Revenue & Tax- House and Senate

And chamber Levin and so. We need to have all the time and we can discuss this issue. You'll take instructions will read. The. Members of the call is joint senate joint Revenue and Tax Committee to order looks like we've got a good little bit of stuff that we need to hear and we've got to be I can chamber eleven and so with that. Mr chairman you have anything. So I'm gonna turn it right over to. Okay. Never miss up and say something I appreciate folks movie company and then project working as done and look for your you have to say. And I'm internet over to. two movies right now much damn wide and Emily Mandel and the. You're up sounds good thank you Mr chairman. We're gonna walk through a couple things today we were asked by the bureau of legislative research to look at two questions the first being examining the and the impact of the pandemic and the federal stimulus response on the state of Arkansas is economy and its tax revenues and then the second question was to look at specific proposed changes to the individual income tax structure in Arkansas what the economic revenue impacts without so we're gonna go through both of those questions individually and then I'll be more than happy to and then we would be more than happy to answer any questions that you might have about the analysis anything that went into the analysis in kind of what the results mean that sound good Mr chairman head sounds good actually to. So just for the record my name is Dan white on the director of fiscal policy research and public sector research at moody's analytics and women dollars an economist is one of our state and local government fiscal policy experts before I get started the moody's lawyers would be remiss if I did not give a couple disclaimers here at the outset so the first thing is family I work for moody's analytics which is an entirely separate company from moody's investors service the ratings agency that you all might be more familiar with we're both owned by the same parent corporation but we are separate company so please so anything that I say be misconstrued as having any bearing whatsoever on past current or future ratings actions that sounds like it was written by lawyers because it was but it keeps me out of trouble so I have to say here at the outset. sekali Mister chairman we perform this analysis and in is and non partisan away as we possibly could in accordance with the bureau of legislative research is wishes so we are not here to advocate for or against any of the policy proposals that we are discussing today without I would also be remiss if I did not thank the wonderful staff of the bureau of legislative research for all of the assistance that they gave us and putting all this together and collecting all the data that was necessary to do the analysis I have the privilege of working with states about forty different states in some form or another I do have to compliment you on your staff you have a wonderful bill our staff you guys should be very proud of. Okay with all the preliminaries out of the way I'm going to hand it over to Emily to discuss the answer that first question there's are are nice slide showing the separation between movies election showed earlier but I handed over to Emily to discuss the first question that we had to analyze. Thanks and. So I'm going to talk about the first there were two reports that you have in front of the and that's the impact of federal stimulus during and after the pandemic so this as this Report we've gone in to try to look at a couple different things we've taken a look back at what happened during the pandemic what would have happened if we didn't have the pandemic and then finally how things would have played out if we hadn't had the huge amount of federal stimulus that was inducted into the national and the Arkansas economy after that I'm going to go through and look at our thanks and look at our outlook just looking ten years ahead and kind of our forecast for a couple different series of tax revenues to get you a sense of what we think is coming FOR Arkansas economy and how things are going to play out both now and relative to if this pandemic had not occurred. So looking back we have three different series here the show actual collections that are to different scenarios are two different what if analyses here first appoint your attention to the blue line and this just shows actual collections for sales and use an individual income tax collections over the past six quarters so beginning at the start of the pandemic for twenty the beginning of calendar twenty twenty on through the first half of twenty twenty one and so all together Arkansas brought in nine point one billion dollars in these two revenue series over these six quarters so that's what we know happened this is how things played out given the pandemic given federal stimulus all include at. So what we've done is we have constructed to alternatives here first I want to focus your attention to our Green Line here are no pandemic scenario. Through constructing this all together we see that collections for these two revenue types would have been a hundred and eight million dollars higher than the actually trying to actuality so that's what our estimates show that the pandemic costs our economy in terms of these revenues streams. Now I want to point your attention to a couple different factors that are impacting the timing of the series overall. first off as all of you know the filing deadline was shifted so you're seeing some difference in the timing of when the revenue would have come in without the. Endemic. Then secondly you can see it that over time our actual collections exceed our estimated no pandemic collections later on in this time period and that we attribute to the massive amount of federal stimulus that started flowing through this economy starting her way through the pandemic through that and and we We believe that this significantly increased Arkansas akhir Arkansas as tax revenue collections relative to even where you would have been without this recession without this pandemic. And now we can really focus in on the impact of that we see from the federal stimulus by looking at the third line here this Orange Line. And this is clearly more severe than what we saw today throughout this. Throughout the time period and all together we estimate that without this. Without the federal stimulus we would have been one point one billion dollars lower in right now relative to where we are today so quite a substantial difference there. Thank. Finally we've prepared a forecast for how these how we expect these revenues to play out over the next ten years this chart here it shows the difference between what we would have expected from our alternative scenario without the pandemic verses what we actually expect things to trial given everything that we know today where we are today and some of the changes that have impacted Arkansas's economy as a result of the pandemic as role to result of federal stimulus and how we see those are going to have long lasting impacts on the outlook relative to where we would have been otherwise. Still see that our baseline forecast or actual expectations are higher basically throughout this forecast period relative to where we expect we would have been. Without the pandemic now there's two main reasons that I'd attribute to that first off of course the federal stimulus were to be conducted huge amounts of money into Arkansas economy and that's going to play through just in generating additional economic activity and that in turn will bring in additional revenues the