The Arkansas General Assembly has informally adjourned, meaning that the time to pass new bills is over. They will reconvene in May to formally wrap up the session, but the major action is now concluded.

Prior to the session, ACRE put together a Top 10 List of policy ideas based on our research. And throughout the session, ACRE researchers were watching relevant bills and in Little Rock whenever our research could help inform the debate. So how did our Top 10 List turn out?

Occupational Licensing

ACRE Policy Analyst Zachary Burt

Major improvements were achieved in terms of interstate cooperation and lowering barriers for professionals who wish to move to Arkansas, through . This act provides for automatic license recognition for any out-of-state license holder who moves to Arkansas, allowing them to get to work after moving here much more quickly. License holders will be granted Arkansas licenses upon moving to the state as long as they have held the license in their previous state for one year and are in good standing. The bill was weakened to some extent from its original form, changing from saying licensing boards “may” administer an Arkansas-specific exam to an out-of-state , but the final bill says that they “shall” administer the exam. This change takes away flexibility from the licensing boards and slows down what would have been a more efficient recognition process, but the reform is still good and significant overall.

Three bills this session joined Arkansas to existing licensing compacts. These compacts are a related, but distinct, concept to universal licensing recognition. joined Arkansas to the Occupational Therapy Licensing Compact, joined the state to the Counseling Compact, and joined us to the Audiology and Speech Language Pathology Interstate Compact. These three acts are excellent steps towards getting more qualified healthcare and mental healthcare professionals to move to Arkansas.

In addition to these good steps forward, Arkansas also created or expanded at multiple occupational licenses, such as a new license for behavioral analysts (note: Governor Sanders recently ) and an expansion of the existing auctioneer license. These licenses will only add to the burden of licenses in Arkansas, and is especially worrying given that according to Arkansas already has the .

Taxes and Spending

ACRE Policy Analyst Joseph Johns

Changes to tax and spending policy can take both large and small forms. This session saw a number of small reforms pass with regard to state income taxes, but there were also some major reforms of local sales taxes.

ACRE’s big idea for tax and spending reform on our Top 10 list was a “tax and expenditure limit,” a policy that about half of US states, including all of Arkansas’s neighbors, already have. While a big change like this can take a long time to build public support – as it should for a major change – there was an important first step. Rep. Wayne Long proposed a constitutional amendment that would establish a TEL in Arkansas, which he called the Arkansas Taxpayer Bill of Rights. The legislature did not refer that amendment to the voters this year, but we are optimistic that it will start future conversations about this kind of tax and spending reform.

On state income taxes, the legislature passed another slight reduction in both personal and corporate income tax rates, lowering both by two-tenths of a percentage point (the top personal rate is now 4.7 percent). While this was a small reform, it is still important, and continues along the path that the legislature has taken in almost every session since 2015. Cumulatively, these small tax cuts have created large reductions in income taxes for middle class families of almost a thousand dollars per year.

One other major set of tax reforms was passed that will limit local sales tax increases. Through the passage of two bills this year, Arkansas both required local A&P taxes to be approved by the public (before this, no public vote was required) and set strict limits on when all local tax elections can be held. Cities, counties, and school districts will now have just two fixed dates each year (in May and November) to hold local tax elections. This reform was not on our Top 10 list, but it is one that ACRE has been working on for years. Additionally, another good corporate tax reform was enacted – repealing the throwback rule – which Arkansas has suggested for years beginning with our 2016 book on tax reform.

Government Transparency

While none of ACRE’s proposed Top 10 ideas for government transparency were passed, this doesn’t mean that we weren’t busy in this area. To the contrary, there were several bills proposed during the session which would have reduced local government transparency, and ACRE followed all of these bills, testified before the legislature multiple times, and explaining why these bills would reduce transparency.

ACRE Policy Analyst Dr. Joyce Ajayi

Even though no bills were passed from our Top 10 list, towards the end of the session, two bills were filed that would have greatly expanded theof public meetings and the for cities in Arkansas. Given how late the bills were filed, they didn’t end up becoming law, but we look forward to similar bills being filed in future sessions that will establish the same transparency in Arkansas cities that ACRE helped in 2019.

The challenges with government transparency in Arkansas were demonstrated in many ways, including several attempts to limit Arkansas’s FOIA law, which is generally regarded as among the best in the nation. ACRE’s advice to policymakers doesn’t always involve recommending new legislation, but often takes the form of preventing bad changes from happening.

Every session the Arkansas legislature considers many major and minor changes to both tax and budget policy. But it’s much rarer to see proposals to dramatically reform the entire fiscal process in Arkansas. As state legislators have begun to debate potential constitutional amendments to refer to the voters, one potential amendment would make fundamental changes to the way Arkansas tax and spending policy works in the future. The legislature can refer three constitutional amendments to the people each year, and have been proposed so far this session, though they will be narrowing down this list to just three amendments this week.

