Legislators, Economists Scrutinize Texarkana Exemption

Legislators and the public got a small taste Thursday morning of just how difficult it’s going to be to reform Arkansas’s tax code.

Legislators on the Economic and Tax Policy Committee heard testimony yesterday on the border city exemption passed into law in 1977.

This exemption is commonly referred to as the “Texarkana exemption,” since it’s currently the only municipality that has voted to pay an additional one percent state sales tax in exchange for exempting its residents from paying state income tax.

Texarkana borders Texas, which has no state income tax.

Jeremy Horpedahl, a professor of economics at the University of Central Arkansas, argued in July — in an op-ed he co-authored with Nicole Kaeding — that the Texarkana exemption should be at “the top of the list” of exemptions to be eliminated in order to pursue broad-based tax reform.

According to the Horpedahl and Kaeding piece, the exemption cost the state about $16.6 million in net revenue in 2016.

Unsurprisingly, state Sen.

Jimmy Hickey (whose district includes Texarkana) doesn’t seem thrilled about this idea. He said the op-ed was as “one-sided as can be.”
Hickey said at yesterday’s meeting where Horpedahl was one of the speakers:

It makes it look like you are in favor of trying to kill a city. If we approach this thing from statements that were made a year ago that we’re just going to try to eliminate all exemptions or phase-out all exemptions in five years…this one-size-fits-all (approach) is not it. Just the mere talk of Texarkana losing their tax exemption, it makes every realtor direct people to the (Texas) side of town.

In fairness to Horpedahl and Kaeding, the op-ed appeared in the opinion section of the Arkansas Democrat-Gazette. Opinion columns tend to have opinions in them which can be somewhat one-sided.

Horpedahl said at the meeting yesterday:

It’s a large exemption for one area. All other Arkansans pay very high income tax rates. We all want our tax burden down. When there’s one part of the state that doesn’t pay it at all, that seems like one of the first things you’d want to look at to see are the things true about how much Texarkana would suffer from losing this exemption. Those are things that should be looked at. If the main problem is the rates are too high on everyone and one place doesn’t pay the rate at all, that’s something that should be looked at very seriously.

Michael Pakko, an economist with the Arkansas Economic Development Institute, testified that the Texarkana exemption wasn’t an example of sound tax policy, but that removing it would substantially harm Texarkana residents and businesses.

Pakko said:

Texarkana is something of a microcosm of the competitive disadvantage we have to our neighbors to the west. The benefits of coming up with a more efficient system are widely dispersed, but the costs to particular entities can be very high. In terms of real estate values and population growth, the two sides of the border have been growing at very similar rates. My concern would be changing the rules of the game might impede alter that delicate balance.

State Rep.

Charlie Collins said “legislators needed to take a principle-based approached to the concepts of exemptions in general and figure out the proper transition process for groups losing these exemptions.”
Collins said:

Forty years ago the person from Fayetteville and the person from Bentonville must’ve been asleep for this type of an arrangement to come around where one city gets a zero down for income tax. It is what it is.

It’s too early to tell whether Texarkana’s exemption is coming to an end anytime soon. However, we can expect this type of discussion to play out over and over in the coming months — some legislators will try to find revenue savings by ending exemptions in order to further lower overall rates, but other legislators will defend those exemptions even at the cost of preserving inequality and lost revenue.

Any exemption that is rumored to be ended or reduced will have plenty of interested parties at the Capitol to defend it. Only time will tell if legislators will be able to move forward on tax reform in the face of such resistance.