other factor here is going to be prices of course you've seen that we've had an increase in inflation over the past. A few quarters and that's playing through in increasing just the cost of goods which increases our sales tax revenues on a nominal basis and we've also seen some pressure on wages which is going to flow through an increasing both spending as well as some of our income individual income tax collections so between those two factors the increase federal stimulus increasing economic type activity as well as the increased on higher prices that we see as a result of the pandemic and some of the disruption to global supply chains we got a higher outlook altogether okay accounting to two point two billion in revenue over ten years. Thanks Emily and so that that's two point two billion dollars just to recap that's the baseline forecasts versus what would have happened had the Arkansas economy continue to grow it pre pandemic growth rate so if we just continue going for twenty sixteen to twenty eighteen that kind of growth rate out into the future compare those to you have about two point two billion dollars last and and we had no pandemic all together that makes sense okay so we're move on briefly to just a summary of the next part of the analysis and there should be a second document the group went along with that a written report that goes into the methodologies and the the details of both of these and quite a bit more detail but in terms of the slide deck it'll be section two of your slides and these are the macro economic and revenue effects of some proposed changes in the individual income tax that we were asked to look at the first thing I want to do is I want to just summarize some of the changes that we looked out there are really two pieces that go into these individual income tax changes the first is a consolidation of the low and mid tables as I'm sure you're very well aware there are three income tax tables here in Arkansas hello omitting coming high income the first thing that they would do is they would take the low income in the mid income and this proposal would consolidate those to put them into one table so instead of having three tables you have two tables the second thing that would do this would do is it would lower the top rate for high earners and for folks at the high end of the the middle income table from five point nine percent marginal rate to five point five percent marginal rate and we can see what that looks like in practice here. we also there are some changes that were proposed in terms of the the brackets where everybody kind of falls within those brackets they're a little clearer in terms of five thousand dollar increments starting out and then they they kind of go right to the next hundred dollars of the thousand dollar threshold above that some changes across these two things at this change does from a tax policy perspective that I want to make sure clear about the first is that this simplifies the tax code in Arkansas so instead of having three different tax tables you have to tax tables to worry about which should create some efficiencies both in terms of complying with the tax code but also in terms of enforcing the tax code for the FNA the second thing that this does and we'll talk about this in a bit more detail on a slider to is it has some distributional impacts across the income spectrum okay so this is going to hit people in the low and mid incomes differently than it's going to get folks in high incomes in terms of the changes that are made relative to current law okay so that's this is the the low mid table you can see the top rate comes down from five point nine percent to five point five percent. Under the high table the brackets would stay exactly the same but the proposed again top rate would fall from five point nine percent to five point five percent. Okay now. Obviously that is going to come with some significant revenue and economic implications so when we go through we calculate the revenue that would be collected under this regime. Two current law we have a total costs on an annualized basis of about two hundred and fifty billion dollars beginning at four twenty three because of what twenty two obviously is already under way you'd only see about half of that impact in the current fiscal year. If you were to grow each of those out by the the cost of inflation from that point over the next ten years you'd see a tax cut of about two point six billion dollars over a ten year period. All right about half of that would be are slightly more than half of that would be concentrated in the low and middle incomes and then slightly less than half of that would obviously come from folks in high income table now that's not necessarily a full picture of the distributional effects of this because obviously folks who are in that eighty two thousand plus category do pay a much larger share of overall tax revenues so I'll show you in just a slide here the distributional impacts as a share of overall incomes you can see kind of who's winning the most out of this obviously if you have a two point six billion dollar tax cut over ten years it's going to have significant economic consequences based on our modeling techniques we assume that the increase in gross state product so the size of the overall Arkansas economy will expand by almost a billion dollars compared to what the current law baseline would project okay that is a very important cabbie out that I should add to that. The the projections here assume that this revenue cut is financed solely out of excess revenues and we're potentially reserves it does not assume that there are any major spending cuts that accompany this kind of a a revenue cut if for whatever reason there's not sufficient access revenue either in terms of the additional revenue that and we talked about or additional revenue that's available in the reserve funds and obviously given balanced budget requirements the state would have to make some spending cuts it to company this if for whatever reason the state finds itself in that situation then these impacts to GDP could be smaller than what we've listed here okay just to full disclosure. I'm from a distribution standpoint you can see that this is I think could be very well classified as a middle class tax cut most of the the the largest benefits really accrue to those in the twenty thousand to eighty thousand dollar range from an income standpoint tapering off as you get above a hundred thousand dollars this is very good from an economic standpoint so we look at these from economics standpoint we're looking at that the GDP impacts especially one of the things that we're looking at is how quickly this money once it's you know captain somebody's pocket how quickly to make its way back through the rest of the economy and what we know from previous economic experiences that the folks in the twenty to eighty thousand dollar range what we would call a higher and PC or marginal propensity to consume right that means if you give them an extra dollar they're going to spend it and the placement of much more quickly than folks with very high end of the income distribution so not only will those dollars be spent more quickly but also probably be spent more here in Arkansas to the extent that those dollars are saved or invested the you're gonna see more leakage there that those dollars would actually be spent outside of Arkansas so because this is a concentrate so much of the impacts in that middle tier you actually see pretty significant economic consequences result of this tax cut. One other thing that I will point out and that is the changes