The include lowering the top marginal personal income tax rate from the current 5.9% down to 5.3%, consolidating the lower- and middle-income tax brackets, and providing a small personal tax credit for low-income taxpayers. Horpedahl explained that all of these changes will benefit Arkansas taxpayers, especially those in the middle part of the income distribution who will benefit from both the rate cut and the bracket consolidation.

The table below shows how the proposed changes would impact five sample taxpayers throughout the income distribution in Arkansas.

The estimated budgetary cost of these changes would be about a $300 million decrease in the state’s general revenue budget. Dr. Horpedahl said that this is a large tax cut, about equal in size to all the tax cuts passed in the 2015, 2017, and 2019 legislative sessions. But Horpedahl also said this tax revenue reduction will not cause any major cuts in government services in Arkansas, since it is about the size of the normal annual increase in the general revenue budget in Arkansas. The tax changes are possible to enact by slowing the increase in the size of state government, but would not require major reductions in the roughly $6 billion general fund.

For more of ACRE’s work on taxes, transparency, and state finance, please see the following:

Shine More Light – Policy Analyst Mavuto Kalulu advocates for more state fiscal transparency in administering COVID-19 relief funds.

Reducing Arkansas’s Income Tax Rate To Zero – Dr. Jeremy Horpedahl discusses the steps necessary to completely repeal the Arkansas individual income tax.

The Road Map To Tax Reform in Arkansas – Dr. Jeremy Horpedahl outlines a series of reforms state lawmakers could enact to improve Arkansas tax policy.

Arkansans Could See Big Savings from Special Session – ACRE Policy Analyst Joseph Johns and Dr. Jeremy Horpedahl discuss how Arkansans could benefit from potential income tax cuts in the upcoming special legislative session.

Dr. Jeremy Horpedahl and I spoke with Ryan Norris, State Director of the Arkansas Chapter of Americans for Prosperity, on his . Our conversation focused on the and more broadly about both tax and spending issues in Arkansas over the past few years.

The first half focusd on the during a planned upcoming special session. The two competing plans have potential benefits for different taxpayers. For example, a household earning around the median income of $43,000 stands to save at least $200 per year. This is a modest savings on a yearly basis. However, the proposed reforms set the stage for further reductions in the individual income tax in future legislative sessions.

Dr. Horpedahl explained the need to consider other tax reform pathways. These include eliminating the tax cliffs that happen when Arkansans earn slightly higher incomes. These slightly higher incomes and are taxed at higher rates on substantially similar income levels. He also recommended indexing the standard deduction, or the amount exempt from state income taxes to inflation. Without inflation indexing, the standard deduction becomes less valuable to taxpayers over time. This is critical since  by an annualized average of 5.3% relative to 2020. Indexing the standard deduction makes Arkansas’s tax code more consistent since “all other elements of Arkansas’ tax code are already indexed to inflation.”

The second half of the discussion centered on state spending trends and finding ways to restrict spending while maintaining essential government services. The RSA came out of the depression-era economic situation when Arkansas defaulted on its state debt. After two to address taxes and debt, legislators adopted the RSA in the 1940s to consolidate around 100 different funds and prioritize state spending into categories (for example, the 2022 budget has four categories, A through D).

Dr. Horpedahl spoke about the importance of the RSA to state spending by reminding listeners that the RSA mandates spending cuts when the state collects less revenue than anticipated. This prevents the state from spending beyond its means and prioritizes essential spending necessary for the state government to carry out its constitutional responsibilities. It is also important to remember that the legislature must fully fund Category A to ensure continued support for essential government services. The RSA does not prevent increased spending if the tax revenues come in high.

Norris then transitioned to the state’s Long-Term Reserve Fund. Dr. Horpedahl suggested that while this fund has grown significantly in the past several years, there are still loose rules governing withdrawal from the fund. The state should consider ways to limit the Long-Term Reserve Fund from being misused for imprudent purposes. I also spoke about a that requires any excess state revenue to be returned to taxpayers.

