Details awaited on roads proposal

Lawmakers hazy on budget offsets

Graph showing Gov. Asa Hutchinson’s highway funding plan.
Graph showing Gov. Asa Hutchinson’s highway funding plan.

Key state lawmakers said they want more details about Gov. Asa Hutchinson's highway funding proposal, particularly what he called "a reduction in spending or other budget offsets" to pay for the phased-in use of state general revenue.

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Arkansas Democrat-Gazette

Graph showing information about Arkansas's Federal highway funds.

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Arkansas Democrat-Gazette

Graph showing information about general revenue surpluses had by the Arkansas Government.

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Construction on the Big Rock Interchange at Interstates 630 and 430 in west Little Rock is shown in this March 2014 photo. Gov. Asa Hutchinson is looking at using state surplus funds for future highway construction projects around the state.

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AP

House Revenue and Taxation Committee Chairman Joe Jett, D-Success, is shown in this photo.

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Senate Revenue and Tax Committee Chairman Jake Files, R-Fort Smith, is shown in this photo.

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Randy Zook, chief executive officer for the Arkansas State Chamber of Commerce, is shown in this photo.

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State budget administrator Duncan Baird is shown in this photo.

Hutchinson last week pitched using general revenue in the highway budget. Rather than increase taxes on gas or diesel, the plan would use part of budget surpluses and reallocate other funds initially to raise about $50 million a year to match increased federal highway funds.

His plan also calls for eventually using $25 million a year from sales-tax collections on new and used vehicles for highway funding. Legislative leaders initially said the plan was likely to be approved by lawmakers.

Hutchinson -- who declined to disclose his ideas to cut spending or his proposed "budget offsets" when he unveiled his plan Tuesday -- said Thursday in an interview that he's asked Arkansas Economic Development Commission Director Mike Preston to review all of the state's economic-development incentives and tax credits "to see which ones are creating jobs, which ones are important to be competitive and which ones are outdated or ineffective."

"We are looking at them all and InvestArk is one of those among all of those," the Republican governor said. "There are other options that are out there. I want to keep my negotiating power strong to see what is the best solution."

InvestArk is a sales and use tax credit program available to businesses established in Arkansas for at least two years and that invest at least $5 million at a single location in plant or equipment for new construction, expansion or modernization, according to the Arkansas Economic Development Commission's website.

The credits are equal to 0.5 percent above the state sales and use tax rate in effect at the time of application, and the tax credits claimed under this program cannot exceed 50 percent of the company's sales and use tax liability on taxable purchases in any year.

In November, auditors for Arkansas Legislative Audit said InvestArk-only economic incentive projects don't have "a positive net tax benefit" to the state. The program distributed $340.8 million in tax credits from July 1, 2003-Dec. 31, 2014, the auditors said.

If the InvestArk program was discontinued, effective July 1, the estimated savings to the state is $1.5 million in fiscal 2017; $8.1 million in fiscal 2018; $14.6 million in fiscal 2019; $21.3 million in fiscal 2020; and $25.9 million in fiscal 2021, said Jake Bleed, a spokesman for the state Department of Finance and Administration.

House Revenue and Taxation Committee Chairman Joe Jett, D-Success, said eliminating the InvestArk program would "cause some heartburn with some chamber of commerce folks. My phone has been ringing because of it.

"I think most of the members just want to see where the governor is going to get the money, from whether it is going to be one of these tax-credit programs or is it a dip in the general revenue for some program," said Jett.

Senate President Pro Tempore Jonathan Dismang, R-Searcy, said the future of the InvestArk sales tax "is on the table."

Hutchinson is reviewing the state's economic development tax incentives, and "those that aren't producing will be on the chopping block," Dismang said.

Senate Revenue and Tax Committee Chairman Jake Files, R-Fort Smith, said "the possible elimination of InvestArk credits, from what I understand, is not going to negatively impact the state in economic development."

"I am sure there are people who have benefited from the credits, but I also believe there are other programs available for incentives and job creation, and I have a lot of confidence in AEDC and their ability to maximize value for those same existing businesses in Arkansas looking to expand," Files wrote in an email last week to the Arkansas Democrat-Gazette.

"I want to hear about [Hutchinson's highway funding plan] more formally and see if there are other parts, but I lean [toward voting] yes," Files said.

Randy Zook, chief executive officer for the Arkansas State Chamber of Commerce, said the InvestArk sales-tax credit program is an important tax incentive for the state's large manufacturers -- with the largest payrolls -- that are the most susceptible to moving their plants to other states. These include steel mills, and forest products and poultry-processing plants, he said.

Axing the InvestArk program "would be a serious step backward" for economic development efforts, Zook said. He said he's calling lawmakers to warn them about the consequences.

The sales-tax credit program, enacted during Gov. Bill Clinton's administration, is the only way to mitigate the state's levying of sales taxes on parts for machinery and equipment in manufacturing plants, he said.

Zook said he supports the governor's highway funding plan, but he still wants the InvestArk program to continue, because "they are both vital."

"We also think there is great potential in [Hutchinson's] initiative to find operational savings opportunities throughout state government. Those savings could be great enough to help fund highway needs," Zook said.

But state auditors said "InvestArk-only projects do not return positive cost-benefit ratios because they do not require job creation; therefore, the only potential tax benefits identified are construction benefits."

"InvestArk projects may result in new or updated facilities or equipment, which could lead to increased jobs and productivity or could lead to decreased jobs if the improvements reduce the workforce," the auditors said in their written report.