down to the the under ten thousand or ten thousand to twenty thousand dollar range which you know people are asking about Obviously given the changes those are not nearly as a larger tax cut as elsewhere in the income distribution but there are a couple good qualifiers there the first being that with the new minimum wage law in Arkansas anyone who's working over forty hours in Arkansas should see at least twenty two thousand dollars a year and taxable income so anybody working over forty hours a week sorry a month yes or a week it's going to fall into that now the only working forty hours money point working full time right twenty to eighty K. would be that range so if anybody who's working forty hours a week they would make at least that much money secondly anybody who's making less than that money it's probably they're not working full time and also probably earning earning but they're receiving significant assistance from state or federal aid in the form of tanna for Medicaid and other sources like that so they're taxable incomes may not be the best way to judge the overall well being of of folks in those income categories that said the distributional impacts are are fairly evenly spread out across the the the income brackets here and that owes to a lot of the the significant economic impacts that we see previously in this analysis okay. So that's kind of a thirty thousand foot view will be happy to get into any of the details on the methodology or or the details of this and Mister chairman be happy to answer any questions. This. Person subject you have a question. It. Mr thank you back on page four in touch back on the. The one point nine billion dollars without federal stimulus can you to speak that one more time please sure that Mister chairman and so the the the one point nine billion that is what the world would live look like if we had or the pandemic but we didn't receive any federal stimulus funding so the federal stimulus funding save this state roughly a billion dollars in tax revenue by having that thank you just wanna clarify thank you. Senator Johnson you have a question. Thank you Mr chairman of. Mr quiet a and and I also of this Mandel. Just to barely touched on the ward inflation. And. We're we've gotten kind of used to. Low inflation single digit inflation so Israel now after member double digit inflation and we see some of the signs in the economy special fiscal policy coming out of Washington that I hate to say his representative would not act is yogi said deja vu all over again. What kind of figure are you calculating into your nails is wrong on at least a presumption of a range of rate of inflation. Mr chairman senator you're absolutely right inflation is a major concern but if there's two different impacts of inflation in this kind of analysis when we look at the forecast we have very strong and I will go forward to this for a second with very strong inflation expectations especially over the next four to six quarters built into the baseline forecast I think on a quarterly basis so there a month so that could get higher than this but on a quarterly basis I think it peaks at about eight or nine percent rate of inflation which is roughly what we're seeing today annualized annualized yes okay it's impossible to take five trillion dollars and push it through the economy without resulting in some inflation has to be inflation That's part of the story around inflation but another big part of the story run installation is there are some of pandemic related supply chain issues that are just exacerbating those problems even more the forecast assumes that within the next four to six quarters does near term supply chain issues are roughly works out do not you know banished completely but they are to a point where we're finding ways to work around them and they're not contributing to the pace of inflation necessary to the group that they are today that said we still have significant inflation expectations as a result of all of that federal money coming in hitting the economy beyond and I would I'm trying to remember the calendar to fiscal year calculations in my head beyond about fiscal year twenty twenty three those inflation expectations come back down to more stable baseline during that two and a half percent range a little bit higher than the federal reserve's target but significant that obviously has major economic effects not only for Arkansas but for the rest United States from a tax revenue perspective in this isn't what I'm we was sitting on is that actually can be a positive for tax revenues in that tax revenues are based on a percentage of the cost of goods sold and so is the cost of goods sold increases in terms of prices you'll actually see a slight artificial increase in sales tax revenues as a result of that once we get out to twenty twenty three twenty twenty four some of those price pressures will abate and so we won't see as strong an increase in sales tax revenues as a result of just inflation along that makes sense thank you for your answers very good thank you Mr chairman. Representative wouldn't hear question. Yes. looking at your Proposal for your. Research indicates that two point six billion. Would be lost or reduced over the ten year period. This is the economy would Realize. Nine hundred and forty seven million. When when I look at that and I'll break it down the that would be of roughly be two hundred sixty million a year law student. Revenue and ninety five million a year given to the economy I got two questions we. Did you in your tables. Include the taxes that would be paid on the nine hundred and forty seven million in the second question is we're we're did or were do you think the other hundred and sixty five million dollar difference when. Mr chairman representative thanks rest a question I should have made this very clear so when we did this analysis is a static revenue analysis of this does not include the dynamic impacts the the report you have that's a bit more detail does have the the dynamic impacts laid out specifically the dynamic impacts of around this so about two point six billion dollars over ten years is the static costs the dynamic cost is somewhere around two point five billion so offsets it by just over maybe a hundred million dollars they're there are thereabouts so that's a dynamic analysis and that is included in the the written report that you have in front of you when we look at tax changes like this there are complications in terms of what eventually makes its way into being actual economic activity and relates somewhat to the the MPC's that the marginal propensity to consume that I talked about earlier so if I give an extra dollar to somebody who's making you know between twenty and eighty thousand dollars a year we talked about them being more likely to spend that money and spend it here in Arkansas right so if I give them an extra dollar they're probably not going to take the entire calendar and spend it at least not right away in Arkansas some of it is going to be saved and some of those savings and actually some of the spending is going to find its way outside of Arkansas so they go on Amazon and they buy a new a new pair of shoes for their son that calendar may not be going to Arkansas and will result in Arkansas economic activity or Arkansas tax revenue so the the numbers that we have to use are based on historical data from the bureau of economic analysis they're called multiplier number or tax multipliers rooms multipliers for those of you who are familiar with that kind of input output analysis we use those estimates to kind of determine how much of those dollars that