There are specific steps that Arkansas could take to provide meaningful tax relief. The state should build on currently proposed income tax reforms, consider ways to guard LTRF balances, and keep Arkansas competitive with its neighboring states. Adopting these reforms puts the Natural State in an even stronger fiscal position.

See more of ACREs work on taxes, transparency, and occupational licensing reform below:

– Dr. Jeremy Horpedahl provides a non-partisan summary of Governor Hutchinson’s 2019 tax reduction plan on Capitol View.

– Dr. Horpedahl explains the necessary steps for Arkansas to eliminate its individual income tax.

– Dr. Jeremy Horpedahl proposes alternatives to increasing the sales tax to fund road construction. He cites equity and tax competitive concerns since Arkansas has a relatively high sales tax, relative to its neighboring states.

Occupational Licensing Review Committee Kicks Off Second Session – ACRE Policy Analyst Zach Burt summarizes his testimony on Seed Dealer Licenses before the Occupational Licensing Review Subcommittee.

– ACRE Policy Analyst Joyce Ajayi explains the need for increased transparency of school district budgets to discourage opportunistic behavior of financially burdened teachers.

ACRE Director David “Mitch” Mitchell and I spoke on the on Monday, October 4^th, 2021, about the upcoming Arkansas special legislative session. We discussed two main tax cut bills currently under consideration by the legislature. The first plan, by Joint Budget Committee Co-Chair Senator Jonathan Dismang [R-Searcy] would reduce the top marginal rate from its high of 5.9 percent to 4.9 percent and consolidate the low-and-middle income tax brackets. The second plan requested by Governor Hutchinson and created by the Department of Finance and Administration (DF&A), would keep the three-bracket structure, lower the top rate to 5.5 percent and lower the 5 percent rate to 4.5 percent by 2023. Arkansas taxpayers will benefit the most under the Dismang plan due to the steeper cut in the top marginal rate.

I also spoke about the effects of the “tax cliff “and how Arkansans who earn as much as one more dollar could be taxed by as much as $180 more “for the privilege of earning that extra dollar.” We both reminded listeners that Arkansas is competing against other southern and midwestern states with lower individual income tax rates. Staying competitive is key to enhancing Arkansans well-being and economic vitality.

Tax triggers are tax reductions applied when the state meets pre-established revenue targets. Tax triggers have been used in several states. Our LTRF is currently around $1 billion and could be used to help enhance the effects of the proposed income tax cut plans as state revenue recovers.

the need for the legislature to place rules around how the Governor could use the state’s Long-Term Reserve Fund (LTRF). Without rules we don’t know how the next governor or legislature will spend that money.

Mitchell also discussed the advantages of lowering individual income tax rates now because of Amendment 19 to the Arkansas State Constitution. Amendment 19 requires that three quarters of the Arkansas legislature or a majority of voters approve an increase in the individual income tax. Mitchell said that Amendment 19 would “make it almost impossible for legislators to raise the income tax” after lowering it.

Elswick also discussed the need to cut the state sales tax to pursue even bigger tax savings during the session. Mitchell suggested the legislature spend its time focusing on the income tax since Amendment 19 doesn’t create that higher three-quarters bar for raising the sales tax. Amendment 19 was adopted in 1934 and preceded the state sales tax which was adopted the following year in 1935. Therefore, it only acts as a constraint when the legislature considers increasing the individual income tax.  The next legislature could just raise the sales tax and saddle taxpayers with that extra burden.

Elswick also discussed the need for state-level , the main focus of ACRE Policy Analysts Mavuto Kalulu and Joyce Ajayi, to help keep Arkansas state lawmakers accountable to their voters and encourage legislators to spend the massive COVID-19 relief spending wisely.

Our three main points are:

• Cutting the income tax rate allows Arkansans to receive more gains from their own work and helps keep Arkansas competitive when looking to attract jobs and talent to the state.
• Cutting income taxes can be done in such a way as to preserve government spending on commonly agreed upon public priorities such as infrastructure and K-12 education.
• Making these changes now can also sustain lower income taxes for many years to come due to the higher standard imposed by Amendment 19 to raise income tax rates.

