Fiscal Discipline and the Beebe Grocery Tax Cut Proposal

Free market economists have opposed the taxation of food for more than two centuries. (Policy Foundation, 2002)

"The sales tax on groceries should be phased-out over a multi-year period using excess state revenues. The surplus means the grocery tax can be reduced by two cents in 2007. A gradualist approach is preferable to raising other taxes." (Policy Foundation, November 2006, Road Map For Arkansas Prosperity)

(November 2008) Freshman Democratic Gov. Mike Beebe is gradually accomplishing a goal that evaded his predecessors: a broad tax cut achieved with modest fiscal discipline.

Gov. Beebe's proposed 2009-10 state budget would cut the state sales tax on groceries by one cent. The grocery tax was six cents when Beebe took office in 2007, and would stand at two cents if state legislators approve his proposal in the biennial session that starts in January 2009.

The budget proposal calls for a 1.3 percent increase in state spending, a level lower than federal CPI reports or estimates. The Bureau of Labor Statistics reports CPI in the 12-month period ending in October was 3.7 percent. The Minneapolis Federal Reserve Bank estimates CPI at 4.0 percent (2008)¹. The Policy Foundation estimates CPI will increase between 1.0 and 2.0 percent in 2008.

Rainy Day Fund for a Recession

Gov. Beebe's proposal calls for allocating part of a $300 million state surplus into a rainy day fund. He is also seeking legislative authority to spend some of the funds on corrections and Medicaid if economic conditions permit.

Provisional funding, Beebe said, "will allow the State to remain proactive and responsive to our most critical needs, no matter the national and global economic conditions."

The Policy Foundation, in April, announced the U.S. economy entered recession in January 2008 due to contraction in U.S. nonfarm payroll employment, industrial production and other economic indicators. State Department of Finance and Administration Director Richard A. Weiss, in presenting the general revenue forecast (2009-11) to the legislature last week, stated:

"The recessionary economic forecast from the May 2008 forecast is retained and extended into the balance of FY 2009 and FY 2010. As in the earlier assessment, a combination of fiscal years is indicated due to the lag effects of income tax collection patterns and lag effects from declining business activity on labor markets and consumption."

Weiss explains that a more "generalized economic correction across more states and regions is now assumed in the forecast. He concludes:

"Although the Arkansas economy might fare better in recession depth and in recovery rates, the forecast incorporates a traditional response to national recession across major revenue categories."²

Conclusion

Gov. Beebe's budget proposal relies on modest fiscal discipline to achieve a further reduction in the grocery tax. This goal eluded earlier Arkansas administrations that increased spending but did not enact a broad-based tax cut. Continued fiscal discipline, coupled with future U.S. economic recovery will make possible further reductions in the grocery tax, and other taxes.