are being going back to the Arkansas taxpayers in the form of tax cuts actually make their way into the economy and what we find is so if we centers two points. X. billion dollars in tax revenue. people want the other one point seven billion dollars that's going away is either money that's being saved and not spent during that ten year period or it's money that's being spent or saved and going outside the State of Arkansas. That makes sense. Well maybe I missed it but what did you include the nine hundred and forty seven million in the tax but use of tax rate of Mister chairman okay late that the and to go to two point six billion but did you include taxes that would be paid over nine hundred forty seven million the goes back into the economy Mr chairman representative do you mean in the economic analysis or in the revenue analysis the economic the economic yes that's those feedback effects are incorporated into that model. Thank you Mr chairman. Senator you have a question. Do you have a question. Europe. When you talked about those that are in the lower tier bracket that probably the best way to determine their well being might not be by looking at their income. Is the reverse of that true as well that when we look at those in the higher bracket that might not be a fair review of what the best representation of their income because people in those higher brackets often times don't reflect their most solid well being in their salaries. But Mr chairman representative yes and yes but maybe for different reasons so I want to make sure I clarify my earlier statement so when we talk about the issue fusional impacts what I wanted to make clear for folks making less than twenty thousand dollars a year is that there taxable income may not be the best protection their overall income certainly would be because there's transfer payments that would be captured in their taxable income well I I was I am maybe I wasn't clear yet our servers thank you when you said there over all income I'm asking about the over all income at the higher level as well which actually we might not have a way of knowing since so much of that well being is in capital a capital gains or some other type of investment so would it be fair to assume that we are at best making a. Well I guess and I don't mean that in a pejorative way but just as we think about those at the lower end their overall income should we think about those at the higher end of their overall income. And assume this the the company the same outcome that will likely not making decisions based on what their overall income is or is not impact our decisions Mr chairman representative yes so to the the lower and actually they're they're overall personal income would be seen of a higher than this because their taxable incomes can be very low at the high and taxable income is not a bad way to look at it because it will include their salary will also include dividends interest and rent will also include capital gains it will only distort the picture of their overall income to the degree to which there are exemptions that exist in the cat tax code for them to lower their overall personal income taxable income so depending on the individual they might be able to for example if a capital gain if it's on paper it may not show up it will show up in their taxable income because they haven't sold that asset so they might be able to borrow against those assets that are not worth more money but they're not actually able to realize those capital gains and so those wouldn't show up in their their top incomes the other thing and just to point out is that those folks especially well over a hundred case or not you know a hundred to two hundred four hundred plus those folks incomes has attended to be incredibly volatile from one year to the next because they are taking incoming they're moving it from one section to another or date maybe are receiving their their marred majority of their income from non salary non wage income which can fluctuate significantly so anytime you're doing an analysis like this on folks were very high wage you would want to spread that out over a longer period of time look at their total income over five to ten year period and then look at the the tax is there one more question if I may miss you I I have not I've only really skim the written report so if this is in there study and more When it when you give us the answer about how the tax brackets the folks in each tax tax bracket would be impacted You gave us that by percentages and roughly I think maybe you said roughly half the impact would be about fifty percent for those in a lower tax bracket and same thing for the higher tax bracket that I hear that wrong Mr chairman represent yes in this line here in terms of just the gross dollar amount so one point four billion dollars up to two point six would come from folks in the low and mid tables as they're currently defined about one point two one point three billion would come from folks in the high income tables is currently. And and that just leaves me just concerned that I I think it's much as anything I need to think about this more but when we are we're given a tax break and we is impacting folks roughly evenly And those in the middle and lower as we know what they're going to spend every dime they get basically and putting it back into the economy so that the speed of a tax break we are. Those in the and the lower bracket are spending and therefore supporting down the road trying to regain the income that we are going to be losing. And those at the top. Are more likely to be in a position where they are not going to have to spend every dime they get so would we in essence possibly Beezus providing an investment fund or saving funds for those at the top at the expense of those at the bottom. If it's hitting us rather evenly Mr chairman representative I'm not sure I understand That concept is we look at the the the share of the tax breaks the folks in at twenty two eighty even though so we talked about that the dollar amounts are spread the way they are but because that's out of a much larger overall tax liability at the high end is actually much smaller share in terms of the percentage tax cuts I understand the much smaller share. But conceptually who. The suggestion I deal somebody else have a question. Okay I'll make this last question but who in the end is going to be the we are providing a tax break for two groups of folks in the end some of the higher end as usual is going to be in a position to not have to spend the tax break we provide for them at the same time we are agreeing that those at the bottom are likely going to spend everything they get at which would be a good thing they've got they might have a getting more money but just conceptually. They are the ones who are going to be putting money back into the economy most likely at a higher percentage than anybody else and therefore bearing more of the burden of trying to recruit the funds that we're going to lose because of the tax break is what I was asking you about right Mr chairman representative so the this this kind of boils down to those NPCs I talked about earlier that the marginal propensity to consume in general the lower someone's income the higher there and PC the higher their marginal propensity to consume that doesn't necessarily mean so if the if the dollar is not being spent immediately does not necessarily mean that it's not flowing into the economy especially they're saving that is going to be invested somewhere so if you're talking about a small business owner they're not spending that money but they might be investing it