The proposed would establish for the first time in Arkansas a “tax and expenditure limit” (TEL), which the author of the proposed amendment (Rep. Wayne Long) refer to as the “Arkansas Taxpayer Bill of Rights.” While the title of the amendment is a reference to Colorado’s similar Taxpayer Bill of Rights, Colorado is not the only state with such a rule. About half of U.S. states have a rule that limits how much state tax revenue or spending can grow in a given year, usually based on a formula that takes into account some economic factors (such as growth in state income, or population and inflation). Arkansas has no such rule.

In this post I will briefly explain how a tax and expenditure limit works, what the research says about TELs, and highlight the primary features of the proposed amendment. Even if this amendment is not chosen as one of the three referred by the legislature this year, it gives Arkansans an opportunity to start thinking about the possibility of a policy such as this in the future.

ACRE has long suggested that a TEL of some sort would be beneficial for Arkansas’s state budgeting process. In a that I co-authored with Jacob Bundrick, we suggested a TEL as a possible reform to address increasing state spending, as well as putting the state’s balanced budget rule into the state constitution. ACRE Policy Analyst Joseph Johns has discussed the potential benefits of a TEL for Arkansas’s budget in the context of large budget surpluses last year. Enacting a TEL was also one of ACRE’s top 10 priorities for the current legislative session. Joseph Johns has also written a short background paper (available upon request) explaining the history of Arkansas’s fiscal institutions, as well as showing some examples of how different TEL rules would have affected state spending levels over the past few decades.

What is a Tax and Expenditure Limit?

A tax and expenditure limit is a fiscal rule that states adopt, either through their constitution or by statute, to limit the growth of state tax revenue or state spending based on a set of rules. They remove some of the discretion that legislators have over tax rates and spending levels, ensuring that taxpayers have some certainty about the growth of government.

About half of U.S. states have a fiscal rule that can be classified as a TEL, but the rules vary widely across states. Some are in state constitutions, some are instituted by statute. Some limit spending, while others limit revenue collection. Some TELs can be overridden with legislative supermajorities or public votes. A few require immediate refunds of any surplus over the TEL rule.

The TEL rules also vary across states. Some use population growth plus the rate of inflation. Some use either the growth in state income, or limit government spending to a specific share of state income. Some use specific, simple numerical limits on government growth, others have complex formulas that take into consideration many factors. They can be found in both liberal and conservative states, higher and lower income states, and more urban as well as more rural states. But they all have a common goal, which is providing taxpayers with some assurance that government growth won’t exceed a certain limit by a simple majority vote of the legislature.

What does the Academic Research on TELs Teach Us?

While early research into TELs suggested they may not be effective at limiting state spending growth, subsequent research has looked more into the details of which sorts of TELs work and which do not. A 1992 paper by found that specific kinds of TEL rules can be effective. Research by suggests that TELs are more likely to be effective when they use an “inflation plus population growth” rule, and when they immediately refund surpluses to taxpayers. Knowing which TELs have been effective can help Arkansas craft a TEL rule that fits our own needs, and will work as intended, while avoiding the pitfalls of curtailing revenue growth or state spending mandated within the Arkansas constitution.

Some recent research, such as a 2008 paper by , once again finds that TELs do not necessarily constrain state spending, but likely because “state officials can circumvent them by raising money through fees.” Again, this is a case where Arkansas can learn from fiscal rules that have been implemented in other states to strengthen the laws that we pass and avoid oversights made by others. As an example, in Colorado the legislature established “” which are private businesses delivering state services, partially funded by fees, which avoid the cap of Colorado’s TEL.

In a 2010 Mercatus Center paper, attempted to summarize the research and provide additional analysis of TEL rules based on the various strands of research already in the literature. He found the following key results from his survey of when TELs are effective:

• Constitutional (instead of statutory)
• Limit spending (rather than revenue)
• Automatically refund surpluses
• Requirement of supermajority or public vote to override

Furthermore, Mitchell found that TELs are more likely to work in states with lower-income levels (this is primarily driven by states using income growth as the TEL limit, since low-income states have tended to grow slower in recent decades).

What Would the Proposed “Arkansas Taxpayer Bill of Rights” Do?

HJR1005 makes the following changes to Arkansas’s budget process:

1. Requires a state balanced budget
2. Requires approval by three-fourths of each chamber (or a vote of the public) to increase any tax rate or establish a new tax
3. Limits the annual increase in state general revenue to 3 percent per year
4. Places excess revenue in the Catastrophic Reserve Fund and Budget Stabilization Trust Fund, until both reach 20 percent of previous fiscal year’s expenditures
5. Refund any excess revenue to taxpayers by temporarily reducing income or sales tax rates

Arkansas does have several balanced budget requirements, including Amendment 20 to the constitution which requires popular approval for issuing state debt. But most of the other requirements are in statute, such as a requirement that the Governor and that the Department of Finance and Administration . Putting this requirement into the constitution will solidify the practice of passing balanced budgets in Arkansas, and strengthening the state’s Revenue Stabilization Act.

