February/March 2016 IssueAfter returning from an early primary election season, state legislators will be meeting this year in a late fiscal session, the fourth such session held during even-numbered years since its establishment by Constitutional Amendment 86 in 2008. As the name implies, business during the fiscal session is generally limited to budgetary issues. Wading through the state’s budget figures requires a mastery of inane acronyms and a tolerance of nonstandard government accounting, but it is important for understanding the role of the government in our state’s economy.
Public discussion of the state’s budget mainly revolves around the mechanism of the Revenue Stabilization Act. Monthly reports from the Arkansas Department of Finance and Administration track revenue on a regular basis and compare it to prior years and against the official forecast. The RSA sets budgetary priorities: Appropriations are designated with letter grades A, B and C (often with subcategories such as B1). Funding is allocated to programs based on available revenue, beginning with the category A priorities, then on to B and C, if revenue is adequate.
On the revenue side of the ledger, the RSA covers much of the direct taxation sources in the budget — individual income taxes, corporate income taxes and general sales and use taxes. Other sources of funding include the state’s severance tax, along with taxes on tobacco, racing, games of skill and other miscellaneous taxes. The sum of these revenue sources comprises “Gross General Revenues,” from which are subtracted individual and corporate tax refunds, a fixed proportion for the State Central Services Fund and Constitutional Officers Fund, along with some other spending priorities that are earmarked out of general revenue, including Educational Excellence, payments on some development bonds and school desegregation payments. The remaining balances, “Net Available Funds,” are then allocated toward the spending priorities set by the Legislature.
When revenues fall short of expectations, the state’s chief fiscal officer can order cuts, beginning with the lower-priority allocations. This mechanism helps to maintain balanced budgets during economic downturns. Indeed, during the Great Recession and its aftermath, the RSA was instrumental in allowing for orderly fiscal adjustments, thereby avoiding the budget crises experienced by many other states. In 2010, for example, net available revenues declined 2.5 percent from the previous year, requiring the cancellation of B and C category spending, and limiting category A spending to 94.7 percent of the original amounts budgeted.
The RSA covers only the general revenue fund, which accounts for just a fraction of total state government spending. The RSA is useful for balancing the budget not because it encompasses the entire state budget, but because it allows for adjustments to state spending on the margins.
Data from the U.S. Census Bureau for fiscal year 2013 (the most recent available) show that the state’s total revenue was $21.5 billion, or 17.7 percent of gross domestic product. This compares to Gross General Revenue of only $6.2 billion — about 5.3 percent of GDP. Another $4.2 billion represented trust fund revenues (e.g. state administered pension programs), which are obligated toward future outlays. The two other major areas of state revenue and spending outside the general revenue category are Special Revenue Funds and Intergovernmental Revenue, which represent pass-through spending of appropriations from the federal government.
Special Revenue Funds cover specific revenue sources earmarked for particular programs or purposes. For example, out of the total state sales tax of 8.5 percent, only the 6.5 percent basic rate allocated to general revenue is covered by the RSA, but there is also a 0.875 percent tax for Educational Adequacy, a 0.5 percent tax for Property Tax Relief, a 0.5 percent tax for Arkansas Highways and a 0.125 percent tax for Conservation. In addition, taxes on soft drinks, gasoline and diesel fuel and other special taxes generate revenue that is allocated toward specific programs.
Intergovernmental revenue — primarily from federal sources — accounts for another large share of the total budget. These funds include federal spending on programs like education and transportation that are administered by state, as well as spending on Medicaid, which is a joint federal/state program. Intergovernmental transfers also include specific grant programs. The Census data for FY13 cite a total of $5.7 billion in federal intergovernmental revenue.
Although intergovernmental transfers largely represent pass-through spending, they also interact with the general budget. Some federal grants require explicit matching funds, while others require that resources to be devoted to administration and oversight. A recent report by Marc Kilmer of the Advance Arkansas Institute cites a figure that every additional dollar of federal transfers to the Arkansas state government requires an additional 59 cents in taxes, fees and other revenue.
Whatever the source of funding, the state budget is important to the economy because it represents a significant share of economic activity that is determined not by the decisions of consumers and producers, but through the political process.