ACRE Scholar Dr. Jeremy Horpedahl and I also co-authored an op-ed in the that discusses on Arkansas taxpayers. A more thorough analysis of the impact of these two plans can be found on the ACRE Review blog.

For more of ACRE’s work on taxes, transparency, and state finance, please see the following:

Shine More Light – Policy Analyst Mavuto Kalulu advocates for more state fiscal transparency in administering COVID-19 relief funds.

Reducing Arkansas’s Income Tax Rate To Zero – Dr. Jeremy Horpedahl discusses the steps necessary to completely repeal the Arkansas individual income tax.

The Road Map To Tax Reform in Arkansas – Dr. Jeremy Horpedahl outlines a series of reforms state lawmakers could enact to improve Arkansas tax policy.

Arkansans Could See Big Savings from Special Session – ACRE Policy Analyst Joseph Johns and Dr. Jeremy Horpedahl discuss how Arkansans could benefit from potential income tax cuts in the upcoming special legislative session.

Access Arkansas: County-Level Web Transparency – ACRE Policy Analysts Mavuto Kalulu and Joyce Ajayi created the Arkansas Transparency Index to help keep Arkansas government accountable to the public.

The Arkansas legislature may be meeting in the near future to consider changes to the income tax that individuals, families, and small businesses pay. So far we are aware of , and more could be proposed at a special session this fall. The plans proposed are one by State Senator Jonathan Dismang and another by the Department of Finance and Administration (requested by Governor Hutchinson).

We wrote about this plans and other possibilities for Arkansas in our recent op-ed, “” published in the Arkansas Democrat-Gazette.

While the plans differ in specific details, both provide tax relief for both middle- and high-income earners. The table below shows how these proposals would lower taxes for different households in Arkansas, as well as a third plan which combines elements of both plans.

As we explain in a recent op-ed for the Arkansas Democrat-Gazette, any tax relief is great news for Arkansas taxpayers, as it allows them to control more of their own earned income. The median household in Arkansas could expect around $300 in tax savings each year if the most aggressive parts of both plans are enacted, and many other families could receive tax cuts even larger than those shown in the table above.

Creating an environment conducive to household and personal economic growth is a good goal for the legislature to consider during the upcoming special legislative session. These tax cuts come after three previous sessions where legislators reduced Arkansas taxpayer burdens. Households could be poised to receive even more relief in the coming weeks.

Details of the Plans

The first plan is proposed by Senator Jonathan Dismang [R-Searcy] and would consolidate the low- and middle-income tax brackets, and lower the top marginal income tax rate from 5.9 percent to 4.9 percent by 2026. The Dismang Plan would eliminate the tax cliff between the low- and middle-income tax bracket by merging them together. This would help those who choose to work more and who could be on the hook to pay more in taxes for earning just slightly more money this year.

The second plan from Governor Hutchinson and Department of Finance and Administration (DF&A), would keep the three-bracket structure, and lower the top marginal income tax rate from 5.9 percent to 5.5 percent by 2023. This Plan would also lower the 5 percent tax rate on income between $22,900 and $38,499 to 4.5 percent by 2023. This plan has a few more details that would include some modifications to rates in the lower-income bracket, as well fixing the income tax cliffs between the low- and middle-income sets of tax brackets.

Lowering the individual income tax and consolidating the overly complex three bracket structure will make Arkansas more competitive with its neighboring states as well as other southern states. For instance, tax to a flat tax of 5.25 percent, and several of Arkansas’s neighboring states . Arkansas is in a very competitive tax environment. As we stated in our op-ed:

our neighbors aren’t standing still either: Mississippi has seriously considered eliminating their income tax. Oklahoma recently lowered their top rate to 4.75 percent, and Missouri will lower their top rate to 4.8 percent over the next several years (using revenue triggers, something discussed in the Arkansas plans too). Voters in Louisiana will soon decide whether to lower their top rate down to 4.25 percent, which would once again make Arkansas the highest in the region if we make no changes. Even Tennessee, where they have never had an income tax on wages, finished phasing out their tax on investment income this year.

