Policy Foundation recommends tax, spending cut policies

Five fiscal policy proposals from the Arkansas Policy Foundation are yet another voice in the budget debate growing ahead of the January opening of the 88th Arkansas General Assembly.

Last week, Gov. Mike Beebe presented a $4.479 billion budget within which the only tax cut proposed was a half-cent sales tax reduction in the grocery tax, which would impact the budget by about $15.5 million annually. Eliminating completely the sales tax on groceries has been a priority for Beebe, with the tax cut from 6% to 2% in his first term.

Following Beebe’s budget proposal, Democratic and Republican lawmakers began to propose other tax cut ideas. Beebe said the budget is already tight, and cautioned lawmakers against cutting revenue for necessary programs.

“Anybody who is going to propose additional tax cuts has an obligation to propose where those spending cuts would correspond,” Beebe said.

However, House Speaker-elect Robert Moore, D-Arkansas City, said he was open to additional tax cuts.

“If there was a magic course, we’d already have been on it. I think it’s all fair game to look at. This is one avenue to potentially stimulate the economy. We need a good debate on it,” Moore said.

On Tuesday, the Arkansas Policy Foundation — the group that crafted the detailed review of state government in 1996-1999 known as the Murphy Commission report — issued five fiscal policy recommendations.

Greg Kaza, executive director of the APF, said the recommendations will be sent to legislators and key members of the executive branch. He said the APF will also issue in the near future recommendations on education reform, ethics reform, and health care. The education and ethics reform ideas come from the Murphy Commission report released in the late 1990s.

“We think they (education and ethics recommendations) are still relevant,” Kaza said.

Matt DeCample, spokesman for Gov. Beebe, said the Governor is convinced that economic realities will allow only the half-cent reduction in the sales tax on groceries.

“Beyond that, he doesn’t see space in the budget for relief at this time, as much as he would like to do it. He would like to do one cent (cut on sales tax on groceries). We would have gone one (cent) but he doesn’t think we can do that now,” DeCample said.

State Sen.-elect Jake Files, R-Fort Smith, said he is happy to see the passion for tax cuts and reduced spending, but says fiscal realities have to be addressed.

“I am glad we are talking about tax cuts, because it makes our state more business friendly. But at the same time, we have to be responsible with the cuts we make and balance those spending cuts within the budget,” Files said, adding that his priority is to support tax cuts “that will produce jobs and help the economy.”

Following are the recommendations, along with a brief explainer and web link.

• Phase-out the grocery tax
Recommendation: Reduce the sales tax on groceries by one cent in 2011.

The APF says reductions in the grocery tax are a reason Arkansas’ per capita personal income moved from 48th to 44th in the U.S.

“But there is another compelling reason to phase-out the grocery tax: it is an immoral tax that falls disproportionately on the weakest members of civil society,” APF noted. “Arkansas liberal commentators have been among the grocery tax’s biggest proponents, arguing the state could not afford a phase-out. Their legacy is assured: future historians will record they defended, like Gov. Bill Clinton and Mike Huckabee before them, a regressive tax on society’s weakest members while others fought to successfully end it.”

• Reduce state income tax rates
Recommendation: Arkansas state income tax rates should be reduced over a multi-year period.

The APF notes that Arkansas has the highest top income tax rate among surrounding states. The state income tax rates (top rates) are Arkansas, 7%; Louisiana, 6%; Missouri, 6%; Oklahoma, 5.5%; Mississippi, 5%; Tennessee, (Income tax limited to dividends and interest); Texas, (No state income tax).

There are two ways to correct this problem,” according to the APF statement. “The number of tax brackets could be reduced, with lower rates in all remaining brackets. Or the number of brackets could remain the same with lower rates. The Policy Foundation, in 1998, after a three-year study, recommended Arkansas state income tax rates should be reduced over a multi-year period. The highest bracket should be cut from 7 to 6.5%, while the lowest could be reduced from 1.0 to 0.5%.”

• Reduce capital gains taxes
Recommendation: Arkansas capital gains taxes should be reduced over a multi-year period.

The APF says the best way to improve Arkansas’ job market is to phase-out the capital gains tax rate.

The APF noted: “Once upon a time many economists did not accept the idea tax rates are a factor of economic growth. That is no longer the case. Tax rates are a factor of growth along with private property, the right of contract and rule of law; infrastructure; a functional education system that produces a skilled labor force; and non-arbitrary regulations. Rates are not the only factor, but entrepreneurs do take them into consideration when making decisions about job creation.”

• Use dynamic analysis in revenue estimation
Recommendations: Legislators should be provided with a second severance tax revenue estimate based on a lower natural gas futures contract price; and, Dynamic analysis should be used in revenue estimation for any major fiscal proposals including any reduction in the sales tax on groceries or income taxes including capital gains.

“Dynamic analysis is an attempt to measure the full impact of fiscal policy revisions, including tax proposals, on revenue estimates. It can also provide legislators with more information when considering fiscal proposals,” the APF noted. “The state has access to trained experts and an econometric model that attempts to measure dynamic effects of policy changes at the level of the national (U.S.) economy. This should also be applied to the state (Arkansas) level.”

• Cut spending
Recommendations: State spending and hiring should be frozen at current levels; Performance reviews should be undertaken in each state department to identify potential cost savings; and, Merge all educational co-ops into one unit.
 
“Arkansas government is like the kudzu plant. It grows when the private economy is contracting. It grows when the private economy is expanding. Through rain or shine Arkansas government grows, advancing policies that interfere with private sector entrepreneurs, job creation and income growth,” the APF noted in its statement.

The APF notes that Beebe’s budget proposes a 2.5% increase, which is greater than the rate of inflation. The Consumer Price Index, in the last 12 months expanded only 1.1% (non-seasonally-adjusted), while it has increased only 0.4% since March (seasonally-adjusted), according to the Bureau of Labor Statistics.
 
“A state spending freeze would save $109 million that could be applied to tax cuts, and demonstrate to Arkansans that the incoming freshman class of legislators is sincere about delivering on promises to pursue fiscal conservatism,” The APF noted.

The APF also noted it is “happy to oblige” tax cut opponents who demand spending cut specifics accompany tax cuts. The APF recommends a broad hiring freeze, audits and performance reviews with all state agencies and departments, and merging of various education service co-ops into one entity.

“The Policy Foundation estimates $150 million in savings to taxpayers if these policies are enacted. Savings should be applied to reduce the grocery tax by one cent, and to start the process of cutting income tax and capital gain rates,” The APF report explained.