in New property plant or equipment for their business or they might be spending through the business order hire new person so it's difficult to draw as distinct online is that between consumption and investment but certainly folks at the lower end of the income distribution are going to be immediately spending that money much more quickly than folks at the higher end for sure. Thanks Mr. Senator Irvin. Thank you Mr chair I'm interested in the macro economic effects of what you're reporting here and I hear you about the spending propensities in the MPC however you also states that this proposal would have similar impacts on both total personal income and employment and that greater demand from rising consumption and investment incentivizes more employees to hire and raise wages see further state that your analytic estimates of the proposed tax relief would add an additional seven hundred and ninety two million dollars to the Arkansas personal income. Over the next decade can you elaborate a little bit more because I think we're focused on just sales and use tax revenue but here you're also moving into actual growth in wages and personal income taxes as a result of the consumption in the spending is not in my reading that correctly can you elaborate more on that please Mr chairman representative absolutely so we want that kind of goes to this gross state product line we have here that's the size of the overall economy so the the the income numbers that we talked about in the report the seven hundred million dollars plus that would be baked into the gross state product so as we have more people spending in Arkansas we have more people investing in Arkansas we have more jobs we have higher levels of overall income in Arkansas as a result of that and that's one of the reasons that we drive this kind of grew larger Arkansas economy as a result of these tax cuts the tax relief from the tax cut would actually overall improve perhaps someone's personal standing in their economic outlook simply because of the economic activity that there is that the tax code cuts will produce Mr chairman rooms and yes thank you. Representing Wooten. I like to follow up on the my earlier questions if I if I look at the percentages that we're saying that sixty three percent of the tax cut will be lost to the Arkansas economy isn't isn't I have a hard time accepting that. Won't you see more and increased jobs and benefits is Senator road reporting out from the tax cuts and and then follow up on that if I may Mister chairman one more do you do you know the dollar amount of money that an individual in the lower bracket the mental break and then the higher bracket how much an individual have also will receive understand the the low is already gotten into the middle now we're talking about the but did you all look at how much each individual home in those low middle and high how much more money they have at their disposal and would not have had if it had not been for the tax cut irrelevant of where they stand they would have the goal the taxpayers are going to have more money at their disposal is that correct Mr chairman representative yes the dancers second question first what I this shows behind us that is the percentage increase our tax code that everyone would receive so everyone across the income distribution under this proposal would receive more money at the end of it I don't they would have more money after taxes and they have under current law regardless of where they are that income distribution follow up from the so if I understand also you said that the the trigger points will be own excess revenues and reserves as it relates to the that's how we're going to be able to not have to have dramatic tax cuts in state government our of spending cuts isn't that correct Mr chairman representative so this is soon said these are all paid for out of surplus revenues for reserves so to the extent so bottom line is if you if you pass this today you would have two point six billion dollars less in tax revenue over the next ten years. So is so long as there is sufficient tax revenue to cover at left over that what's gone what's missing without having to cut spending dramatically or having to lay people off then these are roughly the the economic impacts that you could expect to see if for whatever reason there was not sufficient revenue to cover the cost of that revenue cut and you ended up having to go back in five years or six years and cut back on state spending materially or lay people off than those of economic benefits would not be as strong as we laid out in this report the bottom line is everyone benefits. Maybe some more than others but everyone benefits from the tax cuts Mr chairman representative yes every. Every Arkansas taxpayers should see more after tax income as a result of this proposal than they would without thank you thank you Mr chairman. Senator Chesterfield you have a question. Thank you Mr chair and I know that we've had major tax cuts in this country and most of them have relied on the concept of trickle down economics is that the basis for this as well that if the rich get more than they're going to invest more and they're for everybody else it lifts all boats and all that stuff. Mr chairman senator no if this were quote unquote trickle down economics and we would expect that the two point six trillion or billion dollars sorry I keep I do a lot of work for the federal government as well and sometimes I have trouble getting my trillions of my billion straight. Of the if if this was truly that then we would expect the the increase in the gross state product to be enough to generate additional tax revenue to pay for this two point six billion dollars on its own this analysis doesn't say that this analysis says that you will if you pass these tax cuts it will have a benefit for the economy but it will also get you two point six billion dollars last and tax revenue over the next ten years how you you kind of deal with that less tax revenue is kind of the Q. what the the major increasing the overall economic activity will be as of this act if you have to go back and cut back on spending significantly in order to pay for that two point six billion dollars then the economic impacts will not be as strong as we laid out here if for whatever reason you have the surplus revenues because of the stronger economic growth of the next ten years and because of the large reserves that you've set aside then this is a pretty good representation of the type of economic of results you should see our I think I'm I'm always the only person I guess because I always think sometimes at. We keep cutting and cutting and pretty soon we have to go up people very seldom appreciate us when we cut their taxes but they sure as heck don't like us when we go up on their taxes. And so I am concerned if we have for instance a a period of depression. Is that analysis written in here as to what might happen because sure you have inflation are you going to have some difficulty but there are always bumps in the economy as you say they can reduce the amount of income that the state enjoys. So you're saying it may be maximized at two point six. But god forbid it is more than we are going to have to look at increasing taxes somewhere down the road in order to maintain the services that we currently have is that correct. Mr chairman senator the the forecast you have that I have a behind me now that that's the ten year baseline forecast it does not include a recession taking place sometime in the next ten years that kind of analysis could be done with alternative economic scenarios but they're not something