House Revenue and Taxation Committee
Video
Transcript
Bills discussed (8)
| Bill | Title | Sponsor | Status |
|---|---|---|---|
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HB1052
· 4 mentions in chapter, transcript
Matched: “HB1052”
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Pre-2017 bill | ||
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HB1056
· 2 mentions in chapter, transcript
Matched: “HB1056”
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Pre-2017 bill | ||
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HB1002
· 1 mention in chapter
Matched: “HB1002”
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Pre-2017 bill | ||
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HB1012
· 1 mention in transcript
Matched: “HB 1012, Representative Smith, you prepared to run that bill today.…”
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Pre-2017 bill | ||
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HB1257
· 1 mention in chapter
Matched: “HB1257”
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Pre-2017 bill | ||
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HB1387
· 1 mention in transcript
Matched: “…6, let me 1369, see here, no, okay, Representative Collins, HB 1387,”
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Pre-2017 bill | ||
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HB1389
· 1 mention in transcript
Matched: “Representative Mayberry, House Bill 1389, Representative Jean, HB1052, you're recognized to explain…”
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Pre-2017 bill | ||
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HB1396
· 1 mention in transcript
Matched: “1314, pass over it, Representative Shepard, HB 1396, let me 1369, see here, no, okay, Representative Collins, H…”
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Pre-2017 bill |
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All right, Chair sees the quorum. Let's call the meeting to order. I want to remind if anybody from the audience is expected to speak for or against the
bill today on the agenda, please sign in on the sign-in sheet. Y'all hear that humming?
Speaker 4
0:23
All right. We've got a few bills, I understand, that are going to be presented today, but I am
going to go down the regular agenda list.
HB 1012, Representative Smith, you prepared to run that bill today. You don't see him. We'll pass over it. Representative Lindsey, House Bill 1056, Representative Jean. yes sir you recognize okay I understand you bought representative Lindsey has a
special order of business another committee so we will pass over it and come
back to that when he's able to get here if not representative Gene will run his bill representative Westerman
1233 pass so be representative English 1023 pass over it, Representative McLean,
1314, pass over it, Representative Shepard, HB 1396, let me 1369, see here, no, okay, Representative Collins, HB 1387,
Representative Mayberry, House Bill 1389, Representative Jean, HB1052, you're recognized to explain your bill. Thank you, Mr. Chairman.
This House Bill 1052, give you a little history of this bill, this was passed in 2007 session to reduce electricity and gas sales tax on manufacturers, people that make stuff, that's in the wood business, the plastic, the steel mills. It goes all across this state. Right now the current rate is 3.125. We're asking to drop it a half a cent to 2.625. The fiscal impact by DF&A is a $3.8 million hit.
We believe that since there's a 2.5 percent growth in our budget of roughly $110 million that this ought to be applied back to our companies to help create and sustain jobs. Right now, our sales tax and our surrounding states, Mississippi has a 1% sales tax. Texas, Oklahoma, Missouri, Tennessee, and Louisiana have a zero. Of course, this will be applied for as a rebate. If the companies do not apply for the rebate in one year, they don't get it.
But this is House Bill 1052, and I have Randy Zook with the Arkansas State Chamber. And Randy, if you'd like to
Representative Lane Jean
Unverified
3:24
say a few words on this bill, then we'll entertain any questions. Randy
Speaker 15
3:29
Zook, you're recognized. Thank you, Mr. Chairman. On behalf of the membership of the Arkansas State Chamber of Commerce and Associated Industries of Arkansas, we'd like to express support for this bill. It is a continuing move, an increment in the progress toward eliminating this tax.
We are out of step with surrounding states, as Representative Jean explained. We are hopeful that eventually this tax will go down to something close to zero so that our industries will be in as competitive a position as possible. We support this bill. It's important to our membership. It's important to job creators in the state that we keep them as healthy economically and financially as possible. And we'd appreciate your support for the bill.
Representative Cowling, you recognize for a
Representative Larry Cowling
Unverified
4:24
question. Thank you, Mr. Chair. Mr. Duncan, what is the surrounding states? Can you give me, do you happen to right offhand know
Speaker 15
4:33
what the states around us are? Yes, sir. All the states are at 0% with the exception of Mississippi, which is now down to 1% on this same tax issue. So while we have been making progress, others have been moving faster than we have. So it's important to do all we can to try to remain as competitive as possible.
Speaker 25
4:53
And what is our current rate right now? What are we
Speaker 15
4:57
down to? Representative Gene said it was 3.125. My understanding was it's 3.25, but I guess that includes the 8th conservation. So in total, we're at 3.25, including the 1 8th on the conservation tax. Thank you. Representative Ingram, you recognize. At
Chair
Unverified
5:16
the proper time, I'd like to offer a motion. Any more questions?
Representative Burris, you recognize. MR. Thank you, Mr. Chairman. Thank you, Representative Jean. The question that I've asked on every tax bill here, it's a fair one, how
do you plan to pay for it? MR. Well, the state is projecting a 2.5 million, 2.5 percent growth, which would be about 110 million. Just pay for it simply out of the growth. Give it back to the manufacturers
and the people. MR. Okay, Mr. Zuck has spoken for the bill.
Is there anybody else in the audience who would like to speak against the bill? Mr. Weiss, you
Speaker 37
6:24
recognize. MR. Thank you, Mr. Chairman. I'm Richard Weiss of the Department of Finance Administration.
Speaker 38
6:28
With me is Tim Leathers. What I would like to do, Mr. Chairman, and it's going to be on all of these bills, is
just talk about a few high-level things that I think are very important as we go down this path. I think first and foremost, in the last several years when this nation and this state have been in a recession, there is a group of five states, four natural resource states in Arkansas who have been consistently rated as states who are not in trouble. There is a reason for that. And the reason for that, Mr. Chairman, is that we have had a very conservative budget
process in this state for a long, long time. We have been able to save up money here and there that we have used to support the Medicaid program and some other things. But we're about the end of the line there. In 2009 and 2010, we have been below the 2008 collection levels, but at the same time, the prison population has grown. Medicaid has grown substantially. We've been able to piece together things to keep the state afloat and do it in a responsible
and conservative manner. Any tax cuts above and beyond what the governor has tried to accommodate in this budget is going to put us in the contrary path. It's of great concern to me. I would think it's of great concern to this whole committee that we don't get into that route. Any cuts that are made, and I'd like to remind those of you who may have sat in the fall hearings this year, that we already told the Joint Council and Joint Budget Committee in
the fall that we're already upside down $87 million next year, just with the growth in Medicaid that we have projected that's a reasonable projection. So any cuts we make in the budget above what the governor has recommended is going to make that much steeper a hill for all of you who come back in the fiscal session and then the next regular session to try to overcome.
We're in a very difficult, precarious place with that, and I think it's worth the committee just to reflect on that for a moment. I would like to let Mr. Leathers talk about the bill itself,
Speaker 41
9:06
please. Mr. Leathers, you're recognized. Mr. Chairman, I think that the sponsor of the bill did
an excellent job of explaining the bill. This is just an addition to the current exemption we have. He gave the amount of the cost as 3.8 the first year in FY12 and then FY13 4.2, which
will be a full year phased in, and we've taken this from our actual experience based on the the amount we currently have. This is just a continuation and adding to the current exemption. MR. We'd be glad to answer any questions, Mr. Chairman, if
Speaker 38
9:46
you'd have a MR. Representative Meeks, you're recognized.
Representative Stephen Meeks
Unverified
9:52
MR. Yeah, just a quick question on the $87 million on the Medicaid expense.
MR. Yes. MR. the governor's budget, if y'all are already projecting that, you know, we've got, you know, is he planning on paying for that with the 2.5 percent growth in the state? Let me,
Speaker 38
10:11
I was unclear on the years we're talking about. The upcoming fiscal year, which will be 2012, we have a balanced budget. We accommodated the Medicaid growth primarily through trust funds that we have been building up, reserves we've been building up, because
we got all of that our money, but in 2013, the year after this coming fiscal year, is the year that we're upside down on that. Okay.
Representative Stephen Meeks
Unverified
10:37
So it's in the future that we're looking
Speaker 37
10:40
at that shortfall. It's in the future, but it's a future you'll
be dealing with a lot faster than you think, sir. All
Representative Mark Biviano
Unverified
10:49
right. Thank you. Representative Viviano, you're recognized. Thank you, Mr. Chairman. Would you agree that by Arkansas lowering this
tax, it makes us more competitive with states that are currently charging zero or 1 percent?
Mr. Chairman, I responded to the representative by saying that we have seen no direct indication that we have lost businesses or gained businesses one way or the other. We have some special exemptions we do for new businesses being attracted that offset these in the beginning years for businesses. So I know that businesses would like to pay less taxes and no taxes, but generally we have some other areas that are more favorable.
But I don't think we can tie any amount of economic growth to that. I think most of the economic growth that we have that would be spurred toward this have gotten the other economic exemptions out there, and this would go across the board to every taxpayer
Speaker 41
11:51
that's already doing business, not just to those that would be contemplating coming in the
Representative Mark Biviano
Unverified
11:57
state. MR. Would you agree that typically if businesses have more capital to invest, that generally that leads to more job growth? MR.
