Could you use an extra $700? During these times of high inflation, we could all use some extra cash. But where would that $700 come from? If the state of Arkansas decided to return $1.6 billion of excess tax revenue, every adult could receive $700. That won't happen under Arkansas' current budget process, but with the right reforms, it could for future surpluses.
How did our state get such a large budget surplus? When the state Legislature passed the budget for fiscal year 2022, it budgeted $5.85 billion for all the necessary state spending in the general fund. This fund primarily goes to education and health care (about 84 percent). But now that the fiscal year is over, Arkansans have paid almost $7.48 billion in income taxes, sales taxes, and other taxes we pay every day. The difference between these two big numbers is the surplus, or what you might also call the excess taxes we paid. There are 2.3 million adults in Arkansas, so this works out to $700 on average that we each overpaid.
What will be done with the surplus? Gov. Asa Hutchinson has said he will call a special session of the Legislature in August to decide what to do with it.
There are many different ideas of how to use this huge amount of cash. Some want to spend the money on schools, whether increasing security measures or giving a bonus to teachers. Others have suggested cutting taxes, such as accelerating tax cuts already passed by the Legislature or implementing new tax cuts.
All these ideas have merit, but as policymakers and the general public continue the debate on this topic, let's always keep in mind that this money rightfully belongs to the taxpayers. All state services were fully funded as outlined in last year's budget, and now we're just dealing with excess tax payments. Should all that money go back to taxpayers, either an equal check to everyone or a proportionate refund based on how much you paid in taxes? That's an idea worth considering, but it brings up a bigger issue to consider: Arkansas should reform its budget process.
This surplus is not the first Arkansas has dealt with. Just last year, the surplus was almost $1 billion. In 2019, there was a $170 million surplus. In fact, in 21 out of the last 30 years, Arkansas has had some form of budget surplus.
It's a nice problem to have, much better than having a deficit, which forces spending cuts under the state's Revenue Stabilization Act (RSA). That law was first passed in 1945 as a way of consolidating the state budget process and providing a priority list of spending categories that would be cut if tax revenue was below forecast.
The RSA has served Arkansas well over the years, and the Legislature updates it each year with new spending priorities. However, this law is silent on what to do when revenue comes in above forecast. That means the Legislature has to decide what to do with tax revenue after citizens and businesses have already paid it.
Have any other states figured out how to deal with budget surplus and excess tax revenue? Yes, many states have budget rules in place that address these issues. About half of U.S. states (including all of Arkansas' neighbors) have some form of a "tax and expenditure limit," which uses a formula to determine the maximum amount that tax revenue or spending can increase.
The most famous tax limit is Colorado's Taxpayer Bill of Rights, a constitutional provision that limits state government revenue to the rate of inflation plus population growth. This year, Colorado's taxpayers are estimated to get a $750 refund under that limit.
Oregon has a different budget rule, where any tax revenue exceeding the revenue forecast by more than 2 percent must be returned to taxpayers. Currently, the forecast shows a $3 billion surplus to be returned to Oregon's roughly 3 million adults, or around $1,000 on average. Under either of these budget rules, Arkansans would be seeing a rebate this year.
Reforming the state budget rules provides certainty for both taxpayers and the state government about what happens in the case of a surplus, instead of dealing with it after the fact. And if legislators have a better idea than refunding all the money directly to taxpayers, many states have an option to put this to a public vote. Arkansas could do so too.
By building on our solid foundation of the RSA, Arkansas could have one of the best budget processes in the country while recognizing that the tax revenue rightfully belongs to the taxpayers, not the state.
Jeremy Horpedahl is an associate professor of economics, and the director of the Arkansas Center for Research in Economics at the University of Central Arkansas. The views expressed here are his alone and are not an official statement of UCA.