If they do nothing, he has a scapegoat for not reducing the grocery tax further.

Carter’s and Dismang’s proposal could be the boldest reform effort of all. Tax cut politics at the state capitol isn’t likely to get dull anytime soon.