Prudence should guide fiscal policy. Public services should be provided in an efficient, cost-effective manner.  Savings should be used to encourage economic growth and make Arkansas competitive in terms of jobs creation and income growth.  The Murphy Commission, a Policy Foundation project spent three years (1996-1998) studying state government before advancing ideas to make government cost-effective and accountable to taxpayers.  Several ideas have advanced, including a performance-based budgeting pilot, and income and capital gains tax cuts.  But more needs to be done.



Declare A Jobs Emergency


Incoming Gov. Asa Hutchinson inherits a weak Arkansas labor market. Nonfarm payroll employment is the broadest state level indicator.  Total Arkansas NPE was 1,201,200 (January 2007) but fell to 1,195,300 (October 2014), seasonally adjusted U.S. Bureau of Labor Statistics data show.  These numbers will undergo slight revisions next year but Arkansas jobs creation is likely to continue trailing the U.S. average, up 1.6% in the same period.1  Governors have little influence over some policies2 that affect jobs creation. But they can lead in areas such as state tax policy and regulation.


Continue Reducing The Capital Gains Tax Rate


Some policymakers have recognized for 15 years that Arkansas fiscal policy discourages capital investment.  The Murphy Commission recommended a phase-out of the state capital gains tax in 1998. The 82nd General Assembly (1999) approved a measure by state Sen. Jim Hill, D-Nashville, to exempt thirty percent (30%) of a capital gain from the state income tax.  The Fluor GLS report, later commissioned by the Assembly, also noted Arkansas’ competitive disadvantage in this area. The 89th Assembly cut another twenty percent (20%).  The existing tax should be phased-out over a decade so Arkansas can compete against low-tax states in the region.


Reduce the Income Tax Rate


Arkansas has the highest income tax rates of any border state.3 Mr. Hutchinson has proposed a middle-class tax cut, lowering the top rate from seven (7%) to six (6%) for those earning between $34,000 and $75,000.4  The proposal, advanced as an idea to spur jobs creation has greater potential to grow income.  Arkansas per capita personal income increased from 78.4% (2007) to 82% (2013) of the U.S. after the grocery tax was cut.  PCPI stagnated between 75.4% (1983) and 77.4% (2006) of the U.S. after sales tax and spending increases that failed to deliver much income growth.


Federation of State Tax Administrators5 data show that Arkansas and South Carolina have the highest income tax rates in the region:


Arkansas, South Carolina             7.0%
West Virginia             6.5%
Georgia, Kentucky, Louisiana, Missouri             6.0%
North Carolina             5.8%
Virginia             5.75%
Oklahoma             5.25%
Alabama, Mississippi             5.0%


Tennessee      Dividends and interest income only

Florida             No state income tax

Texas              No state income tax


An important factor is the state of the business cycle.  Arkansas general revenues tend to expand in national expansions and contract below trend in recessions, with a lag.  Use of a trigger mechanism that reduces or freezes tax cuts in recessions, while funding vital services, is prudent public policy.


Dynamic Analysis


Dynamic analysis is an attempt to measure the full impact of tax proposals, on revenue estimates. It can also provide legislators with more information when considering proposals. One example is the 2008 severance tax increase: the static analysis failed to consider a decline in natural gas prices.


Activities-Based Costing and Performance-Based Budgeting


Activities Based Costing should be linked to the state’s accounting system with spending tied to costs and measurable performance outputs. Performance-based budgeting, discontinued after a 1999 pilot program should be reconsidered.  Mr. Hutchinson should name a performance director and volunteer advisory group for oversight purposes.  ABC can be a vital management tool if tied to performance outputs and reporting to Arkansans.  State constitutional offices would benefit from these reforms.


Deregulate policies that harm the poor, Reevaluate Quick Action Fund


Poor and low-income households should not be punished by laws that prevent gainful employment.  One example are restrictions on hair braiders.  The $50 million Quick Action Closing Fund, by contrast, serves the politically-connected and trails the U.S. since its inception.6  The guiding policy should be low rates for all businesses, not taxpayer-funded privileges.

1  U.S. seasonally adjusted payroll employment: (January 2007) 137,448,000; (October 2014) 139,680,000

2  Governors can praise or question International trade and monetary policies but they cannot lead in these areas.

3  State Individual Income Taxes (rates for 2014, as of  January 1, 2014): Arkansas (7%); Louisiana and Missouri (6%); Oklahoma (5.25%); Mississippi (5%); Tennessee (dividends and interest only); Texas (no tax).  Federation of State Tax Administrators.

4  Gov.-Elect Hutchinson has also proposed cutting the 6% rate to 5% for those earning between $20,400 and $33,999 annually.

5  Federation of State Tax Administrators, “State Individual Income Taxes (2014),”

6  Payroll employment: (Arkansas) 1,202,000 (July 2007) to1,195,300 (October 2014); U.S. 137,984,000 to 139,680,000.