that was included here thank you thank you Mr. Senator Teague. Thank you Mr chairman but time you did something. I'm sorry So did you look at other taxes while you were at this. Mr chairman senator we were as strictly look at in changes to the individual income tax so. For my personal this perspective it appears to me that. Our worst tax problem is sales tax. At ten twelve percent some places and And now it appears to be if we lower revenue elsewhere we're going to see more efforts to raise sales tax further so I just to I have concerns about the whole idea and I don't get your problem if you didn't worry that buys a questionnaire Sir is question or just you agree thank you Sir. The representative McClure. Representing the clover. Okay so I understand that the report that you're giving us these numbers that you're given his or static and not dynamic and perhaps this is a Segway question into the dynamic portion of it. When we talk about consumer. Consumption dollars going back into the economy verses and the investment dollars going back into the cop academy what is a difference in a long term effect of that consumption calendar going into the economy versus the investment calendar coming back into the economy. Senator representative that's a great question there are some timing impacts and there also some geographical impacts so from a construction standpoint most of that or all. Used to be that all of that consumption would happen in Arkansas but now because of online commerce increasingly less of that consumption will actually take place in Arkansas theoretically because of the new way fair laws and all that stuff much greater share of that e-commerce activity will be taxable and we'll come back to the state in terms of sales taxes but it may not show up in terms of GDP. the second piece of that in terms of investment is a much trickier thing to grapple with because one it doesn't happen right away and the benefits of that may not sit within the ten year window that we've laid out for this report the second piece is a lot of that investment especially if it's you know it's the average taxpayer making eighty thousand dollars a year goes out and invest that money in the stock market the benefits of that investment may not accrue necessarily to the state of Arkansas because they maybe investing in a company that has operations outside of Arkansas the dividends the interest any payments that they receive the capital gains it on that investment will accrue back to Arkansas at then that taxpayer but it may not be investing there which is one of the reasons why there are it's difficult at a state level to capture all of the the money from a tax cut it leased the same percentage that you would for a federal tax cut expert sample so those are some of the implications to think about in general as we talked about earlier folks those tax cuts to the twenty and eighty between twenty and eighty thousand have a higher marginal propensity to consume which means that their impacts will be quicker and will be more localized folks at the higher the income spectrum they will still have an impact they just will be nearly as immediate and some of them might leak out into the rest of the country. Senator Dismang. Thank you just a couple of points for some the members ask questions represent wooden I I've actually got it works through an in BR committed to us but for some reason I'm getting so many emails on maps I'm I'm I will track it down in my email but we do have been can almost see what the savings will be per household per thousand dollars for the income and so you can see what the person making twenty two thousand dollars paid versus what they will pay and a new scenario and to Center Chesterfield's you know concerns about you know what if we get too far what is the economic engine of the economy tanks and that sort of thing thank you all for referenced it in your in a report that's why it's so critical we have that twenty percent set aside of the you know long term reserve because that's going to give us a backstop would prevent us from having then to you know complete it got you know essential services or whatever it may be due to the tax cut I mean that and that's really a testament to members on both sides of the capitol that I wanted to make sure that we had a robust true long term savings account for those downturns so again we can get both of those items to you all the internet the reference in the report and I understand it's hard to see what the savings are percentage wise but but I'd be happy to help with any other questions on that. Senator Hickey did you have a question. Okay actually spoke Senator Dismang just sit on it is for the members that want to see that that's on the macroeconomic thanks a proposed changes to Arkansas individual income tax on page four and that's what I was just going to bring up and for you all to touch on was exactly what Senator Dismang said this is here and it's been a lot of tall you know you know what what what we do and again you know if we if we were to not have their so surpluses in place of course at that point we're going to have to try to cut spending which we all know how hard that is sometime order to a tax increase so again I think with what we're doing I think that most most people here going to understand that this is a fairly aggressive tax cut but we have been fortunate with what the legislative branch and the executive branch is done to get that money there so we've heard a lot of tall in the reason we're doing this here is because you know because we put this one point two billion dollars back you know we had a lot of people thought well we can use that money for tax cuts and we've been like no you can't use that money for tax cuts you have the you have to use that money to be available in the event the sum of your calculations may not add up over year over year for years to so that you can use it so that's the reason that we're kind of leaning on that if you're wondering what's going on Mr chairman center thanks for that and I I should know that you know one of things we do in movies and you may have seen these reports in the past we do a fifty state stress test every year we we stress test all fifty states to see what would happen if there is a recession how much would they have to either cut taxes or increase spending what would that do to their economy an Arkansas has stood out in the past because they have not had that reserve fund when that reserve fund was put in place a year or two ago it was noticed in in a very positive way and so to the degree that you have that kind of savings account so to speak to fall back on for times of economic distress that is a huge plus four overall a credit and for. kind of the fiscal well being of the state going forward. Senator well. Senator Ingram I'm sorry. Thank you Mr chairman of you can mention the E. commerce in the revenue generated from that there's a number of us in this room that would be interested were you able to break out. What the E. commerce taxes being generated to the state of Arkansas. Mr chairman senator enforcing the data wasn't quite clear enough for us to do that but it's something the date is coming along especially since they started working on it differed the Bill R. and D. F. an agency up kind of where that data is you know that's a real coincidence that date is been little model given us as well so thank you. Senator Dismang. And so in and really this is you know and as I look at this you can look at the analysis and then this is my opinion release kind of what I take from it I know the federal stimulus dollars whether you know