That's a very generalized statement. It may or may not, depending on whether they want to invest or invest in a business deal. You know, as a general economic rule, I let Dr. Shelnut testify to that as a matter of economics, but I don't think this is targeted in any way that it's going to lead to job growth or tied to job growth. Again, it's broad-based across the spectrum to everyone. Ideally, we would like for every state to be equal so we had
no competition, and then we'd have to undo a lot of the special exemptions and things we've done to industry and the things to attract them here because we're doing those things where other states do, and we've gotten in this competitive situation. Ideally, we'd like it to all be equal so that these types of decisions were not based on taxes. But I think Dr. Shelnut will tell you that when corporations say they're looking at investing, that taxes are way down the line when they talk about wanting an educated
workforce, an available workforce, and transportation, all the infrastructure that these taxes go to provide are the first thing they look to, and then they look to taxes. MR. Well, using
Representative Mark Biviano
Unverified
13:21
that rationale, why do you think that our surrounding states have taken their rate down to zero?
MR. I think they've done it in the vein of wanting to be equal to other states. And I'm not saying it's a bad thing to be equal to other states. The point I'm trying to make is to follow up to Richard Weiss and his statements are
that we only have a limited amount of money available, and we're spending it on the places that these businesses needed to be spent and targeted toward them, and we have targeted benefits out there to deal with them, and that we'd like to do all this to make everybody equal. A lot of states exempt electricity to consumers, like some of our border states do. We'd like to have all of that equal, but we're just in the time and situation of budget where we've got to have taxes to provide those essential services.
Representative Mark Biviano
Unverified
14:18
Well, some people believe the theory that if you create jobs, that actually adds to
Speaker 48
14:24
the revenue. Thank you, Mr. Kennedy. I did
not deny that, sir. Representative Westerman, you're recognized. Thank
you, Mr. Chairman. Along those same lines, are you aware that North Carolina does not have a self-tax on utilities? We have a
list of all the states, I think.
I don't know exactly where North Carolina falls
on that. I was doing some research on them. I know the timber industry is important here in Arkansas, but if you look, we have about the same amount of timber base as North Carolina does, yet they have two times the manufacturing facilities. They generate 1.7 times the tax revenue, 1.7 times the jobs, and 1.8 times the payroll as we do here in Arkansas at the same timberland base. So I would just like to ask if you think that it would increase, that
if an increase in manufacturing would increase jobs
and improve the tax base in Arkansas, we could
most of it. You know, we'd have to look at that particular situation because I think they have very high property taxes in North Carolina. You've got to take the whole situation into effect. They may be paying for essential services with their property taxes. Where we take our taxes and we pay for a larger proportion of the schools, theirs may be locally funded. So you can't isolate
Speaker 41
15:44
one particular area and make that kind of a determination. Thank you. Mr. Kaling, you're recognized.
Representative Larry Cowling
Unverified
15:53
Thank you, Mr. Chair. Our sister states or border states around us, how many of them got a balanced budget?
Speaker 37
16:06
Mr. Kaling, I believe all states have some rough idea of a balanced budget. that they do. Many states
Speaker 38
16:12
make up their balanced budget by going into debt, and that's what's coming home to roost on a whole lot of states right now. The state of Texas is upside down
by many billions of dollars right now that came about because of a big change in tax structure did several years ago. They're not going to have a balanced budget without shutting down a whole lot of things. So there is a requirement. Most states have it, but most states also bond their way out of a lot of it and keep doing it until it catches up with them, much like New York and California at this
Speaker 66
16:51
point. What about the Louisiana and Mississippi and Tennessee and Missouri and Oklahoma?
Speaker 38
16:56
Where are they at? Do you know right offhand? I don't know offhand, but let me tell you this, Mr. Cowling. When I talked about the five states that have been recognized by national publications that look at this kind of thing, including the Wall Street Journal, Louisiana, and Texas, and none of those were in that top five list that Arkansas was. Thank
you. Mr. Weiss, just a question from the Chair.
As far as the forecast that your office has submitted for the upcoming fiscal year, How would this bill affect what
Speaker 38
17:47
funding? It would have the effect of, for FY12, a reduction of $3.8 million in the amount that we would budget, of which $2.8 million is general revenue
and then several other education-related things that you have to make up. And then in FY13, it would be a decrease of $2.7 in state general revenues. And you have it on your list, but the educational adequacy and educational excellence trust fund, all those would be affected as well for a total of $4.2 million.
I'm sorry I'm having microphone problems here.
Representative Linderman, you're recognized. Thank you,
Representative Homer Lenderman
Unverified
18:39
Mr. Chairman. Could you give us some kind of idea of how much it would actually save a particular business, something like maybe Tyson or Rysland or
Speaker 48
18:50
Bush or somebody like that? Mr. Chairman, we
cannot respond as to any particular taxpayer. We may come back with you some examples of what the top companies get, some average of that, but we can't point to, under our tax confidentiality laws, we can't tell you about
Representative Homer Lenderman
Unverified
19:07
any of their particular tax business. Okay. Maybe I'll, what I'm, I guess I'm asking here is this would be a very minimal amount to a large company. Is that
not true? Yes, sir. In comparison to what we already have out there, this would be a small percentage. We could have one of our mathematicians do the percentage increase in the exemption they've gotten, and we could look at some companies, but it would not have a substantial impact to the average company that's entitled to this currently.
Representative Homer Lenderman
Unverified
19:38
Me doing my limited math here, it looks like it would be a savings of a little more than a dollar per resident per year which looks to me like a
Speaker 81
19:48
very minimal well this is not this does not go to residents this goes to businesses so you spread spread
it out against the businesses that are manufacturers and fit that category and you know we can get you that I don't know if we have that today I'm looking at our folks and they say we don't have it with us but we can certainly give you what the average claimant or what the top claimants on average get or something
like that if you'd like for us to get
Representative Homer Lenderman
Unverified
20:12
that for you. That's not necessary. I guess I was trying to make a point that I feel like it's a very minimal amount that would be, that manufacturing would be affected by this.
Yes, sir. Thank you. Representative Burrus, you're recognized. Thank
you, Mr. Chairman. I'm going to agree with Representative Linderman in a simple way. I think it is a very minimal amount. I don't think there's hardly a business in the state that has a budget larger than the state of Arkansas, so however minimal it would be to a business, it would certainly be more
minimal to the state's overall budget. Is that correct? Would that be a fair assumption if we're applying the law of
Speaker 38
20:49
percentages here? MR. Sure. If you're applying the law of percentages, you're absolutely right, Mr. Burris. I don't think that's the issue, though, that we're dealing with. We're dealing with looking at all of the various streams of income
into the state and how that affects. MR. It is minimal and certainly overall very minimal to the
state budget. Thank you. MR. Okay. Mr. Weiss, Mr. Leathers have spoken against the bill.
Is there anyone in the audience that would like to speak for the bill? Seeing none, is there any in the audience that would like to speak against the bill? Okay. Seeing none, Representative Ingram, I'm going to recognize you from your Motion do pass, Mr. Chairman. Got motion. Do pass. All in favor of the do pass motion, say aye.
Aye. Any opposed? No. Motion carries.
Congratulations, Representative Gene. You passed your bill. Didn't
even let you close for it. How about that? You want to go back and do it again? All
right. Sorry. Okay. House Bill 1002, Representative Garner, you are recognized to explain your bill.
Representative Ed Garner
Unverified
22:32
Thank you, Mr. Chairman, members of the committee. House Bill 1002 is a bill that would exempt new Arkansas investments from our capital gains rate of 4.9% effective July 1 of this year and forward. Investments made in properties in Arkansas would not be subject to the capital gains tax. We have a noncompetitive. This is a non-competitive tax, with the exception of Missouri, who is currently looking at tax
reform. All of our surrounding states, in one way or another, have either no capital gains tax or have passed laws to exempt certain in-state investments. This causes Arkansas to be an island of taxation with regards to this very important source of capital investment. We tax capital investment. I had one colleague make the point that not all capital investments create jobs. But in the private sector, I'd defy someone to show
me how jobs are created without some investment capital. So there's no other bill that I'm aware of that has the potential of creating jobs in Arkansas than to attract new capital to Arkansas so that businesses don't have to figure this tax into their overall rate of return in the boardroom when they decide where they're going to locate. It also would allow wealth created in Arkansas to be reinvested in the state.
As people look around the nation for the most attractive place to put capital to attain a return, they would begin to look at Arkansas again. Now this bill has no impact in the current budget, so we don't have to look to the current budget to say where do we find some cut, because a capital gain by definition is an investment that is held for over a year. And only on sale of the investment is a capital gains tax liability realized.
So essentially you have the opportunity, if you create a good environment for business investment, capital investments are made, jobs are created, income tax revenue from those jobs is produced, and only should an investor decide to sell that capital investment is there a tax liability. If we remove that tax liability, we attract more investment capital to the state. That's the gist of the bill, and I would be happy to take any questions.
Representative Homer Lenderman
Unverified
25:29
Representative Linderman, you're recognized. Thank you, Mr. Chair. Noting the Department of Finance and Administration's impact statement, it says, This House bill in the legal analysis contains potential commercial clause violations that could subject the state to a lawsuit. That concerns me very greatly. What
are these concerns, and how is this bill going to address those? The
Representative Ed Garner
Unverified
25:56
argument's been made that this would potentially violate the U.S. Commerce Clause.
