8 Principles to Guide Tax and Budget Policy

Today, the Institute on Taxation and Economic Policy (ITEP) released a report called “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States.” According to this report, Low-income taxpayers in Arkansas pay two times the amount of taxes (as a share of their income) as the top one percent of earners in the state. The bottom 40 percent of Arkansas taxpayers (those making up to $27,000 per year) pay nearly 12 cents in state and local taxes for every dollar they make, compared to only  six percent paid by the top one percent, those making an average of $723,000 per year. Arkansas also ranks number ten in highest tax rates on the poor.

The findings of this study are neither surprising nor are they sustainable. As the 2013 legislative sessiion marches on, there will be a lot of talk about tax and budget issues. Here are eight principles that should guide policy as we make the big decisions about priorities for our state budget.

  1. A major goal of tax policy should be to protect state tax revenue, not reduce it, for critical programs in the state budget serving children and families. In addition to closing the projected Medicaid budget gap for state fiscal year 2014, there will likely be significant holes in funding for critical programs serving vulnerable or at-risk children and families –such as child welfare, juvenile justice, pre-K, and afterschool/summer programs–that need to be filled.
  2. We need to protect critical programs in the state budget that serve children and families, not promote expensive tax cuts for the wealthy. To the extent that there are cuts, they should be targeted at low- and middle-income families (options include finishing the job on eliminating the grocery tax or creating a state earned income tax credit based on the federal EITC).
  3. Any changes to the rate structure for the personal income tax should focus on spreading out the rates-the top marginal rate of seven percent currently kicks in at only $34,000 in taxable income-not reducing the top marginal rate or eliminating any rates. Any lost revenue should be recouped by closing corporate tax loopholes.
  4. To the extent that any cuts occur, they should be revenue-neutral and paid for by other tax offsets (such as closing exemptions or loopholes), not by cuts in the state budget or based on “new” revenue that is assumed to be available in the future because of economic growth. For example, any cut in the capital gains tax rate should be paid for by reducing/eliminating the current 30 percent exemption of capital gains income. Any cuts in corporate income tax cuts should be paid for by closing loopholes through the adoption of combined reporting.
  5. Any fund surpluses in the state budget available going into the 2013 legislative session should be used either to plug existing holes in the state budget for programs serving vulnerable children and families or put aside into a “rainy day” fund to pay for any upfront costs related to extending Medicaid or some future state fiscal need.
  6. Any “flexible” federal funding that is available should be targeted to critical programs that serve vulnerable children, like Temporary Assistance for Needy Families (TANF). The Department of Children and Family Services and the state’s pre-K programs both receive TANF funding.
  7. Any tax cuts/incentives enacted under the guise of economic development should require full public transparency and disclosure in terms of which companies and industries are likely to be impacted, the benefits they each will receive, the projected gain in Arkansas jobs and tax revenues, etc.
  8. Any tax policy or budget changes should require a “child impact” statement in terms of the likely impact on the immediate economic well-being of children and families, especially our most vulnerable ones, and access to critical programs serving them.