however they came in in the many forms of kind of profit the economy and right now you know we're still benefiting in the state from that that's going to benefit for the next year and a half or so and and when I look at it you know so the big threat to the state of Arkansas is if we have outbound you know so many if we can become an outbound state right now for two years and roll we've been in town in downstate which more people moving Arkansas then exiting which means that we're increasing our tax base by number of people you know in my opinion what you want to be when the music stops in the federal money stops is continue to be an inbound state and set yourself up to be an inbound state you know there's a lot of components the into that and I'm not representing that tax cuts you know are the the driving or the major driving factor but it isn't a component when businesses look locate or retirees for instance look to locate into the state is that kind of what I mean we're not looking at a down turn per se but what could be the crisis for us as a state would be if we lose that impound position that we right have right now start losing population is that. Is that fair to see is probably one of the bigger threats that we would have. At the end of the day Mr chairman senator yeah I think. Maintaining a is an impound status is very important in the especially if you look at the neighborhood that you're in if you look at the states around you Tennessee Texas in particular have no income tax and so making sure that your lease competitive with them is is an important factor not the factor but it's if it's certainly a factor in terms of relocation decisions there are other obviously very important factors as well in terms of quality of life and all that good stuff but it's certainly something to keep in mind the the basin forecast in for you here it could be much higher if there was significant in bounding in the forecast it doesn't assume that there's tremendous you know out migration either so it's kind of the the rest I think or to both sides of this to the agree that in binding around bonding becomes the new norm over the next ten years could sway with this baseline economic forecast looks like. Senator Ingram. Yes you thought you mentions taxes in Tennessee is not having income tax we understand that but how do we balance our income tax first two states that have tremendous amounts of revenues that we don't of our property taxes are lowest in the country Tennessee's choke new of Texas has all and gas revenues that we just don't have so how do we balance that the balance that with our income tax versus some states that have other revenues that subsidized of the reason that they don't have income tax. Mr chairman senator that's a very noble question that could we could have a whole hearing just about that in general though I think you hit on the head when you talk about the fact that when it's special which I by relocations they are looking at the overall tax picture that I'm looking just income taxes corporate or personal they're not looking just at sales taxes or property taxes everyone of those is going to depend on the the industry that they're in and and kind of what matters to them because it's a very property depended business they're gonna look at property taxes and not be thrilled with it in Tennessee if it's a retiree there to look at income taxes and you know go the other way so I think from a policy perspective it's incumbent upon you all as policy makers to determine what types of populations you really want to go after as part of the tax discussion and build that is part is one component of your overall tax policy which should be based on many components. Members are there other questions. Senator you. I think Mister chair I want to ask questions Senator Dismang I'm not sure to whom we should go but here's my thing is this one will take your questions active forever can help. It all I'm just thinking about this over a ten year period because I'm not. I'm not so concerned about what's going to happen with people in either one of these tax breaks in the short term But. In the amount of money that we are propping our economy on now and I don't mean that in a bad way but we just have to know that all of the stimulus money otherwise indicated in the presentation is really a huge part of our spending such a great check now. And does that is going to. We're gonna lose that here are some point. And. When we when we lose that stimulus funding and if we have an impact of negative impact on the economy in some way. The folks who are at the lower end are the ones who are benefiting the most of services from income from the other taxes is the assumption that What we do reach hard times we're going to have enough money for example to continue the services for the people who need them the most. Because. In the event that that's probably going to happen because I don't know how we do without of all the money that we have now from the stimulus and stay afloat. The assumption is that we're going to have enough to make to make sure those folks who benefited from this tax break are not going to have to then the bear the burden of some tax cuts or figure out some way to get along without the services the state has provided all these years. Yeah and and so eminent. There's not much need to circle back to long term reserve and how that can be the immediate problem of I mean I think and that's the whole point of having metes take a look and what the impact of the stimulus dollars word if I read correctly and make three stated you know the distinguished dollars that came in help prop the economy up we would not be in the position that ran and were slightly above where we had been if there had not been a pandemic with that I think that's it that's one the reasons I wanted to touch on this inbound and outbound type status because you do not want to be a state at the end of the day that's out bound when the federal money runs out you do that and I think you find yourself in a in a terrible situation of the potential to two you know Senator Ingram is point and and their point to its you know what type of folks are we going to attract or what folks are we losing out on right now looks like it or not retirees are very aware of the tax structure in the states if they decide to move to because it's planned in part of you know the them to fill in the rest of their their life to make sure they got the dollars to go you know that that are going to last long enough so if you just take in in my opinion you take a look at the plan and what we're doing here now we're we're becoming more attractive derived retirees the probably any other population reason being they're out of their earning years and so they're not so much worried about income taxes as they are property taxes because they're going to buy their home their you know retirement home whatever it may be we have a you know a low cost of living those are things they're going to take into account when they make the decision of where do I want to spend you know my time and so again I think it's just making sure and I think this is a step in the right direction as far as policy that we are an inbound state we continue to be an inbound state and we give a reason to be in about state. By Senator Dismang I guess I can assume from that that all of the years of we've. been thinking about trying to figure out ways for people to take home more money You taught me maybe that off this ledge that I don't know what the evidence is in it might be somewhere that when we have provided tax breaks for the ones of the most well off the