The world of governmental finances and macroeconomic variables is quite complicated. A lot of fiscal wrangling is happening in DC and Little Rock these days. And let’s face it, taxes and budgeting are not the most exciting topics, unlikely to come up around the dinner table or while waiting to check out at the grocery store. But given tight budgets and the financial insecurity of the moment, now is not the time for additional state income tax cuts.
The Arkansas 95th General Assembly officially adjourned on Monday. Among the 2,652 total bills filled were two identical bills known as the Revenue Stabilization Act (HB 2003 and SB637, now Act 1014 and Act 1018). The Revenue Stabilization Act is the legislature’s unique way of funding the government and allocating general revenue to state agencies.
The $6.49 billion of the Revenue Stabilization Act is known as the discretionary budget, the funds over which the governor and legislature have direct control. And the $6.49 billion represents a 2.89% increase over the current (FY2025) budget, with most of the increase supporting the expansion of Educational Freedom Accounts ($90 million) and the Department of Corrections ($60 million).
If you have been following Education Freedom Accounts closely – the public vouchers for private and home schooling – you may have noticed the tricky math. According to https://learns.ade.arkansas.gov/, EFA applications for the 2025-26 school year are now at 40,261. Secretary Oliva stated during the legislative session that the accounts would be capped at 39,000. Using the Secretary’s number, multiplied by the maximum dollar available per voucher ($6,864), totals $268 million. While not every student will utilize the maximum available amount, the 2023-24 Education Freedom Account Report (the only report available to date) suggests 94.3% of the total available amount is utilized on average.
Assuming a similar usage rate for the coming year, the state will need about $250 million. But the Revenue Stabilization Act only allows $187 million. To cover this increase in demand for vouchers, the governor has created a $90 million budget set aside generated from surplus funds from the past two fiscal years. However, as this is likely a reoccurring expense – as it is hard to imagine the state taking away vouchers from recipients from one year to the next – it will have to be added to the Revenue Stabilization Act in the future.
Here’s another example. The legislature held steady the Revenue Stabilization Act allocation for the public school fund at $2.48 billion. But what about the per pupil increase in funding from $7,771 to $8,162, approved by the legislature, for the next school year? Given there are nearly half a million public school students in Arkansas, this totals about $185 million. And where is this funding if not in the Revenue Stabilization Act? The Arkansas Department of Education will cover this increase through education fund balances, or the money left over from previous years. But in future years this money will also need to be incorporated into the Revenue Stabilization Act.
The increase in per pupil funding and the Education Freedom Account set aside totals $275 million. That’s $92.5 million (or 51%) more than the total increase in the general revenue budget from the current fiscal year to the next. And again, these are reoccurring expenses going forward.
What is the budget surplus expected for the current fiscal year? That’s hard to say. The latest headlines have tax revenue down 15.5% in April, primarily due to income tax deadline extensions for those in storm-damaged areas. Even as these taxes will eventually be remitted, there remains uncertainty in revenue collections this year. If the state meets projections, it will have a surplus of $279 million, an amount very similar to the new revenue needed to cover the educational costs discussed above.
But that’s not all. We hear a lot about President Trump’s “skinny budget” and proposed Congressional cuts to programs and services. While there is still much work and deliberation on a final federal budget, Arkansas could witness drastic cuts in federal funding for everything from public safety to health care to education to food security.
Two programs that could take substantial hits in funding are the Supplemental Nutrition Assistance Program (SNAP) and Medicaid. SNAP ensures that Arkansas children and families get enough food to eat. More than 100,000 Arkansas families are enrolled in SNAP. Medicaid provides vital health insurance coverage to hundreds of thousands of Arkansans. It allows children to get their annual check-ups, ensures Arkansans with disabilities can get the services and support they need to work and go to school, and helps pregnant women get lifesaving care. Medicaid helps seniors access long-term care.
If the cuts Congress is considering come to fruition, Arkansas could lose almost $1 billion a year in SNAP and Medicaid funding. As this funding keeps rural hospitals open, provides payment for services and goods, and helps local economies, the state would be tremendously hurt and left with hard choices. Income tax for all of us would need to be increased by 22% to make up for the difference in lost federal funding. Or other programs and services would need to be cut. For example, as we just increased the amount of per pupil funding, it would now have to be decreased by 16%, or about $2,000 per student. And the state may have to take on other funding traditionally handled by the federal government, such as housing assistance and disaster relief.
Finally, it is unclear where the United States economy goes from here. We might be headed for recession or stagflation (when the economy retracts and unemployment increases, while the cost of living also increases). We know that the decrease in the number of federal employees in Arkansas equates to less income tax; increased unemployment across the board will do the same. When the economy flounders, consumer confidence decreases, as does spending, leading to less sales tax collections. Tariffs may mean it’s harder for Arkansas farmers and manufacturers to get the supplies they need and to sell their products abroad.
In summary, the state and Arkansans are facing a “perfect storm” of fiscal uncertainty:
- A state budget with a razor-thin surplus (if any surplus);
- the potential of a significant decrease in federal funding to the state; and
- the effects of an uncertain national and world economy.
This is exactly the wrong time to consider income tax cuts, or any decreases in state revenue.