Amendment 19 to the Arkansas constitution required that any increase in existing tax rates at the time of the amendment (1934) be approved by voters or three-fourths of both chambers of the legislature. But it did not place any limits on new taxes. Thus, when Arkansas enacted its general sales tax a few years later (1937), it was not bound by Amendment 19, and has been continuously increased in recent decades (sometimes by voters, though often by the legislature). The proposed amendment this year would extend Amendment 19 to cover all current and future taxes.

Placing a hard limit of 3 percent growth in state spending will have a clear impact on state spending growth over time. In the past three decades, year-over-year state general revenue spending has grown by more than 3 percent in about half of the fiscal years (see the background paper by Joseph Johns for the data and calculations under other TEL rules). This cap is different from most state TELs, which typically use a limit based on some economic measure, such as income growth or inflation, but it is not completely unique. Ohio uses a limit of 3.5 percent per year (unless inflation plus population growth is greater). Before the adoption of the current TEL in Colorado, they used a 7 percent annual growth limit.

The final provisions of the proposed amendment which first ensure that the reserve funds are well funded, but then returns the excess to taxpayers, are some of the most important protections for taxpayers in the amendment. States as widely varied as California, Michigan, Missouri, and Oregon have provisions in their TELs that taxpayers will immediately be refunded the excess revenue if certain conditions are met. As Arkansas taxpayers saw record state surpluses of over $1 billion in the past two fiscal years, no doubt they would have preferred that some of that surplus be refunded to them. This amendment would make those refunds a reality in future Arkansas budgets.

The Arkansas General Assembly has now completed 7 weeks of its 2023 Regular Session. While there is still a lot more work to be done this year, we’ve already seen some major developments, and at ACRE we are closely watching several pieces of legislation where our research can help inform the debate and legislative process. I wanted to provide a summary of what has happened so far, and what to look forward to in the remainder of the session.

The biggest news last week was the release of the full details the LEARNS Act (), which is Governor Sanders’ major initiative to reform K-12 education in Arkansas. Not only is this bill important in its own right, but it will also be important for allowing other parts of the legislative agenda to move forward. Given the potential fiscal costs of the education reform, other spending and taxation changes were partially on hold until the details became clear. I recently spoke with about how all of the proposed spending and tax changes in Arkansas might fit together this year.

The education reform bill has already made it through the Arkansas Senate and is expected to come up in the House next week. ACRE has published a variety of research on K-12 education and school choice in the past. In particular, several of our research papers address an important question in the current debate: does school choice hurt traditional public schools? Dr. Thomas Snyder summarizes his research and the research of other economists in a recent ACRE blogpost. In brief, most of the research suggests that school choice programs do not hurt student performance in traditional public schools.

Here are a few of the other pieces of legislation ACRE has been following.

Joseph Johns testifies on HB 1027

While there has not been a major tax reform bill filed yet for Arkansas income taxes, there have been several bills related to the issue of local taxes. ACRE Policy Analyst Joseph Johns summarized the relevant local tax issues in another ACRE blogpost. The first bill Mr. Johns discussed would ban local governments in Arkansas from enacting income taxes, and it has already been enacted into law as . Another bill would require A&P taxes to be put before voters before they can be enacted or increased. These are local sales taxes —  primarily enacted by cities — on hotels, restaurants, and other similar businesses, but do not require a vote of the citizens. has already passed through the Arkansas House, and Mr. Johns testified before the House committee presenting ACRE’s research relevant to the bill.

Dr. Joyce Ajayi testifies on HB 1318

Several bills have also been proposed which would improve local government transparency in Arkansas, and our Policy Analyst Dr. Joyce Ajayi has testified on several of them. would improve the bidding process for city governments in Arkansas, making the process more transparent, and it has passed the Arkansas Senate. Another transparency bill is even more closely aligned with ACRE’s research. HB 1399 would give city governments the option to publish budgets online, rather than in newspapers, which has the potential to save cities money, and would also improve their scores in ACRE’s web transparency index. ACRE’s index already planned to include cities in our new 2023 report, and this bill would give them an immediate improvement in their scores for fiscal transparency. Dr. Ajayi testified before the House committee on this bill as well, but it is currently on hold awaiting a fiscal impact statement.

We’ve also seen a major bill proposed related to ACRE’s research on occupational licensing. Policy Analyst Zach Burt explained in a blog post how SB 90 would improve opportunities for work in Arkansas by establishing “universal licensing recognition.” A law like this would mean that workers could move to Arkansas and not need to go through a lot of red tape to start working if they were already licensed in another state. The bill has not been presented in committee yet, but ACRE is prepared to share our research with the legislature when it is presented, potentially in the very near future.