In ACRE’s 2016 book, Arkansas: The Road Map to Tax Reform, published jointly with the Tax Foundation, we suggested that Arkansas could lower its top income tax rate to 5 percent from the then 6.9 percent level to be more competitive in our region. At the time, our neighbors with income taxes had rates of either 5 or 6 percent. Given the recent changes in other states, our previous recommendations have even more importance today.

Of the two plans, Senator Dismang’s is more comprehensive and would provide larger tax cuts for middle- and upper-income taxpayers. This larger tax cut also means a larger reduction in state revenue, about $400 million in the long run versus about $200 million under the DF&A. Low-income Arkansans, those who earn less than $22,900 per year, would have the same tax burden under Senator Dismang’s plan, though they may see some relief under the DF&A/Hutchinson Plan.

Governor Hutchinson said he is willing to reduce top marginal rate as low as 4.9 percent as long as spending on education and healthcare are protected with special fiscal rules known as revenue triggers. require specific revenue targets to be met before tax cuts would come into effect to allow rates to fall further. The triggers would smooth state spending and avoid revenue shortfall perils that come with automatic, mandatory reductions in income tax rates.

Other Ideas for Tax Relief

Aside from revenue triggers, the Arkansas General Assembly could also consider taking up ideas from the last legislative session to provide further income tax relief. One such idea is to double the standard deduction for single and married filers. during the 2021 regular session that would have made this change. If this were the only change legislators decided to resurrect, a married couple earning $50,000 with one child would save around $260 a year just from this change.

If legislators decided to both adopt Senator Dismang’s tax plan and double the standard deduction, a married couple with $45,000 of income (Nathan and Sarah in our sample table) could expect to save around $432 per year under the combined Dismang-Doubled Standard Deduction plan (about $200 of that comes from the standard deduction change). A married couple filing separately with three children who earns $220,000 (Luke and Hannah in our sample table) could expect to pay around $2,200 less in income taxes under a hypothetical Dismang-Doubled Standard Deduction tax change (again, about $200 is from the standard deduction change).

The state of Arkansas is also more fiscally prepared than it ever has been to implement more income tax reforms due to the robust $1.2 billion balance of the Long-Term Reserve Fund (LTRF), a fund which didn’t even exist prior to 2016 when Governor Hutchinson began championing the idea of a budge stabilization fund. ACRE Director that ensure this fund is only used for true fiscal emergencies. Tax cuts should be made in a way that does not jeopardize the soundness of Arkansas’s balanced budget, but the LTRF’s robust balance could be used as a backstop for any unexpected revenue declines due to future economic downturns.

Finally, Arkansas needs to be able to compete with its neighbors for talent and jobs. Two of our neighboring states, Tennessee and Texas, have no state income tax and balance their budgets without it. In the long run, if it pursues responsible state spending patterns and prudent tax reforms now. A recent shows strong support for the general idea of eliminating the personal income tax in Arkansas.

For more of ACRE’s work on taxes, check out the below links:

Tax book: The Road Map to Tax Reform in Arkansas

Research paper: Lessons From Other States Tax Reform Attempts

More on State Taxes and Spending

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

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.

By Dr. David Mitchell

In a for the Arkansas Democrat-Gazette, I pointed out that families need to have rainy day funds to provide for any loss of income. Similarly, when state governments have unexpected general budget shortfalls, they need a way to pay for them. 

And in the same way that families may see increased expenses after a job loss—pricier health insurance premiums, for example—states may have higher expenses during a recession as more people qualify for unemployment insurance, Medicaid, and other social services related to lost income. 

Rainy day funds, or budget stabilization funds, are what most states use to avoid spending cuts or tax increases during economic downturns. Arkansas has various funds with names that make them sound like rainy day funds, but they don’t quite function the way such funds are intended to.