ones that we tell we always say are going to create more jobs there for more income. Generally speaking I think so somebody had referred to it before for years we've been talking about trickle down income and I'm not calling this trickle down income. But just the assumption that. They're going to be more people hired. I don't know what the evidence is that that's born out over the years there someplace I can go look and find and that's what I'd like to know. I mean I'm I'm not a specifically so I mean what I would say again if we just wanna go back to the retirees pointing in the in the the lower that we make our income tax you know the close we get to competitor that the fact of the property taxes lower again I think we are we can become a magnet for that if those individuals moved to the state because we are more attractive than that means that they have their services that they need to revise any to be filled by someone which then in turn creates jobs and I'm not like that there's a there's a whole long ways into this point we could spend forever talking about what the impact of this or that are going to be I would say though is a tax plan when you look at what's in front of us right now I think it strikes is very good balance between the majority of of what these tax cuts and who they're going to benefit are going to be you know working Arkansas families and and of course in that in the future as any top rate is cut it's going to have a benefit on everyone that's making about thirty eight thousand dollars here in the state so in that to me it strikes the right balance of making sure that we're providing tax relief simplification for working families and then also you know showing that we are willing to be competitive on income taxes with our neighbors. And and lastly would you classify that as of more and equal impact for an equitable impact. I'm interested in the equitable impact I mean I think if you look at the distribution of the dollars of the tax cuts the fact that we're talking about a quarter billion dollars and what is it roughly I don't have in front of me because this was a part of the deal not again I'm having a time getting through my emails. The vast majority of this code or not the vast majority the majority this cut is going for those that are making between twenty two thousand and you know eighty five thousand dollars a year whatever the you know exact Ahlers on and I think that's that's pretty. Equitable. Okay thank you. Represented by the. I guess the takeaway that I see from this report and I want to ask specifically is based on the current collection and revenue stream for the state of Arkansas it and then I understand with the budgetary process that we as a as a legislative body we don't go in and and drastically increase are increase our spending our or the expenses or cut make drastic cuts to taxes. That. Of based on your analysis of the tax proposal that we're looking at can sufficiently be covered from the surplus revenues that we collect without having an adverse effect. On the budgetary process of the state. Mr chairman representative and the the the big takeaway here is that if you do this proposal it's it's going to cost you two point six billion dollars over ten years if we understand that you can't as a tax cut raise it if you can't. Pay for that out of additional revenues sorry a surplus revenues and reserves then the economic benefits so we're talking about here will not be nearly as large because you'll have to offset that with cuts to states but that I understand that but but basically right now with with the revenue stream that we have and then what kind of the state this tax proposal is acceptable and something we should move forward with and it wouldn't have an adverse effect on the budget side of the state right now Mr chairman representative as part of this we didn't take a very close look at the spending of the state we only look at the revenues and so I I wouldn't be able to say that without taking much closer analysis of the spending. The representative wouldn't. Thank you Mr chairman that you know I hear all the talk about the downturn this and that. Relative to the state government today as it stands we have six thousand vacant positions. Six thousand. Shantz roughly three hundred million dollars an average salary of forty five thousand dollars a year but not only that we pass legislation in the last session dealing with those positions have been vacant for over two years. And then amounts to about twenty four million dollars if just half of those one thousand over two years thank you if just half of those are budgeted that's twenty four million dollars or twenty three million dollars a year you add that to the ninety five that's a hundred eighteen million. Dollars that we have access to the event that we have a downturn. And talking about being actionable what we're doing is we're helping the people of Arkansas I don't care if you're rich poor middle income when you give on the tax cut they appreciated they won't it they're tired of the way Houston's efforts that have not been followed through with them here that we could deal with to reduce government. And the burden that is caring and one of the greatest burdens representative would here asking questions or making the stage in this this will benefit everyone is that right. Again. Everyone will be Mr chairman representative every Arkansas taxpayer would see greater after tax income as a result of this thank you thank you Mr chairman. Representative always for. Yes this is me address the chair on this one I need some historical our institutional knowledge didn't we already passed a lower income tax and middle income tax cut before we got to this. That's. We have in the past so this is this is an accumulation of keeping our word to start with the lower income tax cut a middle income tax cut and now we're doing an upper bracket tax cut and smoothing out the edges correct you're correct all right so we're actually keeping our word and following through you're correct thank you. A representative for. He is mentioned several times reserves and the importance of reserves. As a general rule in a movie rating system a healthy state would have what percentage of its state budget. In research. Of Mister chairman representative I can't speak for the ratings agency for really good and legal reasons we just talked about earlier however when we run our stress tests every year every fall which and we will be starting on and just a month or two she's super excited about it The what we have found we will as a couple things the first is that there's no such thing as the average state every state is different every state needs more or less if you live in Alaska or North Dakota and you make money of oil and gas you need a big reserve fund because it's going to go all over the place if you live in a state like Pennsylvania which is where I come from we need a relatively small amount of reserves because we get a lot of our money from sales taxes and they're not nearly as is volatile so depending on the income tax or the the tax structure of the state those will go up what we found though in the past is that if there was an average state the the median state would need somewhere between thirteen and eighteen percent to get through up to years of of moderate down turn right if you expect that the downturn is going to be more severe than that not necessarily the Great Recession that something very similar to the Great Recession you need something more in the age of twenty to twenty five percent of your research. Okay members saying no other questions. We are adjourned.