“Government, in order to be lean and effective, needs to be infused with market forces, less of a monopoly provider of services and measured for accountability and performance.” Murphy Commission, Policy Foundation project, 1998.
Summary: State government does not have a revenue problem. The people of Arkansas face weak employment and income markets.
(August 2013) Arkansas state government does not have a revenue problem. State revenues have recorded surpluses for the last three fiscal years: $300 million1 (2012-13), $146 million (2011-2012) and $94 million (2010-2011).2 The people of Arkansas, by contrast, are faced with weak employment and income markets. Arkansas payroll employment has increased by less than the U.S. average since the recession ended in mid-2009.3 Arkansas per capita and median incomes trail the U.S. averages.
Two economic facts stand above the hype and headlines that trumpet alleged “conservative budgeting” at the state Capitol in Little Rock:
∙ The number of employed Arkansans is lower than in January 2007;4
∙ The most recent Arkansas median household income level reading (2011) is barely above the 2007 level.5
Current economic policies must be reformed if Arkansans are to prosper.
State Government’s Role
State revenues discussions generally ignore state government’s basic functions. These can be defined as ensuing safety and protection of rights; a fair and impartial justice system; helping Arkansans who cannot meet basic needs; assuring educational opportunity is provided; and responsibly managing public property, the environment and public infrastructure.
Murphy Commission Reforms
State government has strayed from these functions, creating the need for reforms. The Murphy Commission, a Foundation project suggested three:
∙ Adopt performance-based budgeting throughout state government;6
∙ Incorporate Activity Based Costing (ABC) into the state’s accounting system with expenditures tied not only to costs but to measurable performance outputs;7
∙ Provide for an independent audit of state government.
Instruct Department Heads to Limit State Spending
The next Arkansas governor, working with the legislature should instruct state department heads to use these reforms to limit spending. The goal should be to freeze overall spending at existing levels or reduce it by small percentages, not target specific programs. Increased spending proponents have defeated counter-proposals when this approach was tried in the past.8
Link Revenue Growth to Inflation or Income
Net available revenues were $4,751.6 million (FY2012), a $178.7 million increase (3.9%) from 2011.9 This was greater than CPI (3.2%, 2011; 2.1%, 2012)10 and median income growth. A CPI-revenue restriction, using the average (2.65%) could have funded a $60 million middle-class tax cut.11
Conclusion
Arkansas employment and income are near 2007 levels. Reducing tax rates is one solution. This goal can be achieved by relying on Murphy Commission reforms, instructing department heads to limit spending, and capping revenue growth (CPI, household income).
–Greg Kaza
1 “State’s budget surplus 4th highest in 20 years,” Arkansas Democrat-Gazette, July 14, 2013
2 Policy Foundation memo (June 2013) “Surplus State Revenues & A 6.5% Top Income Tax Rate.” The surpluses ($540 million) were enough to fund state capital gains and grocery tax phase-outs, a top income tax rate cut (7.0 to 6.5%), and a rainy day fund.
3 Bureau of Labor Statistics: Arkansas payroll employment expanded 2.2% versus U.S. growth of 4.1%.
4 BLS: Arkansas nonfarm payroll employment (January 2007), 1,201,200; (June 2013, preliminary) 1,184,900
5 U.S. Census Bureau: Arkansas median household income, $41,302 (2011), $40,795 (2007), http://www.census.gov/hhes/www/income/data/statemedian/
6 The Murphy Commission, a blue-ribbon panel established by Gov. Mike Huckabee proposed appointment of a performance management director working for the governor through the state Department of Finance and Administration; and a small volunteer performance accountability advisory group to conduct oversight operations. Governor Mike Beebe supported a pilot performance-based budgeting program while serving in the Senate (1999).
7 The Marine Corps started the practice in 1999. ABC is explained in the 1998 Foundation report, Making Arkansas’ State Government Performance Driven and Accountable: Four Reforms State Government Can Implement Now To Save Taxpayers Millions
8 The ‘Home Instruction for Parents of Preschool Youngsters (HIPPY)’ program under Gov. Huckabee is one example.
9 http://www.dfa.arkansas.gov/offices/directorsOffice/Documents/greForecast.pdf
10 Federal Reserve Bank of Minneapolis CPI calculator
11 A middle-class tax cut would increase the likelihood of capital gains abolition if one accepts that politics is the art of the possible.
