Grocery tax facing eager axes
Posted on Friday, September 15, 2006
Several legislators said Thursday that they expect the General Assembly will significantly cut the state sales tax on groceries in the legislative session that starts Jan. 8.
Lawmakers will grapple with the best way to do it, they said.
"I have a sense of a mood in the General Assembly that this is a better possibility than it's ever been,"said Sen. Jim Hill of Nashville. "I sense there is a mood in the General Assembly in these good times to do that."
Sen. Bobby Glover of Carlisle said there's no question that the tax on groceries will be removed because both the Democratic gubernatorial candidate, Mike Beebe, and the Republican candidate, Asa Hutchinson, have endorsed the idea.
"There is just no if, and or buts about it,"said Glover, a Democrat who is vice-chairman of the Senate tax committee.
The state sales tax rate is 6 percent. It raises about $ 2. 5 billion a year, including about $ 270 million a year on the sale of groceries, said Richard Wilson, the Bureau of Legislative Research's assistant director for research.
Sales taxes cities and counties levy on groceries would not be changed by the proposed state action.
Hill, a Democrat, said he also senses that a proposal to exempt manufacturers from paying state sales tax on the energy they use "could fairly easily become a reality"in the 2007 legislative session. Beebe and Hutchinson support the proposal, which state officials have estimated would reduce state revenue by more than $ 55 million a year. Thursday's meeting of the House and Senate revenue and taxation committees was a preview of the debate legislators will have over the best way to cut the state's sales tax on groceries. Lawmakers talked about three proposals.
All three refer to the tax as one on "food and food ingredients."But past proposals in the Legislature for such an exemption define "food"in a way that it pertains strictly to groceries, as distinct from food bought in restaurants or vending machines. Some of the proposals discussed at Thursday's meeting contained the definition that means "groceries."
Under existing law," food and food ingredients"also is defined so that it pertains to groceries, said an attorney in the state Department of Finance and Administration. Sen. Denny Altes, a Fort Smith Republican, wants to reduce the tax on food and food ingredients to 3 percent, effective July 1, 2007. That would reduce state revenue about $ 135 million a year, said Richard Wilson, the Bureau of Legislative Research's assistant director of research. Rep. Horace Hardwick, a Republican from Bentonville, has a proposal reducing the tax on food and food ingredients to 1. 5 percent over four years starting July 1, 2007.
The proposal would keep that part of the grocery sales tax that the state levies for educational adequacy, property tax relief and conservation. The Hardwick plan would reduce state revenue by about $ 68 million the first year and eventually about $ 200 million a year, Wilson said. Glover has a proposal, similar to Hardwick's, that would reduce the state tax levied on food and food ingredients to 1. 5 percent over four years starting July 1, 2007. The Glover proposal also would cut state revenue by $ 200 million a year, Wilson said.
The difference between Hardwick's and Glover's proposals is the tax rates levied in the first three years.
"I don't care who gets the credit, so that we can get the thing passed,"Hardwick told Glover.
Hardwick said his proposal wouldn't reduce the 0. 875 percent tax on groceries that goes to the Educational Adequacy Trust Fund to comply with the state's Supreme Court's ruling that declared school funding inadequate, nor the 0. 5 percent tax that pays for property tax relief for homesteads, nor the 0. 125 percent tax that pays for conservation projects. "I want to get something passed, and I wasn't going to fight the education people and the property tax relief,"he said.
Altes said he proposed reducing the tax from 6 percent to 3 percent because he had thought that an additional 1. 5 percentage points of the sales tax was earmarked for other programs such as Medicaid.
During the meeting, Sen. Paul Miller, D-Melbourne, a member of the Senate tax committee, said he favors exempting food but Altes must find a way to replace the $ 135 million state revenue reduction his plan would cause. He asked whether Altes favors raising taxes or cutting state programs.
Altes noted that the 2004 Legislature increased the state sales tax to raise nearly $ 400 million a year that was appropriated to public schools in response to a 2002 state Supreme Court ruling that school funding was inadequate.
Altes said the state projects a $ 700 million-plus surplus by July 1, 2007, and should use part of it to cut the sales tax on groceries.
Miller said the surplus is onetime money, not revenue that recurs year after year. Sometimes the economy does well and sometimes it tanks as it did it a few years ago, prompting hundreds of millions of dollars in budget cuts and leading the Legislature to impose a temporary income tax surcharge in 2003, he said.
Miller said he likes Hardwick's proposal to phase-in a cut.
"I don't want to have to turn around to raise taxes after we cut it,"Miller said.
Altes said a downturn wouldn't affect state government too much if legislators would cut the size of government and slow the growth in the number of state employees. Miller challenged Altes to provide proposals to do those things. Altes didn't respond at the meeting to Miller's challenge.
OTHER TAX IDEAS Other ideas also came up. Rep. Jeff Wood, D-Sherwood, said the 2005 Legislature increased the $ 6, 000 annual income tax exemption for enlisted soldiers to $ 9, 000, reducing state revenue $ 1. 1 million a year. He said he wants to increase the $ 6, 000 annual income tax exemption for military officers to $ 9, 000 in the 2007 session. That would reduce state revenue about $ 350, 000 a year, he said. Ronald Chastain, adjutant general of the Arkansas National Guard, said increasing the income tax exemption for enlisted soldiers "may have been a big help to us because we are having the best recruiting year that we have had in a number of years..... I would hope that any new legislation to provide this same exemption for our officers would help increase our officer strength."
Altes said he also wants to create a one-day back-to-school sales-tax holiday exempting clothes and footwear from the sales tax. He said it would reduce state revenue by about $ 1 million a year.
Rep. David Dunn, D-Forrest City, said eastern Arkansas loses a lot of sales to Tennessee, which has a sales-tax holiday.
The Arkansas State Chamber of Commerce wants the Legislature to change the Arkansas law that will implement the Streamlined Sales and Use Tax Agreement or repeal the law, said Kenny Hall, executive vice president for the chamber.
The agreement, which is now between states and not federally approved, is aimed at making it easier to collect sales taxes from out-of-state vendors on sales to Arkansas residents.
It prohibits states from requiring sellers to apply state and local tax caps, such as Arkansas'cap providing that local taxes will only apply to the first $ 2, 500 of a single transaction. But, the chamber said, the agreement allows states to refund excess tax collections through state refund programs.
The chamber wants the law changed to provide for the refund, not in effect now, of all excess local tax collections derived from eliminating the local tax caps, the chamber said in a statement distributed to lawmakers.
Hall said the elimination of the cap would cost large companies in excess of $ 1 million apiece and medium-sized businesses from $ 400, 000 to $ 600, 000 each.
Hill, the senator from Nashville, said he would prefer to delay the implementation of the law for two years rather than repeal it. Payments under the agreement now are voluntary.
"I think it is imperative on us as the General Assembly to get it right in the next session,"he said.
Hall said the chamber would work with lawmakers to do that.
Hill said out-of-state vendors have the option of voluntarily abiding by the agreement. "Until Congress acts - and they may never - we cannot do anything to people who don't have nexus in this state,"he said.
Arkansas collected $ 680, 278 in state and local taxes through the agreement from November 2005 through June 2006, according to the Finance and Administration Department.
If Congress approved the agreement, it's estimated that Arkansas could collect as much as $ 100 million per year in additional revenue, the department said.
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