From 2012-2014, InvestArk distributed nearly $110 million in sales and tax credits to 96 companies, according to the state Department of Finance and Administration records, obtained by the Arkansas Democrat-Gazette through requests under the Arkansas Freedom of Information Act.

The dozen companies receiving the most tax credits through this program during the three-year period include Tyson Foods' $12.3 million; Georgia Pacific's $11.5 million; Lion Oil Co.'s $6.3 million; Domtar A.W.'s $6.3 million; and Nucor Corp.'s $6.2 million, the finance department records showed.

The other top recipients were Great Lake Chemical Corp.'s $6 million; Evergreen Packaging Inc.'s $5.5 million; Arkansas Craft Divisions' $4 million; Albemarle Corp.'s $3.6 million; Maverick Tube Corp.'s $3.3 million; Cooper Tire & Rubber Co.' s $2.5 million; and American Railcar Industries' $2.3 million, according to the departments records.

USE OF SURPLUS FUNDS

The state needs $46.1 million in additional matching funds for federal highway money available under the new federal highway law by Sept. 30, and an average of about $50 million a year thereafter, Hutchinson said. He projected his plan would raise, over a 10-year period, about $750 million to obtain about $2 billion more in federal funding.

The state Highway and Transportation Department gets about $410 million a year in state funds, and will receive about $550 million in federal funds under the new law, said Randy Ort, assistant chief of administration at the department.

Last month, the Governor's Working Group on Highway Funding said the department needs $110 million more a year to help address its most critical needs in the next three years. That includes $50 million a year to get more federal funds under the Fixing America's Surface Transportation Act, and $60 million a year for overlays, sealing projects and other nonfederally funded projects.

In fiscal 2017, the governor's plan would raise $46.9 million by tapping $20 million of the state's unobligated surplus from fiscal 2015; using $20 million of rainy-day funds; using $5.4 million that had gone to state central services, which includes money for constitutional offices, from the 0.5 percent sales tax approved by voters for highways, and reallocating $1.5 million from tax collections from sales of new and used vehicles.

Hutchinson proposes gradually reallocating more and more revenue from the vehicle sales tax. The amounts shifted from general revenue to highways would be $1.5 million in fiscal 2017; $8 million in fiscal 2018; $15 million in fiscal 2019; $20 million in fiscal 2020; and $25 million in fiscal 2021, according to the governor's office.

The state collects about $278 million a year from the vehicle sales tax, said state budget administrator Duncan Baird.

Starting in fiscal 2018, the governor's plan would redirect the $4 million of the diesel tax that goes to the central revenue fund with the Highway Department getting $2.7 million of that and cities and counties getting the other $1.3 million.

The state has $46.2 million in unobligated surplus funds and a rainy-day fund balance of $39.1 million. The rainy-day fund is expected to receive $2.1 million more in this fiscal year, Baird said.

Hutchinson said he couldn't allocate $40 million in surplus funds to highway needs "if we do not have access to the federal funds that are part of the Medicaid expansion" in fiscal 2017. The expansion uses federal funds to purchase private health insurance for some low-income Arkansans and is called the private option. He wants to overhaul the private option.

Last month, he said he would call a special session in April to consider changes to the Medicaid and private-option programs. The regular fiscal session starts April 13. He said last week that he wants to hold a special separate session on his highway funding plan, but hasn't determined when he'll call the session.

The governor's plan counts on the Legislature directing 25 percent of the unallocated budget surplus to the Highway Department, starting in fiscal 2018. That would raise an average of about $48 million a year for the Highway Department based on the past 10 years' worth of surpluses, he said.

During the 2015 session, Jett drafted -- but didn't introduce -- a bill to require the transfer of 25 percent of the budget surpluses during each fiscal year to a state highway trust fund that his bill would have created. He said he drafted the bill partly because the Legislature used $80 million of a 2007 surplus for road improvements.

In 2007, the Highway Department received $56 million of the $80 million to help fund 90 overlay projects, and cities and counties received the other $24 million, said Ort.

The Legislature's only other use of surplus funds for the Highway Department since 1995 was its use of $10 million in 2009 for an interchange project in Conway, said Kevin Anderson, assistant director of fiscal services for the Bureau of Legislative Research.

House Democratic leader Michael John Gray said "the fact that we are counting on surplus is a little scary to me instead of having a solution that is long-term."

"I would be looking at any reasonable measure that did not take money away from education or senior citizens or services out in the state. I haven't signed any pledge from some guy in Washington, D.C., that doesn't care about Arkansas issues to say I wouldn't look at tax increases."

Rep. Andy Davis, R-Little Rock, who served on the Governor's Working Group on Highway Funding, said he is drafting legislation to increase legislative oversight of the Highway Department, but he declined to provide details last week.

"My goal is to put more mechanisms in place that make the Legislature more familiar with and aware of how the department decides what to fund and provides the Legislature with better updates as to how those projects are going after they are selected," he said.

"There is a general perception from the Legislature that projects that should get funded don't get funded and the projects that should be lower on the priority list are being funded," said Davis. "The Highway Commission is very confident in their funding process, so what I want to do is put some mechanism in place where the two have to come together and either agree on a funding process or find places where it can be improved and make those improvements.

"There are varying opinions on the level of approval that the Legislature should have over specific projects," he said. "There is a concern in the Legislature of over-politicizing project selection, so we are trying to take a careful step where we increase transparency and oversight, but don't over-politicize the process at the same time."

Information for this article was contributed by Brian Fanney of the Arkansas Democrat-Gazette.

SundayMonday on 01/24/2016

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