We, or I have served on the same think tank that put this information out. Again, the surrounding states have passed this law. Mississippi's law exempting capital gains for corporate investments was passed in 1997. Oklahoma's law was passed in 2006. Louisiana's law went into effect January 1 of 2010. There have been no challenges to this.
In fact, the law that basically most mirrors this is the law that says that Arkansas can tax its income, municipal bond, interest from out-of-state investments, yet our own is exempt for state income tax. And this same think tank went to the Supreme Court as part of that lawsuit to overturn that and it was defeated 7-2. We don't see that there's been any
successful challenge or attempt to challenge this.
Representative Homer Lenderman
Unverified
27:04
We view it as a straw man argument. Also, the second part of my question, there is a substantial, in this case, revenue loss of
$68 million in 2014, $44 million in 2013. How are we going to make that
Representative Ed Garner
Unverified
27:23
up in this revenue stream that we need to maintain? Because when I ran this bill last time, we took those numbers and the tax rate and backed into how much capital gains would be necessary.
I didn't run it on the $68 million, but in 2013, DF&A estimated $44.5 million. If you use the tax rate that is necessary to generate that impact, it would mean that we would have capital gains of $902 million. The bill is enacted for investments after July 1 of this year, and to hold an instrument for a year and then sell it, you would have a six-month window to impact 2013.
It would mean that investments made in Arkansas and sold at a profit would have to generate capital gains of $902 million, and that is just in Arkansas investments made and sold within one year, you would have a six-month window to do that. The entirety of capital gains for all years from all sources for 2009 was $702 million. To say that that is a realistic estimate, it stretches the imagination.
In fact, we have a paper from Dr. Michael Paco at UALR, who is the chief economic forecaster who set up the model for economic forecasting for the state. He did analysis on this bill according to and has written papers on the duration, the holding of capital gains and found that their assumptions were more than a little aggressive. In looking at DF&A's methodology, he came up with an impact in 2013 of $13.3 million.
In looking at the actual numbers experienced by the state of Oklahoma in a similar law, impact for 2013 was less than 10, and we can demonstrate from figures put out by Arkansas Economic Development using capital investments to create jobs that a small fraction of capital investments in Arkansas, if they created jobs, new jobs, income tax revenue exceeds the capital gains lost, we really don't think it has an impact.
Thank you. Oh, well, if it does, it is positive. Thank you. Actually, you know, one of the things that this is, because it is on new investments, this is not some windfall for wealthy people that have made investments in the past. This is an incentive for people to take risk and make new investments, create jobs. And jobs are the number one concern of your
Chair
Unverified
30:12
constituents right now. Representative Westerman, you're recognized. A request
for a motion at the proper time, Mr. Chairman.
Very well. Representative Jean. Representative Kerr? No? Okay.
Seeing no more questions, there are a few people that have signed up. Representative Garner, if you want
to. I've got Randy Zook from the State Chamber who signed up to speak for the bill. Mr. Zook, you're recognized. Mr.
Speaker 17
30:46
Chairman, I am Randy Zook with the Arkansas State Chamber and Associated Industries of Arkansas.
Speaker 15
30:51
This is yet another instance where Arkansas is out of step with surrounding states. We need all capital flows where it's welcome and it stays where it's well treated. We need all the capital investment we can get in Arkansas business to generate as many jobs as we possibly can. This bill would go a long way to make Arkansas a more business friendly, investment friendly environment and we urge and it's an important issue to our membership as well as investors who are not members of ours but we urge the committee to pass
the bill we think it'd be good for the business climate in
Arkansas. I'd be happy to take any questions. Thank you. There
Representative Larry Cowling
Unverified
31:37
is a question. Representative Cowling, you're recognized. Thank you,
Speaker 15
31:40
Mr. Chair. But this is only on new business,
Speaker 106
31:43
right? Yes, sir. Yes, it's for new investments beginning, what's the date? July 1, after July
1. Thank you. Representative Viviano, you're recognized.
Representative Mark Biviano
Unverified
31:54
Thank you, Mr. Chairman. Mr. Zook, if we don't pass this bill, what do you think will be the competitive
Speaker 15
32:04
impact and position of Arkansas in the years to come? That's a good question. I think it's one of those things that you won't see in headlines, but you will see diminished investment. You will see opportunities that do not become available. You'll see reduced employment opportunities for our college graduates.
You'll see money flowing out of the state. And in those instances where investors reap a large profit, you'll see, as we have in the past, you'll see that money go to states where it's more welcome. It's no secret that some of our most successful investors, at the point that they have a liquidity event, as the term is used, when they sell out, they head for Florida, they head for Texas, they head for Tennessee, because it's a friendlier environment.
And it's a rational economic decision on their part. So I think the upshot of failing to pass the bill will be seen in opportunities that don't materialize and jobs that are not created and in investments that are not made. So it will be difficult to pinpoint it, but it will be
very real. Representative Meeks, you're recognized. Thank you, Mr.
Representative Stephen Meeks
Unverified
33:24
Chairman. Right now, Arkansas ranks 40th in overall business climate when compared to the other states.
Where do you think this bill ranks in importance in helping us to climb out of that low number and start working our way up to become a better business climate here in the region and
Speaker 17
33:44
also nationally? I'm familiar with that study. It's the Tax Foundation's Business Tax Climate
Speaker 15
33:50
Index. And the good news is that 40th was the 2010 ranking, the 2011 ranking is 39th, so we've actually moved one tick away from the 10 worst list,
but only because of what other states have done, not because of what we've done. This is one of those things that we get dinged on pretty heavily, having a capital gains tax that's relatively onerous compared to many other states. And this would be a step, an increment that would help us
along with the previous bill that you discussed. Randy, when the chamber was in your
membership discussed whether or not you're going to support this bill,
did your group weigh the budget considerations and the forecast in that, or
is that something that your group gets into? as far as in your analysis? MR.
Speaker 15
34:47
Well, we do, and we try to be as responsible as possibly can, but our primary concern and focus is on the competitiveness issues. But as Representative Garner pointed out, I mean, just mathematically, the impact that's attributed to this bill is just simply not possible. It's just not a credible number to think that within the space or the span
of a year, year and a half that some miraculous investment would be made that would generate nearly a billion dollars in capital gains to generate a 47 or $8 million tax impact is just, it defies, it's way off the credibility scale, I guess is the right word to say. It's just not possible. If it is, I'd like to get in on it.
Representative Larry Cowling
Unverified
35:41
All right, Representative Cowling, you recognize. Thank you. Randy, the governor's got an incentive to bring business to
the state. Does this help? I know it's done business before and all, but would this kind of offset this thing? Would it kind of offset some of the capital gains? Which would draw more, the quick action fund or the capital gains? Well, you know, I'd
Speaker 15
36:07
hate to say you have to make that choice.
And I had the pleasure of serving, working for a year in the Department of Economic and the Economic Development Commission. In fact, it was the first year that the Quick Action Closing Fund was in place. And I must tell you, that is the strongest weapon that the Economic Development Commission has in attracting new outside investment. This bill is really aimed at people, those of us who live in the state and are considering forming businesses or starting new businesses or investing in startups.
This is not about attracting outside investment like a Caterpillar or Nordex or something along that line. This is more about what Arkansas investors can accomplish with their capital, especially that capital which we would manage to keep in the state if we had a friendlier environment. Our problem is we're running off capital. We're repelling smart, strategic, savvy investors with our tax on their efforts and their results.
Thank you, Randy. Mr. Zuck has spoken for the bill. I'm going to recognize Mr. Weiss and Mr.
Representative Davy Carter
Unverified
37:31
Lathers to speak against the bill. Thank you, Mr.
Speaker 38
37:47
Chairman. I'm Richard Weiss of DFA. I would just have to say that the Governor is opposed to this bill for the same reasons
that I alluded to earlier when we discussed the natural gas bill. This is a much larger hit. There are some questions I know that have been thrown up here that the economist for the University of Arkansas at Little Rock has a different take on how soon these will be realized than we do, but in the end I believe that it will all be the same amount, the same hit on the state's budget that we have projected. I would like to have Mr. Leathers talk about the particulars and additionally we have several
other folks from DFA that I'd like to be able to speak on the technical
Representative Davy Carter
Unverified
38:39
issues in the bill. Mr. Letters, you're recognized. Mr. Chairman, I just want to. Tim, I'm sorry. And whoever
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38:46
else wants to speak could just let me know where I can have your name down. Thank you. Mr. Chairman, I want to
just clarify a couple of things in some of the statements that have been made this morning. The first of those is the ultimate impact that Dr. Paco looked at is essentially the
same as what our ultimate impact is. He's looking at $66.3 million when it's fully phased in. We're looking at $68.5 million. But he's looking at phasing it in over a longer period based on some assumptions we've made, which John Tyson is here to explain the difference if you want to go into the detail as to why We think he did use some outdated data. What we've looked at is the actual Oklahoma experience changing it based on our law, trying
to make our best estimate. When you're spreading one of these things out of years where it's phased in, there's going to be some fluctuation. But we have actual amounts of capital gains in years past that clearly shows that this is not out of line with the numbers that we've had in the past on capital gains in this state. So it's not some great amount that's some imagined amount out there, and we will go into that. John can do that in a minute with you. But ultimately, we're still talking about mortgaging our future out there, the amount
of revenue that it's going to cost whenever it hits over a period of time. And this is the money that we're paying for the educated workforce and for the safety and all those things that businesses need to compete in this state and to be attracted to the state. But at some point, we're going to incur the full impact of that bill even according to Dr. Paco and what you've seen today. Is it going to be 66 million or 68 million?