During the last recession of 2007-2009, net available revenue in Arkansas’s general fund cumulatively . Not only is the current Long-Term Reserve Fund balance too small to cover a decline of this size, the general fund is about 25 percent larger today than it was a decade ago. Even doubling the size of the Long-Term Reserve Fund would not be enough to offset a recession of similar size to 2007-2009. While that recession may have been an outlier, a good rainy day fund should prepare for the worst possible outcomes.  

How rainy day funds are supposed to work

It’s a tautology, but good rainy day funds have money set aside for rainy days. For that to happen, the funds need deposit and withdrawal rules. The rules matter: good rules lead to adequate funding.

But here’s where things can go wrong. There won’t be much money in the fund if…

• …the legislature or governor can withdraw money any time they want; or
• …the legislature and the governor don’t have to deposit money in the fund.

Our state has these problems. Arkansas doesn’t have good rules to grow and protect its rainy day funds. 

As I noted in my op-ed, “Only two states—Arkansas and Kansas—lack statutes or other rules that ensure that budget reserves are replenished after they are drawn down and continue to be replenished until the next emergency, according to a recent , a nonprofit organization founded by former Federal Reserve Chairman Paul Volcker. It gave Arkansas a ‘C’ on its rainy-day report card [p. 41], and only two states got a lower grade.”

As Governor Hutchinson referenced in his , he and the legislature have increased funding for . (That fund used to be known as the Rainy Day Fund until Act 1 of the special session in 2016 renamed it.) 

The additional funding is a good first step, but much needs to be done to strengthen the fund and make it into a true rainy day fund. 

Research-based recommendations to bolster Arkansas’s reserve funds

My and others’ published academic research, such as (2016) and (2008), informs the following recommendations for strengthening Arkansas’s reserve fund.

1. Establish clear rules for depositing funds.

Many states have these rules, but Arkansas has none. For example, Tennessee requires that 10 percent of revenue growth be deposited in its reserve fund, and Utah requires that 25 percent of any budget surplus be deposited (see appendix B of ). Deposits should be mandatory when economic growth is above a certain threshold. 

2. Continue to increase the balance until new rules are established. 

The current balance of Arkansas’s Long-Term Reserve Fund is only enough to cover about 2.7 percent of general revenue. The average state has about on deposit, but many have much more. Wyoming has enough to fund . General fund expenditures in Arkansas consist of obligations such as K-12 education, higher education, and many state agencies. Arkansas should emulate these stronger states.

3. Tighten rules for disbursement. 

Withdrawals should only be possible if the state’s economy shrinks by a certain amount, or when the unemployment rate is above a certain threshold. The current rules allow funds to be spent if general revenue grows by less than 3 percent. Other states set a higher bar: they require the economy or tax revenue to actually shrink. 

For example, Indiana requires personal income growth to decline by , while Michigan allows withdrawals when unemployment exceeds 8 percent, according to the NCSL. 

Arkansas also allows for withdrawals for . Other states do not. Research by ACRE scholars shows that targeted business subsidies are not effective. 

4. Make the rules constitutional. 

While Arkansas’s current governor and recent legislators have been good stewards of the state’s rainy day funds, Arkansans deserve strong, ongoing protections. Embedding rainy day fund requirements in Arkansas’s constitution will prevent future governments from changing the rules through a simple majority vote.

Why Arkansas’s reserve funds are vulnerable

Governor Hutchinson, in , attempted to discredit my claims. In the greater space that a blog post provides, I’d like to clarify my sources and arguments. 

I’d also like to emphasize that my op-ed was not intended as an attack on the governor or the legislature, but rather a rebuff of the current rules and an expression of concern that those rules won’t sufficiently protect Arkansans from the next economic downturn.

Arkansas has two main funds that could be considered rainy day funds. Neither has appropriate rules to protect the taxpayers who fund them and rely on them.

