By Steve Brawner
© 2016 by Steve Brawner Communications, Inc.
The easiest things for lawmakers to do politically are to cut taxes and increase spending, but there comes a point where the math stops working (except in Washington, D.C, where they can just pretend). Some state legislators are wondering if we’re reaching that point.
The reason they are wondering is because state revenues have not met the Department of Finance and Administration’s forecast each of the past three months. In fact, they’re $36.1 million less than expected and about the same as the state collected this time last year.
Meanwhile, the state is facing increasing costs that are hard to contain. Spending on K-12 public schools must increase every year or the state probably will be sued. Meanwhile, health care costs are rising – in particular, the so-called private option, where the state uses federal Medicaid dollars to purchase health insurance for lower-income Arkansans. When the program was created, it was expected to cover 250,000 individuals, but the numbers have zoomed past that, and next year the state begins paying 5 percent of the cost.
The situation wasn’t vastly different – at least the same trends existed or were predictable – in 2015, when Gov. Asa Hutchinson first came to office after having campaigned on a promise of cutting taxes. Hutchinson made a $100 million income tax cut his first priority, and legislators passed it right out of the gate early that year and then made spending decisions based off that.
It worked just fine. In fact, the state had a $177 million surplus in fiscal year 2016. But that surplus would not have happened were it not for two factors.
First, the economy is strong. The state’s unemployment rate is 3.9 percent, the lowest in recorded history, though part of the reason is because many individuals have dropped out of the workforce and aren’t counted in the rate.
The second reason for the surplus is that the state is taking a lot of money from Uncle Sam. The private option will rake in $1.6 billion in fiscal year 2017. Many Republican states said no to that money. Then earlier this year, Hutchinson and legislators found about $50 million in state funds so Arkansas would be eligible for $200 million in federal highway funds.
So balancing the budget actually has been pretty easy lately. The problem is that the factors that make it easy are temporary, but the factors that make it harder are permanent. The Great Recession supposedly ended in June 2009, which is news to a lot of people still struggling to make ends meet, but that’s the official date. That was seven years ago, and unless the laws of economics have been rescinded, another recession eventually will come around the corner. At that point, the state will have a lot of obligations that it might not be able to meet, especially as those education and health care costs continue rising. Meanwhile, at some point, the cash-strapped federal government will stop handing out money to the states like candy. Surely.
Hutchinson is determined to cut taxes. The governor’s duties include being the state’s chief marketing officer and deal-maker. He’s told by out-of-state corporate leaders that Arkansas’ high income taxes are a negative. But even he is scaling down expectations. He’s now talking about $50 million, which is not much.
Other legislators are even more cautious. Sen. Jake Files, R-Fort Smith, chairman of the Senate Revenue and Tax Committee, said any tax cut this year will occur after “more fact-finding and evidence-based methodology” than in 2015. He suggested a triggered tax cut that would occur only if revenues meet a certain mark. He’d also like to see the tax cuts targeted to lower income Arkansans, who were left out of the 2015 cut.
Other legislators, however, including Sen. Bart Hester, R-Cave Springs, are full steam ahead. He says the state has a surplus and that if the money stays in Little Rock, legislators will just spend it, and not efficiently. He’s pretty certain legislators will become more enthusiastic about a tax cut when they have the chance to pass one.
What would be the safe bet? There will be a tax cut – a small one, passed with cautious enthusiasm.