Hearings on state's budget to get going

Tax plan details still an unknown

Sen. Jim Hendren (left), R-Sulphur Springs, is shown with Senate President Pro Tempore Jonathan Dismang, R-Searcy, in this file photo.
Sen. Jim Hendren (left), R-Sulphur Springs, is shown with Senate President Pro Tempore Jonathan Dismang, R-Searcy, in this file photo.

In the midst of election season, Arkansas lawmakers this week will head to the Capitol to begin discussing the state's budget for the next fiscal year.

At hearings starting Tuesday, they will learn about the needs of programs amid uncertainty regarding how much of a tax cut Gov. Asa Hutchinson plans to seek when he unveils his proposed fiscal 2020 general revenue budget and forecast on Nov. 14.

The Legislative Council and Joint Budget Committee will begin meeting at 9 a.m. Tuesday. They are scheduled to meet three days a week through at least Nov. 15.

Their main duty during these hearings is to authorize legislative staff members to draft appropriations legislation granting spending authority to state agencies in fiscal 2020, which starts July 1, 2019. The legislation will be considered during the regular legislative session that starts Jan. 14.

"My plan to lower the individual income tax rate for Arkansans is a priority for me," Hutchinson said in a statement last week. "The specific plan and timing depends upon a number of factors still in the works.

"Those factors include the recommendations from the [Legislature's] Tax Reform Task Force, the state's current [budget] surplus, potential savings from our transformation efforts, and, most importantly, the revenue forecast for next year ... the latter of which we do not expect to have until later this fall. That clarity is important as we work toward the presentation of my proposed budget in November," Hutchinson said.

"In terms of the budget, I am committed to increasing teacher pay, and the other specifics of my budget will be released after revenue numbers are in."

Hutchinson is seeking re-election to his second four-year term in the Nov. 6 general election. His challengers are Democrat Jared Henderson of Little Rock and Libertarian Mark West of Batesville.

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In his campaign, the governor has pledged to push for raising the state's minimum teacher salary from the current $31,800 to $36,000 a year during his second term. The higher number would make Arkansas' starting teacher pay the highest in the region, at a projected total cost of $60 million a year.

Henderson has proposed raising the minimum teacher pay to $38,895 a year in the fourth year of his plan at a projected increased cost of $82 million a year. Henderson wants starting teacher pay to be set at $48,090 a year by the 10th year of his plan.

But the governor also has proposed cutting taxes again. His latest income tax plan would reduce the number of individual income tax tables from three to one, and gradually cut the top individual income tax rate from 6.9 percent to 5.9 percent.

This plan also would increase the standard deduction from $2,200 to $6,800 for single taxpayers and $4,400 to $13,600 for married taxpayers. It also would increase individual income tax rates for some taxpayers, but state officials said the higher standard deduction would offset that.

The plan is projected by the state Department of Finance and Administration to reduce state revenue by nearly $192 million a year.

It would be the third income tax cut of Hutchinson's administration. In 2015 and 2017, the Legislature enacted his plans to cut individual income tax rates for people with up to $75,000 a year in taxable income.

The 2015 plan cut individual income tax rates for people with taxable income from $21,000 to $75,000 and was projected to cut revenue by $100 million a year.

The 2017 plan to cut rates for people with less than $21,000 a year in taxable income becomes effective Jan. 1, midway through fiscal 2019. The state projects that it will reduce state revenue by $25 million in fiscal 2019 and then $50 million a year thereafter.

Also taking effect Jan. 1 is a cut in the sales tax on groceries, from 1.5 percent to 0.125 percent, financed with $65 million a year in savings from the end of desegregation payments to three Pulaski County school districts, under a 2013 law signed by then-Gov. Mike Beebe.


Senate President Pro Tempore Jonathan Dismang, R-Searcy, said last week that it's premature to speculate about how much of a tax cut the state could afford in fiscal 2020.

That will depend in part on how much state money is needed to provide an adequate education to public school students and to provide matching funds for the state's traditional Medicaid program, he said.

"The governor will provide a clear picture when he presents his balanced budget," Dismang said.

The Medicaid expansion, called Arkansas Works, provides health coverage to about 260,000 low-income people. The state's share of the program is 6 percent this year, 7 percent next year and 10 percent in 2020 under existing federal law.

The state projects its cost at $135 million in fiscal 2019, which started July 1, and the federal government's share at $1.95 billion. But the number of people in the program is dropping after the state imposed a new work requirement for many participants.

