By Caleb Taylor

Gov. Asa Hutchinson proposed biennial budget released last Tuesday contains an early Christmas present for new Arkansans, but does it make larger reforms more difficult? 

Hutchinson that he’d like to cut the top individual income tax rate to 4.9 percent for new residents of the Natural State. He also mentioned his long-stated goal of cutting the top individual income tax rate for all Arkansans, but that’s not included in his budget.

This top rate is already scheduled to decrease from 6.6 percent to 5.9 percent on January 1, 2021 based on tax reform legislation passed during the 2019 legislative session.

In an interview with (budget segment begins at 9:20) on Sunday, Nov. 15, ACRE Scholar and UCA Assistant Professor of Economics Dr. Jeremy Horepdahl discussed Hutchinson’s proposed budget.

Horpedahl said:

The Governor has had a long term goal of getting the top tax rate on individual income down to 5 percent. I guess 4.9 percent is a little nicer… He’s now saying that he wants to do this in the next five years. Given the uncertain budget times, he is proceeding with caution. There isn’t actually a proposal in this budget to do that. It’s kind of a goal. A taste of that goal is that we’re going to do it for people that are moving here. People who are new residents are going to get that [4.9 percent rate] immediately in his proposal.”

Horpedahl estimated would benefit from the tax cut, but the vast majority would’ve moved to Arkansas anyways. However, it’s possible the change could attract more to move.

Horpedahl said:

You can’t really distinguish between people who are moving to Arkansas anyway or people who are moving for the lower rate.”

Hutchinson’s proposed budget also increases the balance in the Long-Term Reserve from $185 million to $285 million by the end of the biennium. Arkansas’s Long-Term Reserve Fund balance ranks 45th in the nation totaling 2.7 percent of general fund expenditures, .

Horpedahl said:

That’s a very prudent thing to do especially since we’ve just seen a time where the budget got hit really hard. Now, we didn’t have to dip into it this time because it ended up being not as bad as they thought. It’s good to have that reserve there not only to protect the budget but also it helps your bond ratings so the state can borrow at lower rates. It shows you have the money to meet your obligations in case of an unexpected downturn.”

For more on Arkansas’s Long-Term Reserve Fund, check out ACRE Director and UCA Associate Professor of Economics Dr. David Mitchell’s blog post entitled “Why Arkansas’s Long-Term Reserve Fund May Not Weather the Next Rainy Day.” Mitchell and Dr. Dean Stansel’s paper entitled “” published in the Cato Journal analyzes how government spending increases during economic expansions worsen state fiscal crises.

All of these policy proposals would have to be approved by the General Assembly in the upcoming 2021 legislative session in order to become law.

Horpedahl was also quoted in an article in the in Little Rock about tax changes in Hutchinson’s proposed budget.

Horpedahl said:

This tax reduction has been a long-standing goal of Gov. Hutchinson, and it should be feasible to do so once we are past the COVID recession. The governor’s immediate plan to reduce the rate only for new residents could have some benefits of attracting new workers, but it will also be unnecessarily costly, since it will likely have to be given to the roughly 30,000 new workers that move to Arkansas each year anyway, according to the latest IRS Statistics of Income Migration Data.”

How could Arkansas be better prepared for the next recession?

Keep increasing the state’s Long Term Reserve Fund balance and improve its deposit and withdrawal rules, according to UCA Assistant Professor of Economics and ACRE Scholar Dr. Jeremy Horpedahl. 

Horpedahl joined to discuss Gov. Asa Hutchinson’s proposed state budget and ACRE research on the Long Term Reserve Fund, or the state’s savings account. 

The Long Term Reserve Fund had a balance of (about 2.7 percent of FY 2020 projected general revenue) as of November 2019. The average U.S. state’s rainy day fund has reserves of about 8 percent of general revenue.

Horpedahl said:

This (Long Term Reserve Fund) is something that’s fairly new in Arkansas. Before 2016, we didn’t even have this fund. I think the Governor and recent legislatures have done a good job of getting this set up and making sure it is funded. I think what we’d like to see changed is that not only should the balance be bigger, which the Governor is looking at …[but also] having some rules about when money gets deposited. Most states that have these funds have had them longer than Arkansas and they’ve set up rules such as when there’s a budget surplus that half of it will go into the fund. While I think the current administration has done a good job of putting money in there, another thing they can do is ensure future administrations will do that. The main reason to have this fund is if we have another recession — which there will be someday — you won’t have to cut the budget. This money will be used to support the budget so you don’t have to cut services as tax revenue goes down in a recession as well.”

Horpedahl also outlined rules on withdrawals for similar funds in other states.

Horpedahl said:

Most states have rules about deposits and withdrawals. Most states have some sort of rule that the economy or state budget has to be shrinking in order to take money out. With our fund in Arkansas, if the growth of the state budget is less than three percent then they’re allowed to take money out. They don’t have to and they never have, but that’s not a very tight rule. Some states say only if the economy or state budget is shrinking can you pull money out so it’s truly an emergency.”

For more on this topic, check out UCA Associate Professor of Economics Dr. David Mitchell’s op-ed “” in the Arkansas Democrat-Gazette published on November 7, 2019 and Mitchell’s blog post entitled “Why Arkansas’s Long-Term Reserve Fund May Not Weather the Next Rainy Day.”