The fiscal dividend is the budget surplus governments’ experience as a result of economic growth. Without any increase in sales or income tax rates, the state has additional tax revenue at its disposal.
The options facing the state legislature are to leave public spending at current levels and eliminate the surplus by cutting tax rates, or leave the tax rates at current levels, and use the surplus funds to expand the state’s provision of services and transfers, or some combination of the two.
Five years ago the state legislature failed its responsibility test when it squandered the state’s fiscal dividend by cutting income taxes in a way that benefitted upper income families. Given that the state ended this past fiscal year with a record $1.6 billion budget surplus, it was going to be interesting to see what Governor Hutchinson planed to do when he called the legislature back into a session. The rumors out of Little Rock were that he planed to take up tax relief and possibly raise teachers salaries, although the teacher pay hike seems a stretch for the legislature at this time.
While economic theory is silent on what to do with a budget surplus, it makes sense to look at the level of state services, and economic conditions, and ask is there anything that needs improving, or are we at the top of the socioeconomic ladder and the envy of the other fifty states. Given the wealth of Census data in the US, the answer to this question is easy to find.
Arkansas ranks near the bottom in many areas, areas that the legislature could have had an impact on if they chose to do so. For example, we rank no higher than forty-forth in terms of the number of young people ages 18-24 not in school or working, in the number working women who are below the poverty level, in overall poverty, in the number of children in poverty, in higher educational attainment, and dead last when it comes to hunger and food insecurity.
The reason for our poor ranking is not hard to understand, even though our unemployment rate is below the national average, we’re still the fourth poorest state in the union with a median income that is fully $15,000 below the US median. Given this fact, it’s even more incumbent on our state legislature to use our budget surplus to improve the welfare of those in our state who are most in need. Tax cuts can be extremely effective if targeted in a way that benefits those with low and moderate incomes.
In a market economy, the legislature cannot raise the nominal income of Arkansas workers, but they can increase their real income through the use of state expenditure programs and tax policies. On the tax side, the state can increase the real income of low income families by eliminating the remaining sales tax on food and by creating a state Earned Income Tax Credit. If patterned after the federal Earned Income Tax Credit, it would create an incentive to work by increasing size of their tax refund as earned income increased.
On the expenditure side an important program for working women would be a refundable child tax credit. Monthly checks to women with children would offset the cost of childcare and boost the number of women in Arkansas who would be able to enter the labor force. For a state with low educational attainment because of the high cost of education, the state should use a potion of the surplus tax revenue to lower tuition costs, and expand expenditures for internship programs, and since we rank last in hunger and food insecurity, the state should fund a statewide school breakfast and lunch program.
Unfortunately the legislature did none of the above. The bulk of the $500 billion tax cut went to speeding up the reduction in the state’s highest marginal tax rate and to a cut in the corporate tax rate, for those not benefitting from the tax rate reduction, the recently passed bill gives Arkansas families a $150 per person non refundable tax credit. A benefit for sure but a small one, and one that won’t benefit families until next year’s tax refunds are received.
Improving the welfare of Arkansas residents is the legislature’s responsibility. Over time we’ve had the tax revenue to make the necessary improvements, we simply didn’t do it. Instead of this knee jerk reaction, the legislature should have taken an in-depth look at the state’s needs and responded accordingly. The state’s $1.6 billion fiscal dividend was an economic “gift.” The legislature had the opportunity to make as real difference in the lives of poorest Arkansas families and, unfortunately, they made no real effort to do so. We deserve better.