Is it going to hit in 2015 or is it going to hit, as Paco says, or earlier than that? We think we have good documentation to back this up, and we've invited anybody all along to come look at our documentation, and we'd go over it with them to show them that we're prepared to do it today if you want. Also I want to speak seriously about the threat of having to make a large refund. It's not just some made-up straw, as was indicated here earlier today, to try and draw some
attention to this. We have been on the losing side of lawsuits when we have passed laws that discriminate against interstate commerce. And if John and I were lawyers in private practice out there, and there are a bunch of them out there today, if we could get us a class of investors in a couple of years that are investing in out-of-state corporations and paying Arkansas income tax, we'd be filing that lawsuit to say you're discriminating against interstate Commerce and our client and bringing that lawsuit, and we
would fully expect that someone would do that. If we lost that, our exposure is $95 million in addition to this if we lost all the corporate gains because we're discriminating against those out of state. We've had to make large refunds before in situations like this, so it's something to be taken seriously and not just a straw out there. With that, if you want to go into details as to how we came up with this number. John Tice is
Regarding the lawsuit, to your knowledge, have any lawsuits been filed in Oklahoma or Mississippi? I'll let John respond to that. And have we, has the state been involved in any, anybody from Arkansas filed a suit in those states alleging the same things that were just discussed? Mr. Chairman, members of
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the committee, I'm John Tice with DFA. To
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our knowledge, we've tried to see if there have been any lawsuits filed in the other states, and there have not been at this point. There's one possible difference, I don't know this for sure, but Arkansas has a provision
in our Constitution that's an illegal exaction provision. Under the cases that we've been a part of over mine and Tim's 30 to 35 years with the Department, our Court has recognized the ability of attorneys to get a portion of the proceeds that are successfully won in that lawsuit as attorney's fees, and in many cases those have amounted to millions of dollars. So there is an incentive for an Arkansas attorney in our Constitution to pursue this as an illegal
exaction, and I do not know whether that same incentive occurs in the other states. Also the Tax Foundation was mentioned earlier. the Tax Foundation has issued its own opinion of the Mississippi law that provides the same incentive to invest in a Mississippi-headquartered company as opposed to an investment in a company elsewhere, and the Tax Foundation has come to the determination that they believe that provision in Mississippi law is unconstitutional. Ty, how does this
compare along those lines with the, I mean, when we're talking about this,
Representative Davy Carter
Unverified
44:03
I think about the milk bill we had a couple of years ago. So how would this differ from that milk
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bill we had about, you know, in the last session? The
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U.S. Supreme Court has recognized to a limited degree the ability of a legislature to provide economic development incentives for industry in the state. Here, this differs in that you are directing people's investment decisions.
You are saying in the milk issue, you're saying any company that wishes to come in and make an investment in Arkansas, we will treat them the same, whether that company is headquartered in Arkansas or whether that company is headquartered outside the state. The investment is treated the same regardless of the residents of the party making the investment. In this bill, what you would be saying is to the Arkansas investor, we will provide you a preference for an investment in an Arkansas company that we will not provide to you for
an investment in a company outside Arkansas. So you're putting out-of-state business at a competitive disadvantage in terms of getting the Arkansas investment dollar. Mr. Flatter, if you recognize. Mr. Chairman,
if I could. That bill in its original form, which I think John is talking about, providing a direct payment incentive, started out as a tax exemption. And our opinion was exactly the same as it was here. You can't exempt Arkansas milk sold in here and not the milk coming in from out of state.
That's why the law was changed to make it an economic payment incentive to support the industry, which is what John is talking to. But we early on had an opinion that we had serious constitutional concerns, and that that bill was changed. MR. VIVIANO,
Representative Mark Biviano
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46:04
you recognize? Thank you, Mr. Chairman. Back on the lawsuit, a clarification. Are you suggesting that the State of Arkansas shouldn't take any action that will lead to
economic development, job creation, ways to create a better life for the citizens based purely on the fact that we are perhaps threatened by a lawsuit? Representative Viviano,
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what I'm suggesting is that as an attorney and as a state employee, I took an oath to follow the Constitution and to make sure that those that I represent and those that I advise know when there's a possible constitutional issue.
And I think I have a duty that's incumbent on informing you, ladies and gentlemen, that there is a very real constitutional issue out there. Is
Representative Mark Biviano
Unverified
47:00
that same risk not really in any type of business
with the state transacts that we're always open to potential lawsuits? There
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is always a risk of lawsuit. There's a difference between a risk that someone could come up with a unique issue or file a lawsuit versus a situation is here where there is strong case law involving the Interstate Commerce Clause dealing with situations where a state enacts legislation that provides a benefit to in-state business that's not available to out-of-state business.
There's a long line of cases dealing with that. Representative Westerman, you're recognized. Thank you, Mr. Chair. Mr. Leathers, I believe you stated that in years past, we have exceeded the $44.5 million in capital gains. And I was just wanting to clarify, you're saying that we have actually seen companies grow as much as $960 million in six months in the past and sell that same year?
John has the numbers on that for the capital gains in previous years you can compare to the total that we
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would project here for this exemption. Representative Westerman, I believe the comment was made is that to have the level of usage, the level of cost that DFA projects, I believe it's three years out, that you would have to have about $800,000, $900,000 in gain, and that in 2009 the gain was not that high,
and that's absolutely a true statement. A million, right? I'm sorry. Correct. That's a million. I'm sorry. $700,000. I'm trying to think and talk at the same time, and I'm not quite capable of doing that. 2009 was a unique year. the level of capital gain after the 30% exclusion in 2009 was $795 million. That is less than one-third of what it was only two years earlier.
Two years earlier, the capital gain was almost $2.4 billion after the 30% exclusion, So we're looking at about 300 million, over 300, over 3 billion in capital gains before the 30% exclusion. So, yes, 2009, if you look at it in isolation, DFA's numbers are totally out of line. But when you look at historical information and you look at in 2006, capital gain was about $2.5 billion.
dollars, 2007 was about three billion dollars, 2008 was about 2.3, 2.4 billion. So 2009 was a very, very bad year. We don't anticipate future years are going to be that bad, so the revenue impact is based not on that single bad year, but it is based on several years and averaging the good and bad years together. Another point that I would like to make related to that is that Mr. Paco in his analysis says
DFA used a much too short impact. Knowing how quickly someone's going to dispose of a capital asset is very difficult to determine. But Mr. Paco used data that was 25 to 30 years old. He quotes that stock held on the New York Stock Exchange is held for about four years. I have more recent data from the New York Stock Exchange that shows by 2005 the average
holding period had declined from where it was about in the early 1980s of about four years down to right at one year. Capital stock, stock that would be traded on the New York Stock Exchange or a similar exchange makes up anywhere from 15 to 40 percent of total capital gain in any one year, according to IRS data. It fluctuates depending, as you might expect, on how well the stock market's doing. In 1999 and 2000, it was over 40 percent.
By 2001, 2002, it had dropped to less than 15 percent. But then by 2005, it was back up to 35 percent. So a significant portion of that capital gain is going to roll over very fast. Is DFA's estimate of a three-year full phase-in too rapid? That's possible, absolutely. Is Mr. Paco's estimate of five- to ten-year full phase-in too late or too long? That's also possible.
The truth may be somewhere in the middle. Where we do agree is the bottom line full phased-in costs, we agree, is somewhere in $66 million to $68 million. The
question is when. So you're saying we should probably just ignore this $44.5
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million in 2013? No, that's not a fully phased-in year. That is a partially phased-in year. I'm talking in terms of the full phased-in, which is 2014. The $900 million estimate, I think that was based on the full-faced-in $68 million number or $65 million or whatever.
So even in 2007, when we had $3 billion in capital gains, how long of a time period had those gains accumulated? Those weren't all just in one
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year. You're absolutely right. Those were not all in one year. That's the point of the comments that I made after that, that according to IRS data, somewhere around 30% to 40% of gains is in stock. And transactions in stock, according to the New York Stock Exchange, roll over about an average of once per year.
So we're looking at a significant portion of the gain rolling over. That number, that 44, may be too high for the second or third year out. But it's a reasonable estimate based on the rollover of capital stock and the rollover of other types of property ownership.
Representative Viviano, you're recognized. Thank you, Mr.
Representative Mark Biviano
Unverified
53:38
Chairman. Based on the numbers you just quoted, I understand that there was a downward trend in 2009.
Representative Lane Jean
Unverified
53:50
in what, sir? Capital gains.
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Absolutely. Do you expect that to continue? Absolutely not. Why? Historical data shows that Arkansas's capital gain for the last five to ten years has been well over $2 billion and approaching $3 billion in some years as compared to only about $900 million in 2009.
