Arkansas legislative leaders agree the state’s $1.2 billion surplus means taxes should be cut further, but diverge on whether to wait until next year to act.
The General Assembly could convene in a special session this year to further reduce state income taxes, as it did following a surplus in 2022.
But a consensus on the details would still need to be reached. And key lawmakers cite two reasons for waiting until 2024: the Legislature earlier this year implemented an income tax that went into effect retroactively, and the House and Senate are scheduled to convene in April for a fiscal session.
Still, a decision to call a special session lies with Gov. Sarah Huckabee Sanders, and several prominent legislators said circumstances could change.
Special sessions often come together quickly, House Speaker Matthew Shepherd said in an interview.
“Back during the regular session when we looked at tax reduction, we did have some discussions about: if the opportunity presented itself we could come back in a special session and provide additional relief,” Shepherd said. “That likely would be something for the future, maybe around the fiscal session or sometime next spring, but things can change…
“What I anticipate right now, if we were going to have one, it would likely be the first of next year.”
Arkansas ended fiscal 2023 in June with a $1.161 billion budget surplus, the second largest in state history. The haul set off immediate calls in the Republican supermajority Legislature to further reduce state taxes.
Some Republicans have remained cautious, fearing a possible recession and wondering if Arkansas’ recent budget surpluses have been bolstered by temporary influxes of federal dollars due to the COVID-19 pandemic. There’s also concern about the price tag in year three of the LEARNS Act when caps on participation in the new school voucher program will be lifted.
When the year-end revenue report was released in 2022, former Gov. Asa Hutchinson immediately announced plans to call a special session to cut taxes, saying the large surplus showed the state was collecting too much.
Sanders has been less committal. At the Little Rock Rotary Club last month, she said she wouldn’t take a special session off the table, and she named education investment and additional tax cuts as priorities in light of the surplus.
“The Governor promised and delivered on cutting taxes so Arkansans would see more of their paycheck and the state would remain competitive in attracting businesses and more jobs,” Sanders’ spokeswoman Alexa Henning said in a statement this week in response to questions about the surplus and a potential special session.
“She believes we have to look at every opportunity we can to responsibly phase out the state income tax and will work with our partners in the legislature to determine the best path forward.”
Timing
Both chairmen of the House and Senate revenue and tax committees told the Advocate that any tax legislation should wait until next year’s fiscal session.
Senate Revenue and Tax Chairman Jimmy Hickey, R-Texarkana, pointed to several factors, but chiefly, it would give lawmakers more time to monitor the economy.
“Waiting would give us the calendar year we’re in to see what the Fed does with interest rates and watch inflation,” Hickey said. “In the end, as tax cuts go, just because we have a surplus doesn’t mean we can do tax cuts for that amount. We’ve got to make sure that we can sustain whatever is going on. We know a large part of these surpluses are covid money and inflation causing an increase in revenue.”
House Revenue and Tax Chairman Les Eaves, R-Searcy, said he’d prefer waiting since the fiscal session isn’t far off. But he said the message from the surplus was clear.
“It shows we are collecting too much money from Arkansans,” Eaves said.
He agreed with Hickey that the surplus was likely bolstered to some extent by federal pandemic relief funds, but he noted that Arkansas has seen significant surpluses for consecutive years and they’ve continued to grow even as the Legislature has enacted a series of income tax cuts.
The cuts
State Rep. David Ray — one of the most vocal proponents of tax reduction in the Legislature — also pointed to consecutive billion-dollar surpluses as evidence the state is collecting too much in taxes.
He said most Republicans in the Legislature want to further cut income taxes, but the Maumelle Republican acknowledged there may be disagreement on timing.
“If it were up to me, I think we should have a special session at some point once we can get consensus around a specific plan,” Ray said. “But as far as the specific timing, I think that is much less important than the substance of what we end up doing.
“If we had a special session this year, it would be beneficial for workers coping with the effects of inflation and economic headwinds, like interest rates, to see that saving in 2023.”
Recent Tax Cuts
The last three rounds of income tax cuts enacted by the Arkansas General Assembly focused on the top rates.
State lawmakers voted for more than $100 million in tax cuts during this year’s legislative session, slashing the top individual rate to 4.7% and the top corporate rate to 5.1%.
State budget officials expect the cuts to cost the state $186 million in revenue in fiscal 2024 and $124 million the following year.
In 2021, the General Assembly also cut the top individual and corporate rates, and those cuts were accelerated during a special session last year in response to the 2022 $1.6 billion budget surplus.
That special session also included a one-time tax credit for inflation relief.
In 2019, the Legislature cut the top individual rate from 6.9% to 5.9% at a cost of about $97 million a year.
In 2017, lawmakers cut the income tax rate for people earning up to $21,000 a year in taxable income — a revenue hit of about $50 million a year.
In 2015, cuts were approved for individuals earning between $21,000 and $75,000 a year — costing the state about $100 million a year.
Openness to a special session also includes some Democrats.
State Rep. Andrew Collins, a Democrat from Little Rock who sits on the Budget Committee, said he would support a special session for tax relief, but he would want the cuts to be measured and focused on lower- and middle-income Arkansans, perhaps through a child tax credit.
He said the economy had proved more resilient than many expected, but the state shouldn’t expect billion-dollar surpluses in perpetuity.
While there is enough money left over for tax relief, Collins also said the state still has needs and services that could be improved with surplus funds. However, he said those things would be better addressed during a regular session, rather than a narrowly tailored special session.
But on tax relief: “I think we can get that going soon to help people as soon as possible,” he said. “It’s a billion-dollar surplus; I don’t think we need to wait to act.”
Ray said he felt the next tax cut should again focus on reducing the top rate, which he pointed out begins to apply to those earning more than about $25,000 a year. The General Assembly earlier this year reduced the top individual income tax rate from 4.9% to 4.7%.
“It’s a no-brainer to go from 4.7% to 4.5%; that’s only $100 million and we have over $700 million in unallocated surplus funds,” Ray said. “That is the bare minimum we should do, but I think we could do substantially more.”
Shepherd and Eaves said there haven’t been detailed conversations among lawmakers about specifics of tax-cutting legislation, but that the Legislature has a strong track record of finding consensus on the issue.
“I think that there is a lot of interest in doing further tax cuts,” Shepherd said, adding that he an others have sought to avoid tying permanent tax cuts to one-time funds, like a surplus. But, the state now finds itself in consecutive years of massive savings.
“At some point, it’s not really one-time money, it’s money that’s recurring.”
