Arkansas Budget Address: Planning for Tax Reform

In his January address to the Joint Budget Committee, Arkansas Governor Asa Hutchinson outlined the details of his $5.6 billion FY 2019 budget proposal. While this is around $100 million lower than his initial FY 2019 recommendation in a 2-year budget proposal presented to lawmakers one year ago, it still increases state spending by more than $172 million in FY 2019, a 3.2 percent increase.  Of the increased spending, nearly 83 percent—$142 million—flows to the Department of Human Services . Other leading recipients include Division of Children and Family Services ($7.3 million), county jails and the state corrections system ($4 million), and state police vehicles ($3 million). To his credit, efficiency improvements and “real spending cuts” across multiple government agencies did help limit overall proposed spending growth to 3.2 percent rather than 5 percent.

Governor Hutchinson applauded lawmakers for their hard work in putting $100 million back “in the consumer’s pocket” through pro-growth tax relief in 2015, and revealed the positive dividends it has paid. He touted that in 2017, Arkansas “had the lowest level of unemployment” in state history, as well as a “record number of Arkansas that entered the workforce.” Better still, wages are rising, Medicaid enrollment has fallen, and SNAP (food-stamp) usage is the lowest in nine years. Thanks to economic growth, state revenue collections have grown despite tax cuts.

In fact, the Department of Finance and Administration estimates the state will end FY 2019 with a $64 million surplus. Gov. Hutchinson asked lawmakers to devote $48 million of the projected surplus to a reserve fund and $16 million to highway improvements.

The governor noted the 0.875 percent Education Adequacy component of the sales tax has, for the first time, fully funded mandated education spending. This surge of revenue enabled lawmakers to forgo an expected $50 million transfer from the General Revenue Fund to education.

Of important note, nearly 60 percent of the $172 million increase in the Department of Human Services spending stems from the increase in the state’s share of Medicaid expansion costs under the Affordable Care Act ($35.7 million) and changes in the Medicaid matching rate (48.6 million).

The governor highlighted the proposed $12 million increase on four-year colleges and universities as part of formula change in part providing increased funding in exchange for freezing tuition for in-state students.

Concluding his remarks, the Governor called his budget “conservative in spending” and stated its goal is to “create a surplus that will be a cushion for future economic changes…and future tax cuts.” Lawmakers set the stage for major state tax reform by assembling a task force during last year’s session. With economic performance over the past 10 years a lackluster 28th place and economic outlook stuck at just slightly better than average, individuals and businesses will welcome more substantive tax relief.