2009 was a very, very weak year, not only in Arkansas but at the IRS level and in other states. Is that based on your expertise on are you
Representative Mark Biviano
Unverified
54:26
expecting an economic recovery in our country or is there a scientific report to validate that? It is based on historical record. It's an historical record. Would you not agree that we probably need to be proactive to ensure that we have gains continue to grow in the state certainly anything we can do would be of help yes
thank you representative burris you're recognized thank you mr chairman uh gentlemen i'm going to make a point here that i
think you can all agree with me on i'll try to be quick sometimes we're guilty of talking to each other and we've had this debate a lot there's a lot of people watching today in the audience and otherwise that haven't heard this debate i think the root of So this whole argument comes down to the method of scoring that you use to evaluate the impact. It is a static analysis.
It is not a dynamic score. In other words, it is possible to look at to judge using dynamic scoring the amount of the jobs that would be created, therefore income tax and sales tax paid into the state through investments made through an investment by which a person would normally pay a capital gains tax. You do not evaluate that in your impact, any potential benefit. You simply tell us the line item cost if we were to eliminate the capital gains tax. Is that correct?
I'm not arguing why. I'm just that that's
how you do it. We do not use dynamic scoring because we think it's an invalid method for this type of state tax. Fair enough. But in essence, you
tell us what we're going to spend, but you don't tell us what we're going to get. I'm not arguing why. I'm just saying that at the end of the day, that's the root of a lot of these discussions and debate, why Representative Garner thinks his impact is probably less, even in future budgets, and why I agree with him is because the impact in no way measures the amount of investment
and therefore jobs that we will see in the state that will be created if this bill is passed. Is it at least fair to say that your impact doesn't take into account any growth that would occur if this bill is passed? MR. We do not.
We take into account in the budget growth that would naturally occur, and we will be doing that later. But as to any growth that could be directly attributed to this, no. MR. Okay. Thank you.
Representative Meeks, you're recognized. MR. Thank you, Mr. Chairman.
Representative Stephen Meeks
Unverified
56:57
And I've got two questions, and one of them is actually a follow-up to Representative Burris. But the first one is the capital gains tax, typically when folks think of that, they're thinking of the high-end investors. Will this tax break benefit the small investor, the individual person who is investing in businesses locally, retirement accounts, so forth? That is my first question. And my second question is, if the state is expecting a $68 million impact on this in 2014, that means
means Arkansans that invest are going to get to keep an additional $68 million in their own pocket that they can use to invest. And following up with what Representative Burris has said, have your economists come up with any ideas, projections of what that additional $68 million worth of investment in the state will do as far as growth and then what that growth would lead into as far as additional income into the
Speaker 41
58:01
state? Mr. Chairman, we did not, and the reason for that is if that money would be spent
in the economy regardless whether it's spent
on schools or for Medicaid by the state or spent by those people that receive it, there's the same amount of money in the economy, so there's no way. We can't print money like Washington. They can cut a tax and have the income not come in, and they print more money. We can't do that. We either do one or two things. We've got to cut the budget to make up for it and take that money out of circulation, then we put it over here.
So there may be, you know, philosophically, you may think it's better to have it over here because it does more good, and I'm not addressing that. But just the point from purely an economic, and Dr. Shelnitz here, he could talk better than I on this, but pure economics, you know, we're not printing money, so the same amount of money
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stays in the economy. Representative Meeks, I wanted to address one of the questions you asked. You asked about who within the economic strata would be affected.
The latest data I have with me is 2008 data for Arkansas residents, and I show that this is excluding non-residents, but for residents who filed a return, there was $1.6 billion in capital gain reported to Arkansas. $957 million of that came from folks earning $500,000 or more. $146 million came from persons earning $250,000 or more,
$250,000 to $500,000. If you drop down to $100,000 in taxable income, you add another $200 million, so about $1.3 billion of the $1.6 billion in capital gains was derived by folks making more than $100,000, with over half of it coming from folks who earn over $1.5 million a year.
Representative Nate Bell
Unverified
1:00:13
Representative Bell, you're recognized. Thank you. I think my question probably is best answered by Mr. Tice. You mentioned earlier that 35% roughly of the capital gains come from stocks and that those stocks are now on average based on the IRS data held approximately a year. My question goes specifically, according to this bill, it would only apply to stocks held in Arkansas corporations that are headquartered in Arkansas.
Have you all broken out those numbers to take a look at what percentage of the aforementioned stock investments actually are in Arkansas
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corporations? Representative Bell, we have made an effort. There's no good strong data. And to be honest, I want to make sure you understand that according to the IRS, the range is anywhere from 15 percent up to 40 percent over about a 10-year period. The best we've come up with is about 50 percent, and
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Mr. Paco in his study didn't find any
evidence to contradict that or confirm it
Representative Nate Bell
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1:01:21
either. Have those numbers been taken into account when you did your revenue impact? Yes. Just one additional question. When we looked at percentage of investment that's in Arkansas stocks, do you believe that there is potential for this bill to stimulate additional interest in investing in Arkansas companies were this bill to pass? I'm really not
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an economist, and that's outside my ability to answer, but we have economists here who could.
Representative Fredrick J. Love
Unverified
1:01:51
Thank you. Representative Love, you're recognized. Thank you, Mr. Chairman. I would just like to ask, I want to ask a couple of questions. Number one, how many jobs can you guarantee will be produced if we were
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to pass this bill? Mr. Chairman, I think that's right. It's to either
Speaker 9
1:02:18
one of the gentlemen. Representative Love, who were we directing the question? MR.
It's either one. Okay. MR. It doesn't matter. MR. Mr. Chairman, we would not say that we could say that there were any jobs that would be directly created by this. We don't have a number for that, and the sponsor may have a different opinion of that, but we can't say that if we do this, we're going to automatically have more investment than we would otherwise have, you know, based on
Representative Fredrick J. Love
Unverified
1:02:46
that business condition. So are you telling me that if we pass this bill, there's not a guarantee of one job being created?
Is that what you're saying? There's no guarantee
Chair
Unverified
1:03:00
of that, no, sir. Okay, thank you. Representative Harris,
Representative Justin T. Harris
Unverified
1:03:05
you're recognized. Just to thank you, Mr. Chairman. But just to make a quick statement, as a business owner, if you have more money coming in, you
are going to create jobs. That would just – I'm not an economist, but I think that's common sense. Then the other question I want to ask, when you're talking about the upper tier, that it would affect the 100,000, the 500,000, how many of those are actually employers that
are creating jobs in the state of Arkansas that may be able to take that money and create – one job would be better than no jobs in our economy at the
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rate our unemployment is? Representative, the data that I quoted to you is off the individual income tax returns filed by those folks, and there's no ability to look at those and determine who are small businessmen, who are any other type of business. So we can't say which these are employers and these are not.
All right. I don't see any more questions. Mr. Wise, Mr.
Leathers, Mr. Tice has spoken against the bill. Is there anybody in the audience who would
like to speak for the bill? Seeing none, Mr. Rich Huddleston, I've got you down to speak against
Representative Davy Carter
Unverified
1:04:21
the bill, so you're recognized. Please state your name and the interest that you represent. Thank you. MR.
Rich Huddleston
Unverified
1:04:29
My name is Rich Huddleston. I'm Executive Director for Arkansas Advocates for Children and Families. I just want to make three quick points because I think the testimony has been pretty thorough here. We believe that given the tight state budget that any state tax cuts pass this session really need to be limited and really need to be targeted to the low and middle income families who are really struggling in today's bad economy. And this bill clearly does not meet that standard.
to the Institute on Taxation and Economic Policy, low- and middle-income families would receive virtually none of the immediate benefits from this bill. If you look at the tax cut like a pie, the top 1 percent of taxpayers, or those making more than $352,000 a year, would receive about 77 percent of the total benefits. In contrast, at the bottom 80 percent of taxpayers, those making less than $71,000 would receive less than 2% of the total benefits
of the tax cut. If you look at it in dollar terms, the top 1% of taxpayers would receive an average tax cut of about $4,200 while the middle 20% of taxpayers would receive an average tax cut of between $1 and $2. These findings make sense if you think about it. Low-income Some families generally don't have disposable income to make investments or buy assets and any assets that most middle income families have are generally tied up in either their
home or their 401 plan, both of which would pretty much be unaffected by this bill because they already received very favorable treatment under existing law. Second point, I think it's worth noting that part of the state tax cut that Arkansas taxpayers would receive would be offset by higher taxes on their federal returns. And that's because you get to write off or itemize, you know, the state taxes that you pay on your federal returns.
And so roughly, on average, about 14 percent of whatever state tax cut a taxpayer might get on this would be lost on their federal return. So I mean, if you think about that, I mean, imagine a state economic development program that sent 14 percent of its cash out of state and never to be seen again. And that's basically what we would be doing. We would be sending 14 percent of what we're currently paying in taxes to, you know, to taxpayers among other states. And that's a pretty inefficient economic development program by any standard.