Thank you for continuing to follow ACRE’s research and our educational outreach to the legislature. Be sure to continue checking our blog and subscribe to our newsletter (go to the bottom of this page: /acre/) as we will continue to provide weekly updates throughout the session.

Beginning in 2015, Arkansas has been making gradual reductions in both personal and corporate income tax rates. The cumulative personal income tax reductions could be saving middle-income families in Arkansas $2,000-$5,000 every year, as an analysis by ACRE Policy Analyst Joseph Johns shows. Not only has the top income tax rate been reduced for individuals and families, but many lower rates have been cut as well. The corporate tax rate has been reduced from 6.5% to 5.3%, along with other important changes to the structure of the corporate tax code.

These changes have clearly benefited Arkansan citizens and businesses, but have these tax cuts greatly reduced available state revenue? This concern is potentially real, since income taxes make up over half of state general revenue in Arkansas. It could also be a concern moving forward, as the legislature considers further tax cuts in the current legislative session.

Despite these concerns, the data so far shows that there has been no reduction in income tax revenue in Arkansas. The best way to measure how much tax revenue is being collected is to express it as a percent of personal income in the state. If tax revenue was being significantly affected by the tax changes since 2015, we would expect this number to decline.

The tax revenue data in the chart comes from the Arkansas Bureau of Legislative Research in their “. Personal income data is from the US Bureau of Economic Analysis. Both are expressed for the fiscal years, which run from start in the third quarter of the year (e.g., Fiscal Year 2022 ran from July 2021 to June 2022).

While there is some fluctuation from year-to-year, this figure has stayed right around 2.7% since 2015, which is the average both before and after the tax changes began. We all know why 2020 was an unusual year and revenue was down slightly, but 2022 also proved to be an above-average year as the economy began to return to normal.

The chart above is not adjusted for price inflation, because it doesn’t need to be. Both tax revenue and personal income are expressed in nominal dollars from the same time period, so it is adjusted for the size of the economy. But we could also adjust the tax revenue data for inflation to make sure it is growing each year, which is what the table below shows (all dollars expressed in January 2022 dollars).

We can see that even after adjusting for inflation, total income tax revenue in Arkansas was over $700 million greater in 2022 than it was in 2015, before the tax reductions began.

That’s all good news for Arkansas, both for taxpayers and the state budget. But it might seem surprising. How can tax revenue continue to increase when taxes are being cut?

The overriding reason these tax reductions haven’t lowered total revenue very much is that these tax cuts were small compared with the overall budget. While the cumulative amount is somewhere around , this total was phased-in over multiple fiscal years. During most years, the total new reductions were somewhere around $100 or $200 million, or less than 5% of income tax revenue and an even smaller share of the total general revenue budget. Gradually reducing income tax rates has meant there is never a large hit to the state budget, since tax revenue tends to grow every year anyway along with the economy growing. Adjusted for inflation, was almost 12% larger in FY 2022 than it was in FY 2015.

Another reason is that there will be some positive impact on economic growth from these tax cuts. Economists sometimes refer to the dynamic cost of a tax cut, which is different from the static cost. The static cost () assumes that people’s behavior doesn’t change in response to the tax changes. But changing behavior, such as encouraging work and business formations, is one of the policy goals of lowering taxes. If people do change their behavior, the dynamic cost will be less than the static cost, since more economic activity partially offsets the lower tax revenue.

Dynamic scoring is often challenging to do, and the Arkansas Department of Finance and Administration typically only scores legislative bills based on their static costs, which means it is hard to say exactly how much of the effect we see in the charts above is due to dynamic behavior changing by individuals and businesses. And tax cuts rarely “pay for themselves,” in the sense of all of the revenue being made up by more economic activity, which would only happen at very high tax rates (a relationship sometimes called the Laffer Curve). But there is likely some positive, offsetting effect on tax revenues: they won’t decrease as much as the static analysis suggests.

In 2018, the Arkansas Tax Reform and Relief Legislative Task Force had some economists model the dynamic effects for reducing the personal and corporate tax rates to 6% (when they were both higher), and most estimates suggested $300 million of new economic activity from the personal income tax cuts and another almost $50 million from the corporate rate cut. This new activity should not be confused with new tax revenue, which will only be a fraction of the economic growth, but it does show there is some dynamic offset likely to have occurred as rates decreased (the analysis starts on ).

As the legislature looks to further reduce the burden of taxation in Arkansas, they should be able to comfortably lower rates by roughly the same magnitude as recent years without worrying about dramatically impacting the state budget.

