Beebe budget calls for deep food tax reduction

Governor Mike Beebe’s balanced budget proposal calls for a near-elimination of the food tax based on a trigger mechanism tied to revenue growth.

The Governor’s $4.937 billion proposal for FY 2014, which was presented by Arkansas Department of Finance and Administration chief Richard Weiss on Thursday morning, calls for an upward revision of 2.1% to the current forecast, which would bring in an expected $99.5 million in additional funding for the current year.

It calls for a 2.5% increase in general revenues in FY 2014, up $120.3 million, and a 3.7% increase in FY 2015, up $182.9 million. General revenues are primarily driven by individual and corporate income tax collections, sales taxes and other tax collections by the state.

For FY 2015, Beebe’s budget projects a $5.12 billion budget.

“Economic models employed by the Department of Finance and Administration include low inflation and modest but improving recovery across the biennial projection period,” Weiss told state lawmakers. “The Arkansas economy displays less volatility than a majority of states and especially those hit harder in the recession with greater recovery rates now.”

Other key takeaways from the Beebe budget proposal:
• A 2% COLA increase for state employees in FY 2014, which would total $12 million and include all state workers minus higher education employees;
• $140 million over 2 years in surplus funding to help close a Medicaid funding gap;
• A 2.7% increase in funding for public schools for FY 2014;
• A 10.7% increase in human services for FY 2014;
• A 0.7% decline in general government spending for FY 2014; and,
• $10 million rainy day fund for emergencies for FY 2014 and FY 2015

RISK FACTORS

Weiss warned that international risks and a global economic slowdown remains a possibility and could impact the budget forecast presented today.

“Recession in the Eurozone economy is assumed in this forecast, but the full extent of ramifications for trade, corporate profits, and credit markets are not fully known,” said Weiss. “The Arkansas economy has been remarkably stable compared to most states in economic and fiscal comparisons, but it is subject to these uncertainties at the national and international levels. We have provided a conservative forecast recognizing this risk profile.”

Weiss also said the energy markets could be affected by global tensions.

FOOD TAX REDUCTION TRIGGER
Beebe’s first-year election promise when he was elected Governor in 2006 was to reduce the grocery tax as low as possible.

He has reduced the tax incrementally in previous sessions and his proposal today would lower the rate from its current level of 1.5% to 1/8th of a percent in the next 2 years. The 1/8th percent figure is set by a constitutional provision that garners that money exclusively for parks and tourism.

Reducing the grocery tax by a penny equates to about $48 million annually.

Weiss outlined a trigger mechanism that would lead to the grocery tax’s further reduction. If mandatory deductions to several general revenue funds decline by $35 million or more for 6 consecutive months, then Beebe would allow the food tax to kick in.

The tax reduction would take effect on the first day of the next calendar quarter after the 6 consecutive months.

The general revenue funds that would have to decline to trigger the sales tax on food reduction include:
• Disbursements to the Department of Education for desegregation expenses;
• Payments for bonds issued under the Arkansas Water, Water Disposal, and Pollution • Abatement Facilities Financing Act of 2007;
• Payments for Arkansas College Savings Bonds;
• Payments for bonds issued under the Arkansas Higher Education Technology and Facility Improvement Act of 2005; and,
• Payments from the City-County Tourist Facilities Aid Fund