And then finally, I would just like to reiterate the point that DF&A made earlier. I mean, the budget is about setting priorities. And many experts say that factors other than taxes are more important in business location decisions and state economic development, having a highly educated and healthy workforce, access to markets and distribution networks, high-quality public infrastructure, high-quality of life. And eliminating the state tax on Arkansas-based capital gains comes at a time when the state
budget simply can't afford it. I mean, removing $68 million from the state tax base, I mean, could endanger, you know, public services, you know, K-12, higher ed, corrections, Medicaid, programs that really serve our most vulnerable citizens. And not only that, if you're looking at it from a long-term economic development question, I mean, we could be endangering at the very base for economic development by lowering the quality of life in this state. So there's no guarantee that this is going to have the impact that I think is being intended
here. So with that, I'll stop, and I'm happy to answer any questions. I just want to say that I appreciate the thorough debate that this committee is going through on both sides of it. I think this has been one of the better debated bills that I've seen in a long time in terms of the information and the arguments going back and forth, and so as a citizen, I really appreciate y'all taking the time on this,
so thank you. Thank you. And we do have a few questions. Representative Harris, you're recognized.
Representative Justin T. Harris
Unverified
1:08:46
Mr. Huddleston, I'd love to sit down with you and talk about more tax cuts. That would be great. That's what I've come here to do. The people in my district, we have a rural district, one of the things I want to ask of you, because we were talking about impact, but don't you believe that it would raise the quality of life and impact a low-income family if they were provided a job that maybe they weren't provided for before or had the opportunity
Speaker 164
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to work? MR. Well, I think DF&A made the point earlier that there's no guarantee, you know, how
Rich Huddleston
Unverified
1:09:19
many jobs are going to be created, when they're going to be created, what types of jobs are going to be created. I mean, I think it's also worth noting that while this bill may or may not up front, I encourage folks to invest in Arkansas assets. I mean, once you eventually sell that asset and you take advantage of the tax break, there's no requirement that you then turn around and reinvest in Arkansas. I mean, you could just as easily, after you take advantage of the tax break after you sell your asset, you could just as easily invest those proceeds in another
state or even in another country. I mean, I also think that especially at a time when the economy is bad and many citizens are struggling, do we want to risk making sure that kids aren't getting access to health care? I mean, we already have, you know, thousands of kids in this state who aren't able to access health care, you know, because we don't have the money. You know, we put the All Kids First expansion on hold and some other things. And so do we really want to undermine our ability to serve our most vulnerable citizens at a time when we can't afford it? I mean, maybe
later on when the economy gets better, you know, maybe we come back and revisit this. But I think now is the wrong time to do this.
Representative Justin T. Harris
Unverified
1:10:36
I appreciate all the work that you do for the children in the state of Arkansas, so I want to make that clear with
ever been a business owner? I have not. Okay. Thank you. Representative Burris, you're recognized. Thank you, Mr.
Chairman. I admire passion from any direction.
House Bill 1369 by Representative Shepard, back-to-school sales tax holiday on supplies and clothing. Do you support that bill? Does your organization support that bill? Our board has not looked
Rich Huddleston
Unverified
1:11:09
at that bill yet, so I don't know the answer to that. And I don't get out in front of my board, and so we have to decide on that bill. Based on your previous statement of supporting
tax relief that goes straight into the pocket of working Arkansans and simply allows them to continue to live simply lower income.
I'd encourage you to look at that, and I'd encourage you, based on
Rich Huddleston
Unverified
1:11:35
your statement, to support that bill. I would just add to that that based on what I know about that bill, many of the
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benefits of that bill would also go to, you know, the families who don't need
that bill as well. I'm sorry to interrupt you. Let's keep it on 1002. Thank you. Okay. Representative Viviano, you're
Representative Mark Biviano
Unverified
1:11:55
recognized. Thank you, Mr. Chairman. Mr. Heddleson, earlier we heard that the amount of capital gains has dropped dramatically in the state of Arkansas.
Do you agree with the economic forecast that we heard that we're on the road to recovery
Rich Huddleston
Unverified
1:12:12
and things are going to be much better in that regard? I think DF&A has always done a reliable job of doing an economic forecast and has done a reliable job of estimating revenue impacts on bills. And so, I mean, so we base our analysis based on what they put out and so beyond that. So
Representative Mark Biviano
Unverified
1:12:32
assuming that to be the case, and we are going to have much greater capital gains,
does that not have a direct impact on
revenue generated here in the state and therefore, you know, good for the people that you
Rich Huddleston
Unverified
1:12:45
represent? Well, I guess my question would be if it looks like we're on the road to recovery, then is this bill really needed? I mean, is it attempting to fix a problem that doesn't exist? I know earlier we talked about how we compare it to other states, but I think it's also worth noting that of the 41 states that have income taxes, Arkansas has been identified as one of the eight states that offer really generous treatment of capital gains income
among the states that have income taxes. And so I think that's worth noting. I
Representative Lane Jean
Unverified
1:13:18
was just asking if you believe that by taking no action that you agreed with
that economic forecast. Yes. Representative Collins,
you're recognized. Thank you, Mr. Chair. Mr. Huddleston, thank you so much for coming, and I certainly appreciate your compassion for the children and families here in Arkansas. So you made a point about the percentage of this deduction that would currently go toward a deduction on federal income taxes
and hence suggest that the feds may wind up with a lot of this money in their coffers. And I just wanted to ask you, if you've taken a look at the AMT or the Alternate Minimum Tax, tax, which for a lot of these types of individuals adds that money back into their income and then goes ahead and takes a federal tax on that as well, so that the net effect would be to leave a lot more of that money in Arkansas. Thank you. I would not
look at that. Representative Collins Smith, you're recognized.
Thank you, Mr. Thank you. As a business owner, I want to say to you that if there were no capital gains, I can see me investing and creating more jobs. And in our small rural area, we're working in the intermodal that the governor designated in a regional area in northeast Arkansas. I can see that even local persons would want to invest in businesses in our area. And so I guess I just disagree with your first comment, because I believe it's a job creator.
Rich Huddleston
Unverified
1:14:52
And I guess all that I could say to that is, of course, I've never been a small business owner, but have read a lot of the research, and a lot of the research, like DF&A said earlier, really ranks taxes down near the bottom of the list in terms of factors for business location decisions and state economic development. And if you don't have an educated workforce, a healthy workforce, a high quality of life, then are we really going to attract the well-paying jobs that some other states have been able
They'll respond to that. Don't see any more questions. Well, I do see
Representative Stephen Meeks
Unverified
1:15:32
one. Mr. Representative Meeks, you recognize. Thank you, Mr. Chairman. Just a quick question. The impact on this is thought to be around $60 million, $68 million. We also know that, generally speaking, contributions to charities tend to typically come from those of us who are better off. if the ones of us that are making, of course that's not myself, but those that are making more than $100,000 have more income that they can keep
that frees up more income that they can contribute to charities that helps the low- to middle-income families out. Would your organization be more adept or be more interested in seeing charities, people donate through charities to help low-to-income, or rather see that state government provides those services. Well, if you have your checkbook handy, we would love
Rich Huddleston
Unverified
1:16:24
to take a check from you. But no, seriously, I think it's really important that state government have the resources that it needs
to provide the programs that we all care about. I mean, because every one of you has a district where you have low and middle income families in your district. You know, that depends on health care and Medicaid. I mean, your seniors depend on services. I mean, given, you know, the Medicaid crisis, you know, that we hear about the Medicaid funding crisis, again, I think the last thing we can do is afford to take $68 million out
Representative Stephen Meeks
Unverified
1:17:00
of the budget. So what you're saying is you would rather the citizenry be dependent on government more so than the goodwill nature of our fellow citizens.
Rich Huddleston
Unverified
1:17:09
Well, I think to think that charitable contributions are going to go directly to provide health care for a low-income family, generally charitable giving generally does not work that way. And so while we want to do as much as we can to increase charitable giving to good causes, it's just as important that state government have the resources it needs to provide critical services. Okay. All right. Thank you, Mr. Adelson. Thank you, Mr. Chairman.
Thank you, Mr. Huddleston, for coming today and testifying. I think although there may be some disagreements on some issues, you certainly respect what you're doing and appreciate your advocacy on behalf of those of you you're trying to protect. So thank you for coming. Thank you. Thank the committee again. Mr. Huddleston has spoken against the bill. Is there anyone from the audience who would like to speak for the bill? Is there anyone else? I've got a Mr. Christopher Brown who has signed up to speak against the bill.
Mr. Brown, are you here? You're recognized. Please state your name and any interested parties you represent, if any. Mr.
Christopher Brown
Unverified
1:18:31
Brown, hit the microphone there, please. Thank you. My name is Christopher Brown, and I'm a professor of economics at Arkansas State University in Jonesboro, and I don't represent any interest here today.
I'm here because I think that this proposed bill would be bad public policy, and I want just give a few reasons why I hold that opinion. Okay. First, if you pass this bill, you're certain to suffer a significant decrease in revenue from the Mr. Brown, I'm sorry. I can't hear you very well. If you would, I don't
Speaker 185
1:19:12
know if it's plugged in or get a little closer. Thank you.
Speaker 191
1:19:20
All right. One thing you can be sure of if you pass this bill is that you're going to suffer a very significant decrease in revenues from the capital gains tax. So the bill would have to be justified on the basis that by eliminating the capital gains tax, you would create an incentive to investment, creation of new jobs,
business startups. And to think that the elimination of capital gains is going to accomplish that objective requires a leap of faith on the part of our elected officials. Now, I've heard the term investment used here today, but by investment, economists mean spending by business firms for newly built equipment, durable structures, and software.