Arkansas recently reported the , a record-setting $1.628 billion as of June 30, 2022. While this is good news in some respects, the true history of state surpluses reveals a disturbing trend that needs to be addressed. Arkansas has run . This means Arkansas taxpayers have been overpaying for government services 70 percent of the time for a generation. Dr. Jeremy Horpedahl, Director of the Arkansas Center for Research in Economics at UCA, recently discussed the budget surplus and possible pathways forward in an op-ed with the .

As Horpedahl discusses, one option for the $1.6 billion surplus would be refunding the amount in some fashion to taxpayers, which comes out to $700 on average per adult in Arkansas. But this brings up a broader question: what if Arkansas had permanent budget rules to address how surplus tax revenue is spent? Even if the legislature does not elect to refund the $700 per adult this year, it is useful to think about improving Arkansas’s budget process for future years.

Arkansas has a strong budget framework already under the Revenue Stabilization Act (RSA). The law requires Arkansas to spend no more than it collects in a given year, essentially guaranteeing a balanced budget. However, the RSA is silent on how the state should spend any revenue brought in above annual forecasts. Arkansas is now facing this scenario, but in a bigger way than ever before. The state collected approximately $7,477.4 million in total revenue in fiscal year 2022, 2.1 percent above its own revenue forecasts. Horpedahl noted that Arkansas only allocated “$5.85 billion for all the necessary state spending in the general fund,” leaving Arkansas with the largest surplus it’s ever had.

For that matter, in every major tax category. Individual income tax collections were 0.9 percent above forecast, corporate income tax collections were 7 percent above forecast, and sales and use taxes came in 1.3 percent above forecast. All of this is indicative of the strong recovery Arkansas has made from the COVID-19 pandemic-induced economic decline and underscore the continuing importance and positive effects of the passed last year.

Arkansas can and should continue to do even more by adopting tax and spending reforms of other more successful states. One common theme amongst more prosperous states is the presence of tax and spending limits which are built into these states’ constitutions. Tax Expenditure Limits, or TELs, as they are known, slow the growth of government spending and tax collection by different benchmarks, and . Capping state spending by the rate of population growth and inflation is the most restrictive benchmark states use. Colorado uses this standard in its . This makes intuitive sense since many government services such as education, transportation, and public utilities need to be bolstered when that state’s population increases.  However, Missouri only allows its total tax collections to grow by a maximum of 1 percent of its prior year’s general revenue, or .

TELs and similar budget rules can also require refunds be given back to taxpayers for any revenue collected above the TEL cap. Perhaps most crucial from a political perspective, highly effective TELs require taxpayer approval through a public vote “if legislators have a better idea than refunding all the money directly to taxpayers,” according to Horpedahl.

Figure I:

To show the possible impact of different spending caps, ACRE researchers created several retrospective estimates of adopting two different budget rules at different points in the past. Although we cannot know exactly how the budget process would have worked out under these different rules, our examples provide evidence that the savings for Arkansas taxpayers would be large cumulatively, even though for any specific year only minimal reductions in spending would have been needed.

If we start the estimates in 1992, the same year that Colorado adopted its TABOR limit, total spending in the Arkansas General Fund would have grown from $1.9 billion in 1992 to about $4.2 billion in 2021 (shown by the green line in the chart to the left). Instead, spending actually grew to about $5.9 billion (the black line in the chart). The difference, around $1.7 billion, is what could have been saved under a rule similar to Colorado’s and would currently amount to about $700 per person in Arkansas.

This number should be taken as an “upper limit” of the savings under this rule, but shows the potential power of cumulative savings under a budget rule. Alternatively, a much stricter budget rule, such as limiting state spending growth to 2 percent each year, is shown by the purple line in the chart. Some states have rules which limit state spending growth to a specific percentage (such as Oklahoma), and others use a blend of the “inflation plus population” rule and a specific percentage (such as Ohio). Again, these estimates should be seen as illustrations of how such a budget rule would work, not as what would have actually happened if Arkansas had adopted a hypothetical TEL rule.

Figure II:

However, looking back all the way to 1992 may not be the most useful timeframe for Arkansas. Major changes to the funding of local school districts came into place in the late 1990s and 2000s due to Arkansas Supreme Court ruling, as well as other important changes. Even looking at a shorter time period, such as from 2012 to 2021, the benefits of a spending cap would be noticeable to Arkansas taxpayers. The chart to the right shows a similar estimate of spending from 2012 to 2021 under different spending caps. Whether Arkansas had used the “inflation plus population” rule or a 2 percent spending growth rule, spending would have grown from $4.6 billion in 2012 to about $5.5 billion in 2021. That growth in spending would be around $400 million lower than the actual spending growth, saving around $200 per Arkansan.

