Arkansas prepares for significant tax cuts

LITTLE ROCK, Ark. – Arkansas is poised to become one of the first states in the nation to enact a significant tax cut this year, showing the sentiment for scaling back government even in places where state spending is limited and no fiscal crisis exists.
State representatives Monday are expected to approve cutting the grocery tax, the centerpiece of a $35 million tax cut package. The action comes days after lawmakers reached an agreement with Democratic Gov. Mike Beebe on reductions of five other taxes likely to be approved later this week.
The amount of the cuts doesn't compare with the deep reductions proposed in some larger states, especially those with fiscal problems that are trying to attract new businesses. But it shows the far-reaching impact of the anti-spending backlash in the 2010 election that swept more Republicans into office across the nation. The cuts could be enacted so rapidly in Arkansas because the state's Democrats, including Gov. Mike Beebe and the majority that control both chambers of the Legislature, are conservative and differ little from Republican lawmakers on most fiscal issues.
"Arkansas is going to cut $35 million in taxes, have a balanced budget and adequately fund education," said Sen. Gilbert Baker, the Republican who co-chairs the Joint Budget Committee. "There isn't another state that wouldn't love to have that scenario right now."
Arkansas' government is already modest in scale; it doesn't offer the range of services provided by states such as Wisconsin and New Jersey, where heated battles over spending and employee compensation are under way. But officials decided to cut more anyway.
Beebe, a popular Democrat, handily won re-election last year after promising to continue reducing the state's grocery tax. Since he took office in 2007, he's successfully pushed for cutting the tax from 6 percent to 2 percent.
Although the state's residents are accustomed to lean services, Beebe said he is concerned the tax and spending restraints could go too far.
State officials estimate that they could face as much as an $80 million shortfall in the state's Medicaid trust fund in the fiscal year that begins July 1, 2012. Beebe asked federal officials for permission to overhaul the way Arkansas pays for services in Medicaid to address that danger.
"I'm not worried about this year," Beebe said in an interview last week. "I mean, we can make some adjustments on the balanced budget this year. I'm really worried about next year and the year after, because of Medicaid."
The tax cuts this year may mean that a proposed cost-of-living increase for state workers may be limited to lower-paid employees.
About one in five governors are proposing large tax cuts this year, and several are states with a budget shortfall, according to the Center on Budget and Policy Priorities. In many of these states, such as Florida and New Jersey, the tax relief is coupled with calls for cuts in education, health care and employee salaries.
Arkansas has escaped the fiscal problems plaguing many other states partly because of the state's budgeting system, which requires that spending priorities be linked directly to expected revenues.
Aside from the grocery tax cut, lawmakers are expected to approve cutting taxes for manufacturers' utilities, single parents and used car sales. They're also planning to institute an annual back-to-school sales tax "holiday" and expand a tourism-related tax exemption.
Beebe originally had proposed only cutting the grocery tax but acknowledged that in the current political climate, he couldn't hold that line.
"The way this stuff was running through here, it was necessary for me to accede to some additional tax cuts in order to keep (away) even more tax cuts that would exacerbate it or increase it even more than we can afford," Beebe said in the interview last week.