The question the Governor and interest groups are asking right now is: How to spend some of the $1.6 billion surplus? Many people have wish list items for which they want more state spending and have arguments for doing so.
But how to spend the surplus is the wrong question. There are two questions you should be asking. 1. Where did the $1.6 billion surplus come from? 2. Is the Governor and legislature so bad at budgeting that the budget adopted earlier this year already needs more spending after only one month into the new fiscal year?
In this article we examine the first question: Where did the $1.6 billion surplus come from?
- The $1.6 BILLION surplus all comes from you the taxpayer because, compared to other states, Arkansas is a high tax state. Calling it “surplus” does not make it fun money. Arkansas’ high taxes are NO FUN.
- Tax and spend politicians have a plan to pass SOME tax relief in a special session but are using it to divert your attention from their plan to also SPEND MORE OF YOUR MONEY.
- Some tax and spend politicians would like for tax relief to be in the form of a one-time rebate, which is a scam to ensure there will still be lots of so-called “surplus” money to spend next year and every year after that.
WHAT ARE SURPLUS FUNDS?
Tax and spend politicians want you to believe surplus funds is like manna falling from heaven that must be used quickly. They would like you to think the surplus is a surprise gift that appeared because Arkansas’ economy is doing so much better than expected.
The ideas they are selling are based on the longstanding fiction that the state’s general revenues suddenly change into something completely different after June 30 of each year. Unspent taxpayer money remaining in the general revenue fund on June 30 is declared by politicians as “surplus funds” and is transferred to another fund for easy spending.
While politicians pat each other on the back for holding down increases in general revenue spending and creating a surplus, they then spend the same money (now called surplus) like a kid spending birthday money.
Where did the surplus come from? Start with the fact that compared to other states Arkansas is a high tax state. Second, despite highly publicized tax cuts the same politicians have been busy keeping taxes high by: imposing new taxes, increasing the rate of some taxes, repealing a tax exemption, and by broadening existing taxes to add new items to be taxed.
Some tax increases go directly into the general revenue fund which serves to produce higher surpluses to use as fun money.”
Other taxes are dedicated for specific purposes and instead of going into general revenues the money goes into special revenue funds. Even the special revenue taxes have an impact on general revenue because the new special revenue taxes allows general revenue and its so-called surpluses to remain high.
Here is a good example. For several years highway officials demanded more tax dollars for highways and roads. Many legislators realized a new tax was not necessary because general revenues were growing and therefore, they proposed to provide additional highway money from the existing general revenues. The plan would have worked. The only drawback to using general revenues was political. If the spending came from general revenue the general revenue budget would show a significant increase in spending and that fact would have destroyed the myth that politicians are being conservative by holding down general revenue spending. So, instead of using existing tax money already being collected the politicians protected their conservative myth by passing a tax increase on gasoline and diesel fuels. (How do you like the 2019 fuel tax increase now that the Biden economy has gas and diesel prices sky high.) Their passing the fuel tax means more money is being taken out of your pocket and more money is being spent, but because they can call it special revenues the politicians continue to claim they are conservative by holding down spending out of general revenues.
Spending is spending whether it comes from general revenues, so-called surplus funds, special revenues, trust funds, etc. Likewise, when you buy something it doesn’t matter if you use money from your wallet, change from your pocket, a check from your checkbook, or a debit card, the spending all has the same effect on how much money you have left.
The surplus funds game used by politicians to spend more of your money is infuriating. And yes it infuriates some politicians who are tired of the scam and tired of Arkansas being hamstrung by high taxes.
Tell Arkansas politicians to quit playing games to spend more money. Tell them to do their jobs. Cut our taxes. Quit being so lazy that you give state agencies more money just because of what they spent the year before. Find out what spending is needed and what spending needs to be cut back by consider all request for spending during the regular and budget sessions and then set real spending priorities and limitations.
We realize this article is already long but if you want more detail about tax cuts and tax increases Arkansas politicians passed in 2017, 2019, and 2021 then read this bonus material. WARNING reading the bonus material will make you madder.
INCOME TAX CUT.
While increasing other taxes, the legislature has passed a series of income tax cuts. In late 2021 the legislature passed a highly publicized income tax cut to be implemented over several years. It is still being called the “biggest tax cut in history.” The cut was a good thing for taxpayers but let’s put this cut into perspective. Before this “biggest” tax cut, Arkansas’ top individual tax rate was higher than ALL SIX of the surrounding states. When the cut is fully implemented in a few years Arkansas’ rate will STILL BE HIGHER than all the surrounding states other than Missouri and that assumes Missouri does nothing to cut taxes. That is how bad Arkansas’s taxes are.
TAX INCREASES GOING TO GENERAL REVENUES
- Internet Sales Tax. In 2019 politicians imposed an Internet Sales Tax which is paid by Arkansas consumers on their online purchases. To help sell the tax the Hutchinson administration lowballed the estimate of how much taxpayer money the Internet Sales Tax would take from Arkansans. Within months bureaucrats had to admit the state was already receiving more than double the estimate. We don’t have real numbers because bureaucrats say they can’t separate out-of-state sales subject to the new tax from sales already subject to tax. Add a couple of years of pandemic where consumers became even more accustomed to shopping online plus the natural growth of e-commerce and boom the state’s general revenues are overflowing.
- Increasing the sales tax on some items. In 2017 the sales tax on soft drinks and candy was increased from the state grocery rate of 1/8th of one percent to the full state sales tax rate of 6.5%. Again, the state tax collectors just can’t figure out how much extra tax money that brings in.
- New item subject to the sales tax. In the same 2017 legislation digital downloads were added to the list of items subject to the sales tax. Digital downloads includes such things as digital movies, digital music, and e-books. Digital purchases and rental have replaced much of the purchases of physical copies of movies, music, and books. And, it seems nobody knows how much Arkansas are paying in taxes on digital items.
- Income tax on unemployment compensation. Legislation in 2017 also made payments of unemployment compensation subject to income tax. This new tax came in time for the state to reap a tax benefit from the tax despite the government causing unemployment by pandemic shutdowns.
- TAX INCREASES HAVING AN INDIRECT EFFECT ON GENERAL REVENUES
These are special revenue taxes that increase spending while enabling general revenues and surplus funds to remain high for other spending. The special revenue taxes replace calls for spending out of general revenues while spending increases overall. Politicians also love special revenue taxes because despite special revenue fund spending increasing year after year nobody notices because politicians don’t have to vote on the increases.
- Gas and Diesel Tax. We covered the 2019 gas and diesel fuel tax earlier in this article. But we want to mention the legislation also includes a mechanism for automatic tax increases. Don’t you just love automatic fuel tax increases during the Biden inflation.
- Permanent Sales Tax for Highways and roads. In 2019 the legislature proposed and got the people to adopt a new ½ percent sales tax to replace a temporary tax for highways and roads.
- Cigarette paper, e-cigarettes, etc. In 2019 the legislature increased taxes on cigarette paper, e-cigarettes, and alternative nicotine products plus repealed a lower tobacco tax rate in border cities. The taxes go to a cancer research center designation.
- Tire tax on new and used tires. In 2017 the legislature increased a special revenue tax on new tires and on mounting used tires on your vehicles. The special revenues are used by the Department of Environmental Quality for a new regulatory program.
- Cell phones and water bills. In 2019 the legislature passed legislation to increase the tax on water bills and cell phone bills. While not going into state funds these increases potentially lowered calls for state assistance.
With all these recent tax increases we might have missed one but you get the point!