Adopting such a reform in the this year or in future budget sessions could pave the way to dramatically reduce the individual income tax and reduce the burden on business and higher income individuals and make Arkansas a more attractive place to live and work. The mandatory refund provisions of excess tax collections within the most effective TELs would also have the added bonus of greatly reducing the tax burden on low-income Arkansans.

Regardless of how the Arkansas General Assembly chooses to utilize the surplus, ACRE will continue to advocate for greater economic freedom for all Arkansans through creative and sustainable policy solutions.

To see more about how ACRE is working to inform the conversation around tax and spending issues visit the following links below:

1. Arkansans Could See Big Savings from Special Session (from October 2021 session)
2. Why Arkansas’s Long-Term Reserve Fund May Not Weather the Next Rainy Day (February 2020)
3. Learning From Other States On Tax Reform (May 2018)
4. There’s Nothing Natural about the State of Government Spending in Arkansas (2017 research paper)

By Caleb Taylor

What’s the latest news on taxes and spending policies in Arkansas?

ACRE Director and BT����Associate Professor of Economics Dr. David Mitchell and ACRE Legislative Research Associate Dr. Nathan Smith joined the Dave Elswick Show on 101.1 FM in Little Rock to answer this and more on Monday, April 26th.

Smith recommended legislators consider eliminating the “tax cliffs” in the state income tax code when they meet again in the fall.

Smith said:

The way a well-designed income tax code would work is that as you make more money, you pay more tax and for each dollar you earn, you’d pay a little bit more tax. You do that by setting a marginal tax rate that rises. Arkansas has something weird where when you hit certain thresholds…suddenly your tax bill jumps so if you make $1 more you’re taxed $167 more. That doesn’t really make much sense.

Smith also acknowledged that “it’s kind of expensive” to eliminate Arkansas’s tax cliffs. 

Smith said:

You lose a lot of (tax) revenue because you have to cut taxes not just for people just across the tax cliff but also on everybody above that level. That would be a smart thing to do, but they’d have to have some room in the budget to fund that.”

For more on this topic, check out Smith’s recent op-ed “” in the Arkansas Democrat-Gazette on February 12th.

Mitchell said a recent decision by Gov. Asa Hutchinson and legislative leaders to increase the state’s Long Term Reserve Fund, a kind of state savings account, was both “laudable” and a “serious chunk of money.”

Mitchell said:

It’s the money the state puts aside for the future in case of recessions. I’m glad they’re putting money aside. It’ll end up being about $700 million. It would take us from near the bottom of the list to very high on the list as the percentage of general funds we have set aside.” 

According to the , Arkansas’s Long Term Reserve Fund had a balance of $153 million, or 2.7 percent of general fund expenditures, at the beginning of fiscal year 2020. This left Arkansas with the sixth lowest so-called “rainy day fund” balance in the nation at the time.

Mitchell recommended Arkansas consider passing a Constitutional amendment that would have stricter rules for withdrawals from and deposits for the Long Term Reserve Fund.

You can listen to the entire interview .

For more of our research on taxes and spending, go here.

By Caleb Taylor

Gov. Asa Hutchinson proposed biennial budget released last Tuesday contains an early Christmas present for new Arkansans, but does it make larger reforms more difficult? 

Hutchinson that he’d like to cut the top individual income tax rate to 4.9 percent for new residents of the Natural State. He also mentioned his long-stated goal of cutting the top individual income tax rate for all Arkansans, but that’s not included in his budget.

This top rate is already scheduled to decrease from 6.6 percent to 5.9 percent on January 1, 2021 based on tax reform legislation passed during the 2019 legislative session.

In an interview with (budget segment begins at 9:20) on Sunday, Nov. 15, ACRE Scholar and BT����Assistant Professor of Economics Dr. Jeremy Horepdahl discussed Hutchinson’s proposed budget.

Horpedahl said:

The Governor has had a long term goal of getting the top tax rate on individual income down to 5 percent. I guess 4.9 percent is a little nicer… He’s now saying that he wants to do this in the next five years. Given the uncertain budget times, he is proceeding with caution. There isn’t actually a proposal in this budget to do that. It’s kind of a goal. A taste of that goal is that we’re going to do it for people that are moving here. People who are new residents are going to get that [4.9 percent rate] immediately in his proposal.”

Horpedahl estimated would benefit from the tax cut, but the vast majority would’ve moved to Arkansas anyways. However, it’s possible the change could attract more to move.

Horpedahl said:

You can’t really distinguish between people who are moving to Arkansas anyway or people who are moving for the lower rate.”

Hutchinson’s proposed budget also increases the balance in the Long-Term Reserve from $185 million to $285 million by the end of the biennium. Arkansas’s Long-Term Reserve Fund balance ranks 45th in the nation totaling 2.7 percent of general fund expenditures, .