Figures on how much in state funds would be needed for public schools weren't available through the Bureau of Legislative Research on Friday.

Sen. Jim Hendren, R-Sulphur Springs, who is in line to succeed Dismang as president pro tempore in January, said, "The good news is the big-ticket items we have under control," regarding the cost of the state's Medicaid program and educational adequacy.

The challenge is other state needs and how much to set aside for them, he said, referring to matters such as public school safety and the possibility of providing more funding to the Arkansas State Police for lagging employee salaries.

"I think the number for tax cuts will be between $50 million and $150 million," depending on the economy and what other areas legislators need to increase funding or decrease funding for, Hendren said when asked how much the state could afford.

The governor has proposed reorganizing state government to reduce the number of state agencies reporting to his office from 42 to 15.

"There is some hope that transformation efforts will produce some savings. We are going to continue to control growth of the Medicaid expansion," said Hendren, whose uncle is Hutchinson. "I think we'll be able to continue with a $50 million [a-year tax cut] pace and hopefully more than that."

The state projects phase one of Hutchinson's plan would reduce revenue by $94.8 million a year, and phase two would reduce revenue by another $96.9 million a year.

"You got to have some savings [in state government] to have a significant tax cut like the governor is proposing," Rep. Lane Jean, R-Magnolia, said.

"I was hoping there was going to be more significant savings from the governor's transformation" plan, said Jean, who is a co-chairman of the Joint Budget Committee. Both Hendren and Jean are co-chairmen of the Tax Reform and Relief Legislative Task Force.

Hutchinson has said the Department of Finance and Administration conservatively estimated savings from the reorganization at $21 million a year, but he said that won't happen until fiscal 2021.

Jean said he's anxiously waiting to see the size of the tax cut in the governor's proposed fiscal 2020 budget.

Sen. Larry Teague, D-Nashville, who is the Joint Budget Committee's other co-chairman, said, "It is possible that we will cut another $50 [million] or $100 million out" for tax cuts in fiscal 2020.

But, he said, "I don't think we know what we are going to do yet."

In March, the Republican-controlled Legislature and Hutchinson enacted a general revenue budget of nearly $5.63 billion for fiscal 2019, which is $172.8 million more than the budget for fiscal 2018.

The fiscal 2019 budget set aside what Hutchinson considers to be $63.9 million in surplus funds. Of that amount, $47.9 million would be used in the event of an economic downturn or for future tax cuts. The remainder would help match federal highway funds.


The legislative task force is still working on a multiyear plan for its recommendations to change taxes beyond individual income tax rates. The panel's recommendations may influence the budget for the next several years.

Last month, finance department Director Larry Walther told the task force that he was leery of developing triggers based on revenue collections for future tax cuts. Triggers set conditions before tax changes take place.

Hendren told him the result would be never doing more than a two-year plan.

"Part of our objective here was long-term tax reform, and it is different than our two-year budgeting cycle. It is what we have done the last three years, but we have a package here in our report of nearly $400 million, so you may not agree with the trigger mechanism and I think triggers can be in the eye of the beholder," Hendren said.

"Whether you agree with it or not, I would just ask you to go ahead, if we are going to use those type of mechanisms, what criteria based on your all knowledge at DF&A is going to give us the best indication of what is going on with our revenue," Hendren said.

Hutchinson was asked about triggers in a recent interview.

"If the trigger is not based upon the right economic standard, then you could get into a bind and it's a little bit more unpredictable," he said. "I think Sen. Hendren and some of the legislative leadership looks at more than just my package, which is focused on the income tax cut. They have another level of tax cuts they want to do, and they want to have some way to implement that, so I think that's part of the trigger discussion."

Finance department officials make "the case that that's more complicated, but Gov. Beebe has a trigger [to cut the sales tax on groceries]," he said.

"There are triggers that have worked, but what I don't want to do is to obligate future administrations. I didn't like that.

"I want to be able to accomplish what we can in the next four years. There can be some overlap, but I want to avoid constraining the future decisions because of what we think looks right for now. If we have triggers, I want them to be more short-term triggers," Hutchinson said.


Democrat-Gazette file photo

Rep. Lane Jean, R-Magnolia, is shown in this file photo.


Democrat-Gazette file photo

Sen. Larry Teague, D-Nashville, is shown in this file photo.


Special to the Arkansas Democrat-Gazette

Finance department Director Larry Walther is shown in this file photo.

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