Now, if you buy a piece of commercial real estate and you hold it and then you sell that piece of commercial real estate at a profit, you get a capital gain. But that's not what we mean by investment. As a result of that transaction, there's been no necessary increase in the size of the capital stock, nor has there been any increase in the employment base. So that based on the numbers we see, a significant share of capital gains income in the state of Arkansas comes from real estate transactions.
Similarly, there's a community out there that specializes in buying and selling existing businesses so that certainly these entities would be helped by a reduction in the capital gains tax. However, just because someone has purchased a business and then later sold that business does not mean there has been additional expenditure for plant and equipment, new jobs created.
Now, similarly, when people buy shares of corporations, that by itself does not result in any increase in new plant, equipment, jobs. Now, when you look at the economics literature on the effects of capital gains tax cuts, the link they make between the capital gains tax rate and investment, as I have defined it,
because after all, it's spending for new plant and equipment that makes us more productive, that adds to our employment base, et cetera. But in any case, the specific chain of cause and effect that is identified in the economics literature involves the cost of financing, particularly equity financing, so that equities are held primarily for the prospect of capital gains.
so in that sense they differ somewhat from bonds, so that if you reduce the capital gains tax rate, then the after-tax realization of capital gains is greater than it otherwise would be. Well, this makes equities more attractive relative to other portfolio assets. Now, this may lead to a run-up of equity prices. Now, that may, in turn, make it such that new equities can be issued on more advantageous terms
so that most people that I've talked to don't understand the way the stock market works. When you buy shares, that's a secondary market transaction. As a result of that purchase of shares, there's no receipt of financial capital by the company that has issued those shares. Now, it is true that it's possible that a run-up of share prices may result in more favorable conditions for the issue of new shares.
And the issue of new shares can provide the financial capital for the purchase of new plant equipment, et cetera. However, I can tell you, based on many empirical studies, this link between capital gains taxes and the cost of equity financing is tenuous at best. Okay. Now, on another issue with respect to real estate transactions, no less an economist than Adam Smith distinguished between productive and unproductive uses of financial capital.
So that, again, if you buy land or you buy commercial real estate merely to hold that asset in the anticipation that it can be sold at a profit, well, that activity by itself does not constitute investment. It does not add to the capital stock, to the employment base. In fact, Adam Smith referred to that as an unproductive use of capital, so that if you reduce this capital gains tax rate, you're going to incentivize speculative activities in commercial real estate, in land, and so forth.
Okay, now, another point that's been made here is that with respect to business decision-making, you're making a decision to start a business or to expand an existing business. How does the capital gains tax rate come into the decision-making process? Now, I imagine it could be a factor, but I would think it would be a very minor factor compared to the other factors, specifically the prospect of earning a positive income stream out there in the future from the production and distribution of goods and services.
so that I could imagine that people start a business with the expectation that at some point in the future they will sell that business. And certainly they want to keep a good share of the profits that they would earn from selling that business. But when we sort of model decisions to start new businesses or to expand existing businesses, I would think that the capital gains tax rate would be a very minor factor in that calculus.
Another point I wanted to make here is that most venture capital for startups comes from pension funds or other institutionally managed portfolios. and those entities are not subject to capital gains taxes so that I would expect no effect from this bill in terms of stimulating an inflow of venture capital into our state
because it's simply a non-issue for the people
Speaker 192
1:27:24
involved. So I want to summarize here by saying that I think this bill is
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going to result in a very significant net revenue loss for the state. And the benefit is mainly to give tax relief to the very wealthiest Arkansans because we know that capital gains income is concentrated at the top of the income scale.
Thank you. Thank you. Mr. Brown, Representative Bibiano, you're recognized. Thank you, Mr. Chairman.
Representative Mark Biviano
Unverified
1:28:06
Mr. Brown, is only wealthy people who own houses in Arkansas? No, sir. So when somebody buys
a house and it appreciates in value and they sell it sometime in the future and it creates a capital gain, what do they do with that investment typically?
Speaker 192
1:28:28
Well, I would imagine that there are many outlets for that. Some would use it to supplement their retirement. Others may purchase a retirement home down in Florida. Okay. Now, in some cases, in some
Speaker 191
1:28:55
cases, they may use those funds to start a business.
Representative Lane Jean
Unverified
1:29:01
Maybe. Maybe they'll buy another house, a more expensive one. They'll build
Speaker 192
1:29:16
a new house. Do you think? Okay. Well, does that create any jobs? Well, I would say that as
Speaker 191
1:29:24
a result, I mean, certainly we've gone through a period where house flipping became the national sport. And that led to a real estate price bubble in a number of areas of the country.
And I don't think that the aftermath of that real estate price bubble has been too favorable. So certainly you had people that were buying houses simply to flip those houses, and I don't see any connection between that house flipping and investment in
Speaker 192
1:30:02
new plant equipment, those things we need to really improve our economic base.
No more questions, Chairman. Representative Cowley, I'm recognized. My question
Speaker 52
1:30:19
would be for Representative Garner. If I've got a house right now,
Representative Larry Cowling
Unverified
1:30:24
it's not going to apply to me, right? Because this would be new ground, new stuff, right? That's correct. Thank
Representative Ed Garner
Unverified
1:30:36
you. Oh, I'm sorry. Go ahead. I'm sorry. And there's additional law that governs capital gains as far as rolling over profit
on a home, so I just, it's not the same as investing in a
business. Mr. Brown, thank you for coming down today and making that trip. Appreciate your insight and your testimony. Mr. Brown has spoken against the bill. Is there anybody in the audience that would like to speak for the bill? Seeing none, Representative Garner, you're recognized
Chair
Unverified
1:31:08
to close for your bill. Thank you, Mr. Chairman and
Representative Ed Garner
Unverified
1:31:14
members of the committee. It's been a great debate, and I want to go through just there's quite a cloud
here of information that I think needs to be clarified a little bit.
One, I've been operating off of the information provided by DF&A on capital gains in recent years, net of the 30 percent, And in 2009, the net capital gain was $702 million. Going back to 2003, the high, and this is what we used to base our impact on, the high was $2.2 billion in capital gains in 2006.
So when you talk about the $3 billion as an impact, I think that might be off. Again, addressing the legalities of it, Mississippi enacted their law exempting capital gains for in-state corporate investments in 1997. Oklahoma passed their law in 2006. Louisiana's law went in in 2010. Again, you can sue anybody for anything, but there are no pending lawsuits against these
laws in our competing immediately surrounding states. And again, the same institute that brought out this opinion participated in a lawsuit to try to overturn the municipal bond exclusion. There is a deferential of treatment of investments in Arkansas versus out of Arkansas. That suit in front of the U.S. Supreme Court lost in a 7-to-2 opinion. I've heard many questions that were asked DF&A or others about jobs created by capital,
and it strikes me as difficult to get an opinion from someone about the creation of jobs using capital investment from people who do not measure it and stand before you and say we do not look at that aspect. So asking people to say, well, guarantee that jobs are created from people who testify, we don't measure that, you're not going to get a reliable answer. I think that's logical. And having spent time in the investment market and not in academia
and looking at business deals for corporate investments, I can guarantee you that in the boardroom of a company, They look at total return over time, and when you look at it, it is true. Capital gains avoidance is not the reason to start or not start a business, but where to locate that business. It makes a dramatic difference in whether I would locate that business in Arkansas with a 4.9% capital gains rate or make that investment
and put that business in Tennessee or Texas or Oklahoma or Mississippi or Louisiana because 4.9 percent paid to one state and not paid to the other, it makes a huge difference where I place that investment. It was said that investment in commercial real estate could simply be flipped, and certainly you could purchase publicly traded stocks and turn that over for a gain, and those don't create jobs. But it was also testified that approximately 40 as high as 50 percent of capital gains do just that.
But when you look at job creation from another aspect of our state government, Arkansas Economic Development, and we spend money on the Quick Action Closing Fund and we advocate for the Amendment 82 passage and we take a look at our competitive nature when ADC and Progress Arkansas puts out information on projects that we miss and you look at the investment capital of these companies and where they went out of state and why we missed them and the jobs that they created, the income tax revenue for creating this is anywhere from five to ten times the capital gains lost.
So if you have 40 percent of and even 50 percent of capital gains activity that does not create a job, we still come out two and a half times the capital gains lost from income tax revenue. The reason we have to include publicly traded firms in this is that we want publicly traded firms to leave California and Illinois and other places to come here because of the very things that Richard Weiss says. We have one of the best opportunities being in Arkansas. We have a balanced budget, and we don't fudge it.
And so when you have a balanced budget, Arkansas is in the best position to move forward. Now, earlier I saw former Senator Shane Broadway here. When I came to this body, there was a study produced, Arkansas 2020, and again I'm going to agree with Dr. Weiss or Richard Weiss. We have a looming crisis. We are not going to spend enough money in government to overcome the liabilities of the future unless we have job growth, and it must be rapid. This puts us in a competitive situation with our surrounding states to move out of this slow economic environment with job growth where income taxes pay for the elimination of this most volatile of all revenues, of all taxation.