Horpedahl said:

That’s a very prudent thing to do especially since we’ve just seen a time where the budget got hit really hard. Now, we didn’t have to dip into it this time because it ended up being not as bad as they thought. It’s good to have that reserve there not only to protect the budget but also it helps your bond ratings so the state can borrow at lower rates. It shows you have the money to meet your obligations in case of an unexpected downturn.”

For more on Arkansas’s Long-Term Reserve Fund, check out ACRE Director and BT����Associate Professor of Economics Dr. David Mitchell’s blog post entitled “Why Arkansas’s Long-Term Reserve Fund May Not Weather the Next Rainy Day.” Mitchell and Dr. Dean Stansel’s paper entitled “” published in the Cato Journal analyzes how government spending increases during economic expansions worsen state fiscal crises.

All of these policy proposals would have to be approved by the General Assembly in the upcoming 2021 legislative session in order to become law.

Horpedahl was also quoted in an article in the in Little Rock about tax changes in Hutchinson’s proposed budget.

Horpedahl said:

This tax reduction has been a long-standing goal of Gov. Hutchinson, and it should be feasible to do so once we are past the COVID recession. The governor’s immediate plan to reduce the rate only for new residents could have some benefits of attracting new workers, but it will also be unnecessarily costly, since it will likely have to be given to the roughly 30,000 new workers that move to Arkansas each year anyway, according to the latest IRS Statistics of Income Migration Data.”

By Caleb Taylor

Arkansas’s small businesses are still feeling the effects of the economic downturn from COVID-19, ACRE Director and BT����Associate Professor of Economics Dr. David Mitchell said in a speech to about 25 Conway Kiwanis Club members at Larry’s Pizza on Wednesday, Nov. 4.

Mitchell said the Natural State could be better prepared for future recessions by improving Arkansas’s tax structure, lowering or removing some occupational licenses and funding and reforming Arkansas’s Long Term Reserve Fund.

Small Business Woes

The number of small businesses open in Arkansas has decreased by 21.2 percent as of September 29 compared to January 2020, according to .

That’s better than the national average of 24.1 percent but still nothing to celebrate, according to Mitchell. 

Mitchell said:

Small businesses are struggling. They don’t have access to capital markets like other (larger) businesses. For small businesses, it’s been really hard as you might guess. Everyone of these numbers has a story behind them. That’s someone whose business has closed. Arkansas is one of the states that didn’t do a full close down. I think it helped a lot but it’s still pretty brutal.”

State Tax Revenue

State taxes to fund government services has been a mixed bag so far in 2020, according to Mitchell. 

Sales taxes are above projections while individual and corporate income taxes are less than projected so far.

Mitchell said:

Sales tax revenue has actually been up. Sales tax revenue tends to be smoother than other types of revenue. It’s one reason why economists have a tendency to suggest that you depend more on sales taxes than some of the other taxes. It’s just smoother…it doesn’t go up and down like other types of revenue. Individual income and corporate income tax [revenue] has fallen. Corporate income [tax revenue] is just very, very volatile. When the economy is good, corporate income [tax revenue] skyrockets and then plummets when it’s bad. Individual income tax [revenue] is a little more stable, but it’s not as stable as sales taxes. Arkansas relies a lot on income taxes for revenues. That makes it very vulnerable during recessions. We should pick a smoother stream of revenue such as sales taxes.”

Possible Reforms

Mitchell concluded by recommending Arkansas policymakers reform the state’s occupational licensing burden.

Mitchell said:

Arkansas is a state that has a lot of regulations. We have a lot of occupational licensing for low to moderate wage jobs. Some might think that these are put into place to protect people, but sometimes these are just barriers to entry.”

For an example of a possible solution, check out ACRE Policy Analyst Alex Kanode and ACRE Scholar and BT����Associate Professor of Economics Dr. Thomas Snyder’s op-ed “” (published in the Arkansas Democrat-Gazette on October 22) about a recent occupational licensing reform bill passed by the Missouri legislature, known as universal licensure recognition.

Mitchell also recommended Arkansas legislators consider enacting stricter deposit and withdrawal rules from the state’s Long-Term Reserve Fund, a kind of state savings account for rainy days, so the state will be better prepared for future recessions.

For more on Arkansas’s Long-Term Reserve Fund, check out Mitchell’s blog post entitled “Why Arkansas’s Long-Term Reserve Fund May Not Weather the Next Rainy Day.” 

Mitchell and Stansel’s paper entitled “” published in the Cato Journal analyzes how government spending increases during economic expansions worsen state fiscal crises.

How can corruption be minimized in pandemic-related government programs?

Incentivize whistleblowers and improve online transparency. Programs such as the Paycheck Protection Program (PPP) or the need greater scrutiny, according to ACRE Policy Analyst Dr. Mavuto Kalulu in “,” an op-ed published in the Arkansas Democrat-Gazette on August 27.