Fund 1: Arkansas’s Long-Term Reserve Fund

The Long-Term Reserve Fund (LTRF) was created by of a special session in 2016, renaming the Rainy Day Fund without changing the rules regarding funding and disbursements. Arkansans should know the following key facts about the LTRF: 

1. Funding Rules: The LTRF is funded at the discretion of the legislature.
2. Disbursement Rules: Disbursements from the LTRF are allowed when general revenue grows by less than 3 percent annually, or for economic development superprojects.
3. Disbursement Examples: No funds have been dispersed from the LTRF since its renaming in 2016.
4. Current Balance: According to the governor’s op-ed, the LTRF had a balance of (about 2.7 percent of FY 2020 projected general revenue) as of November 2019. (Recall from earlier that the average state’s rainy day fund has reserves of about 8.0 percent of general revenue.)

Fund 2: Arkansas’s New Rainy Day Fund

As mentioned earlier, the LTRF used to be called the Rainy Day Fund. Arkansas now has a new Rainy Day Fund that was created in 2017 by . Arkansans should know the following key facts about their state’s new Rainy Day Fund:

1. Funding Rules: The Rainy Day Fund is funded from the former General Improvement Fund, Attorney General settlement funds, or at the discretion of the legislature.
2. Disbursement Rules: Arkansas’s Rainy Day Fund has no clear disbursement rules.
3. Disbursement Examples: Rainy Day Funds have been disbursed many times in the past few years, including for the state fair, highways, senior centers, and a theater. The act itself refers to the fund as a “miscellaneous fund” (p. 1); it is not a true rainy day fund.
4. Current Balance: $15.9 million was allocated to the Rainy Day Fund in Arkansas’s fiscal year 2020 budget (p. 5). Given the fund’s small allocation, the Governor clearly envisions it not as a solution for unexpected general budget shortfalls, but as a way to cover small expenses.

How Arkansas can improve its reserve funds 

Neither Arkansas’s Long-Term Reserve Fund nor its Rainy Day Fund has allocation rules in line with the standards for state fiscal responsibility as determined by experts like Pew Charitable Trusts. Arkansas would be better prepared for the future and for the next recession by improving how money is appropriated and spent—especially from the Long-Term Reserve Fund, which serves as Arkansas’s true rainy day fund.

It is great that the Long-Term Reserve Fund, under Governor Hutchinson’s tenure, is now better funded than it was when he took office in 2015. But, it lacks adequate rules for deposits. Deposits are completely at the legislature’s discretion, which leaves the door open for poor decision making. 

Withdrawal rules could be better, too. Arkansans need a stronger requirement than the current slow economic growth requirement. Instead, withdrawals should be allowed only in the event of a revenue shortfall. 

Further, because the Long-Term Reserve Fund serves as the state’s de facto rainy day fund, the governor should not be allowed to transfer funds out of it and into the . That fund is used to provide for payment of all or a part of debt service on bonds and to directly fund superprojects, and transferring funds in this way would represent an imprudent use of rainy day funds. While Governor Hutchinson has never made such a decision, Arkansas’s Long-Term Reserve Fund needs strong rules to prevent such transfers from happening under future leadership.

We’ve enjoyed a prolonged economic expansion over the last 10 years, but expansions are always followed by recessions, and Arkansas is underprepared. Our state only has enough rainy-day funds to pay for about eight days of spending, according to Pew’s article, “.”

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To summarize, our recommendations for changes Arkansas could make to its Long-Term Reserve Fund, or any other fund designed to serve as a true rainy day fund, are as follows:

1. Establish rules for depositing funds (such as a percent of surpluses up to a dollar-amount cap).
2. Until new rules are established, freeze withdrawals and continue to increase the balance.
3. Tighten rules for disbursement so that rainy day funds are used for revenue shortfalls only and not for other programs, such as economic development.
4. Make the rules constitutional to bind future legislators to husband rainy day funds in the same way the current administration has.

I commend Governor Hutchinson and the legislature for taking the initiative to strengthen a true rainy day fund in the form of the Long-Term Reserve Fund. But despite this good first effort, Arkansas is still unprepared for a significant economic downturn. The LTRF needs to be better funded and have better rules for deposit and withdrawal.

Many other states have achieved these goals, and Arkansas should emulate the best examples. For example, North Carolina also did not have clear rules for deposits and withdrawals, but the state made and is now a national leader in this area. I believe Arkansas can be a leader, too.