Capital gains is the most volatile, hard to budget. If it is a competitive disadvantage, get rid of it. And by saying new investments, there is no windfall. And I promise you the best social program that this state could possibly do is to provide someone a job. And that is what the people of Arkansas sent us up here to do in this environment. It is number one on their minds beyond anything else, create an environment for jobs in Arkansas. With that, I'm closed, and I would appreciate a favorable consideration.
Representative Garner has closed for his bill. What is the pleasure of the committee?
Westerman, you're recognized. Mr. Chairman, I move do pass on
House Bill 1002. Okay. Representative Westerman, would you like to explain your motion? Anybody want to speak for the motion or elaborate on it? No? Would anybody like to speak for the motion, against it?
Okay. Very well. All right, the motion before the committee is due pass. All in support of the motion, indicate by saying aye. Aye. You can be opposed. Aye. Motion carries. Congratulations. Representative Garner, you passed your bill. Thank you, Mr. Chairman. Thank you, members of the committee. You know, I need to change my sheet up here. That didn't sound right when I read that off, so let's take that line out. Okay, we passed over HV1056. Representative Lindsey is representing Gene.
I understand you're going to run this bill. He has not made it back in, but you're recognized.
Representative Lane Jean
Unverified
1:38:41
Run HB 1056. Thank you, Mr. Chairman. This is the third time that we've discussed my friend, Representative Lindsey's bill, 1056. What this does is, and it's been debated in earlier meetings, is back in 2007 we had an error in our tax code.
And what this does is provide tax credits to head of households with two or more dependents. And it's mainly concentrated between the $18,000 and the $22,000. So this is the working poor. It's got an estimated impact on 2012 fiscal year. of $3.7 million. This has support on both the House tax revenue and Senate tax revenue. And
if you have any questions, I'd be happy to try to answer them. Representative Collins, recognized. Mr.
Chairman, I'd like to make a motion at
the proper time. Very well. Okay. Anybody here in the audits like to speak
for the bill? Mr. Weiss, Mr. Leathers. Y'all recognize, speak against the bill.
Speaker 38
1:40:07
Thank you, Mr. Chairman. Richard Weiss from DFA. With me is Mr. Leathers. Let me just briefly state that this is about the money. Just like all of the other bills that are taking money out of the budget, this is another one. There's an impact of $3.7 million the first year and $3.8
million the second year. MR. Okay. Seeing no questions, Mr. Leathers, would you like to elaborate?
Speaker 54
1:40:37
No. MR. Mr. Chairman, I think the – not the sponsor, but Representative Gene did an excellent job of explaining
this. It was left out of the original bill, but, you know, again, it boils down to being consistent. This is the money that comes out of that balanced budget that's out there that we proposed, and we already have tax relief budgeted in there, and we want to make
Speaker 41
1:40:58
sure the committee understands that. Very well. Mr. Weiss and Mr. Leathers have spoken against the bill.
Is there anyone in the audits who'd like to speak for the
bill? If not, Representative Jean, you're recognized close
Representative Lane Jean
Unverified
1:41:24
for the bill. If there's any other questions, I'm closed, and I'd
appreciate a good vote. What's the pleasure of the
committee? Professor Collins, you're recognized. Mr. Chairman, I'd like to recommend a due pass on House Bill 1056.
Speaker 185
1:41:42
The motion is due pass. Would anybody
like to speak before the motion against it? Okay. If not, the motion before the House will do pass. All in favor indicate by saying aye. Aye. Any opposed? Motion carries. Congratulations. You passed the bill. Thank
you, Mr. Chairman. Thanks, Committee. Seeing no other
Representative Keith M. Ingram
Unverified
1:42:01
items. Yes, sir. Representative Ringham, you're recognized. I'd like to make a motion to take 1257 off the
table and present that. Okay, we have a motion to take 12-5-7 off the table.
Let me get my rules out, Representative Ingram. That is non-debatable. It needs a majority of the quorum. Would you like to explain the motion? Anybody against it? All right, the motion before the committee is to take the bill off the table. All in favor, say aye. Aye. Any opposed? Motion carries. Representative Ingram, you're recognized.
Chair
Unverified
1:42:45
In taking the, removing it from the table, as my memory serves me, we start back from
Representative Keith M. Ingram
Unverified
1:42:52
where we ended. I think that we ended, we had had questions, I had had Mr. Tice join me up here to ask any questions. I would make a motion, do
Speaker 211
1:43:02
pass on 1257. Representative Ingram, give me
30 seconds here. I've got a procedural issue I need to line out. Yes, sir.
Okay, we're back. Representative Ingram, you're recognized again. I'm sorry.
make a motion on 1257, do pass. Okay. The motion in front of the committee is to do pass HB-1257.
Would anybody like to speak against the motion? Representative Weiss, you're recognized. Sorry, Mr. Weiss. I'm flustered up here on this deal,
so. All right, I'm back. All right. I'm not sure if I'd rather
Speaker 40
1:44:24
be Representative Weiss or Dr. Weiss. I've been called both today. But I feel kind of like I'm steamroller twice. But in regards to that, this has a very
Speaker 38
1:44:33
slight revenue impact, but nonetheless to be consistent, we've got to speak against it. It's not part of the governor's balanced budget.
And we would appreciate it if you would vote accordingly. Mr. Weiss has spoken
against the bill. Anybody like to speak for the bill? Against the bill? What's the pleasure? I'm sorry. Representative Burris,
I guess I'll ask a question. He's already had a motion due pass. I assume I'd like to
maybe ask this. I guess I'm going to speak against the motion would be my desire.
Okay. Let's hear it. And simply on the premise, Representative Ingram, I had some questions that I wanted to ask you. I'm assuming procedurally I cannot do that now because we had a motion due pass. I would say I just have several concerns. As far as the procedure here, I know we heard a presentation on the bill. I didn't get a refresher. I assume there's interested parties here. The impact statement, I had questions about some of the technicalities in the bill, even though it has been debated.
The motion there, I respect you being quick on your feet. I don't – it's good. But I have enough questions where at this point I think my only option is to vote no on the motion. and
maybe come back and have some debate on this later. I'm not saying necessarily even against the bill. Just at this point, the only option is to either vote for the motion or against the motion. Thank you. Okay.
Just procedurally, when we pick up a bill that's been laid on the table, it comes back at the same position where we left
Representative Davy Carter
Unverified
1:46:22
off, So that's, which is where we were at, public comment, and then it was withdrawn at that time. So we're not, excuse me, it was laid on the table at that time. So I'm
going to recognize the motion to do pass, Mr. Ingram, Representative Ingram has made. Does anybody like to speak against the motion, for the motion?
If not, the motion before the committee is to do pass HB1257, indicate your favor of all by saying aye. Aye. Any opposed? No. All right. The ayes have it. Representative, congratulations. You passed your. Thank you. Call on the roll. I'm sorry.
Speaker 217
1:47:15
1257, Representative Moore, Representative Moore, Representative Garner, Representative Rep. Patterson? Rep. Patterson? Rep. Lindsey? Rep. Lindsey? Rep. Ingram? Rep. Kerr? Rep. Burrus?
No. Rep. Meeks? No. Rep. Gene? No. Rep. Love? Yes. Representative Bibbiano? No. Representative Collins? No. Representative Linderman? Yes. Representative Link? No. Representative Westerman? Yes. Representative Harris?
No. Representative Collins-Smith? No. Representative Bell? No. Representative Cowling. Yes.
Speaker 225
1:48:49
Chair votes yes. I'm sorry, Representative Ingram, bills
did not pass. Mr. Chairman, may I ask a question at this point of the Chair?
Yes. This will come back on the agenda. Is that
correct? It's got one more opportunity. It
Speaker 212
1:49:17
will be there Thursday on the active
calendar. Okay. Very good. Thank you.
Yes. Very well. Seeing no more business, we'll stand adjourned.
Agenda
Call to Order
HB1052
HB1002
HB1056
HB1257
Adjournment
Documents
No documents posted.
Speakers
Representative Charlie Collins Chair
Unverified
Speaker 4
Representative John Burris Chair
Unverified
Representative Lane Jean
Unverified
Speaker 15
Representative Larry Cowling
Unverified
Speaker 25
Chair
Unverified
Speaker 37
Speaker 38
Speaker 41
Representative Stephen Meeks
Unverified
Representative Mark Biviano
Unverified
Speaker 48
Representative Bruce Westerman Chair
Unverified
Speaker 66
Speaker 71
Representative Homer Lenderman
Unverified
Speaker 81
Representative Ed Garner
Unverified
Speaker 17
Speaker 106
Representative Davy Carter
Unverified
Speaker 120
Speaker 121
Speaker 126
Representative Nate Bell
Unverified
Speaker 128
Representative Fredrick J. Love
Unverified
Speaker 142
Speaker 9
Representative Justin T. Harris
Unverified
Rich Huddleston
Unverified
Speaker 164
Speaker 166
Speaker 179
Christopher Brown
Unverified
Speaker 185
Speaker 191
Speaker 192
Speaker 52
Speaker 54
Representative Keith M. Ingram
Unverified
Speaker 211
Speaker 40
Speaker 217
Speaker 225
Speaker 212