Dr. Kalulu begins by citing two recent Department of Justice Office of Public Affairs (DOJ OPA) news releases, “” from July 16 and “” from June 4 as examples of corruption in the PPP program.

Kalulu writes:

Fortunately, these cases have been caught quickly. The secretive nature of fraud makes it difficult to detect with much speed. More often than not, it is caught long after the damage has already been done. A 2020 ‘’ by the Association of Certified Fraud Examiners (ACFE) estimates that the typical time between when a fraud begins and when it is detected is 14 months. In general, abuse of public resources negatively affects the delivery of services by diverting resources from important services such as public education and public health. In the case of PPP, there are other struggling businesses that could use these dollars to pay their workers.”

While audits can help catch some of the corruption in these programs, the 2020 ACFE Report finds that audits only catch 19 percent of fraud. Therefore, Kalulu recommends improving the online transparency of these government programs and incentivizing whistleblowers to report abuse.

Kalulu writes:

According to the ACFE report, tips from whistle-blowers account for 43 percent of the initial detection of occupational fraud. Thus, in addition to audits, it is important to incentivize people to report fraud. According to the National Whistleblower Center, between 2007 and 2019 the IRS has been able to recover $5.7 billion while awarding nearly $932 million through the IRS Whistleblower Reward Program. The program rewards whistle-blowers 15 percent to 30 percent of proceeds from tax fraud or tax underpayments. Another way is to be very transparent by publishing online recipients’ details including their names, addresses, number of employees and the amount that they receive. The idea is to empower residents to be a part of the process of detecting abuses. If unscrupulous applicants are using fake addresses, residents can assist to detect such abuses. It is encouraging on this front that the U.S. Treasury reversed its earlier stand not to disclose details of the PPP recipients.”

You can read the entire op-ed .

Dr. Kalulu is the co-author of the second edition of Access Arkansas: County Web Transparency, with ACRE Policy Analyst Joyce Ajayi.

The index ranks counties on a score from 0 to 1 by combining three types of transparency: fiscal, administrative, and political. Fiscal transparency is the disclosure of financial information. Administrative transparency relates to the openness of government activities and processes, while political transparency relates to the transparency of elected officials and quorum courts.

“State Government Internal Auditing, Education Attainment, and Occupational Fraud Control” by Kalulu and BT����Assistant Professor of Accounting Ashley Phillips, published in the Volume 41, Number 2 edition of the Southern Business and Economic Journal of Auburn University in April examines the effectiveness of public sector internal auditing in reducing public sector corruption. 

To see more of our work related to this topic, you can go here.

By Caleb Taylor

What’s one tool states can use to weather financial downturns?

David Mitchell and Dean Stansel have been studying state fiscal crises for more than  a decade. 

As state finances falter from COVID-19’s impact, Mitchell and Stansel draw on their research in a recent opinion article in to show how long term reserve funds, often referred to as “rainy day funds,” can help states as revenue falls and spending increases. RealClearPolicy is an online media platform that publishes opinion, news, analysis, and more with a focus on research from think tanks, associations, and foundations. In their article, “” they talk broadly about “Rainy Day Funds” which, in Arkansas’s case, is called the Long-Term Reserve Fund.* 

Mitchell, a BT����Associate Professor of Economics,  and Stansel, a senior research fellow at the , also argue a federal bailout of states with inadequate reserve fund balances would be imprudent. These states should instead “show more fiscal restraint” during the next economic expansion to be better prepared for future recessions. 

Referencing their paper, “” published in Public Budgeting and Finance, Drs. Mitchell and Stansel said:

indicate that states which increase spending faster during good times tend to end up paying for that extravagance later with worse fiscal crises during recessions.”

They identify two different kinds of causes: program expansions increasing expectations of future funding (like California and Kansas) and the cost of overspending dollars instead of saving them (like New York and Illinois). 

Moreover, states with strict withdrawal rules on how reserve funds are spent tend to experience less severe fiscal crises during recessions. 

Drs. Mitchell and Stansel said:

However, not all RDFs are created the same. They need two things to function best: strict deposit rules and strict withdrawal rules. If there is no deposit requirement, legislators and governors will not put much money into their rainy day fund. It’s always more fun to spend now than save for later.”

You can read the entire article .

*For more on the distinction between Arkansas’s Long-Term Reserve Funds and Arkansas’s Rainy Day Funds, check out Mitchell’s blog post entitled “Why Arkansas’s Long-Term Reserve Fund May Not Weather the Next Rainy Day.” 

Mitchell and Stansel’s paper entitled “” published in the Cato Journal analyzes how government spending increases during economic expansions worsen state fiscal crises. 

BT����Assistant Professor of Economics and ACRE Scholar Dr. Jeremy Horpedahl also joined to discuss Gov. Asa Hutchinson’s proposed state budget and ACRE research on the Long-Term Reserve Fund.