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Gov. Asa Hutchinson unveiled his long-awaited plan for highway funding at a press conference last Tuesday in which he made the case for an approach that would rely on general revenue and surplus money — but no new taxes — to fill holes in Arkansas's road budget.
Understanding why this matters requires a little explanation about how state finances actually work before digging into the details. At its most basic, revenue flows into state coffers as taxes are collected, then flows out as the government spends money. But not all tax revenue goes into the same pot. Taxes collected on gasoline, diesel and certain vehicle-related transactions are used to directly fund the operations of the Arkansas Highway and Transportation Department. Most other taxes collected by the state — such as income taxes and sales taxes — go into Arkansas's general revenue fund, which is used to pay for K-12 education, health and human services, jails and prisons, higher education and other government services.
This means AHTD traditionally has been kept separate from the other major functions of the state. In a sense, it's self-sufficient: The means of paying for the roads are taxes on those who use the roads. That's also why AHTD is set up to be constitutionally independent from other state agencies, with an appointed director and five commissioners administering the department largely outside the legislative scrutiny and direct executive oversight applied to the Education Department, the Department of Human Services and so forth.
But Arkansas's gas tax rate has stagnated at 21.5 cents per gallon since 2001, while inflation has increased the cost of road construction and repair. Vehicles have also grown more efficient, a fact that's great for the environment but means less revenue from fuel taxes. The Highway Department can't meet its own bottom line unless taxes on drivers are bumped up — or money is taken from elsewhere in state government.
Enter the governor's funding plan. Hutchinson wants to allocate an additional $46.9 million to highways in FY2017 (the fiscal year that begins this summer), rising to an estimated $81.1 million by FY2021. Most of it comes from using the state's budget surplus, along with some funds that currently flow into general revenue. None of it is from higher fuel taxes, which the governor ruled out as a possibility.
"This plan should act as a catalyst for [economic] growth by allowing us to increase our investment in highways without placing an unnecessary burden on Arkansas taxpayers," he said last Tuesday. "I am pleased to say that it accomplishes both objectives."
If general revenue is used to pay for highways, though, that means other programs will inevitably get less money. Hutchinson claimed increased efficiency measures would make up much of the difference, though he wasn't specific about where exactly he'd want to see cuts, adding that he would be negotiating with the legislature over priorities.
The governor acknowledged that this would be the "first time in history we've made a contribution to highways from general revenue." He said he'd asked the Highway Department and its commissioners to "be responsive to increased legislative oversight in light of the transfer of general revenues to the Highway program" and would push for more transparency from the traditionally cloistered AHTD. When a reporter asked Hutchinson if he was worried about "leaving the barn door open," in regards to eroding the wall between AHTD and the rest of state government, he replied, "that's a barn door that is not sacrosanct."
However, the nonprofit Arkansas Advocates for Children and Families argued that the governor's plan would inevitably drain money from other services.
"How will we handle the unprecedented withdrawal of general revenue funds, which are already taking a beating from the most recent two rounds of tax cuts?" Arkansas Advocates asked in a blog post responding to Hutchinson's announcement. "If the state fails to replace the funds taken out of general revenue — and there is no guarantee that they can or will be able to do so — the list of critical services that could be on the chopping block is long and alarming. Think of programs that protect abused and neglected children, kids in pre-k or afterschool and summer programs, public defenders and firefighters."
The solution offered by the nonprofit is a simple one: "We need to modestly raise Arkansas' gas and diesel taxes and index them to inflation as well as fuel efficiency. Starting off with just a 2.5 cent per gallon increase (which will cost about 37 cents extra every time you fill up your 15 gallon tank) will more than meet the governor's first year highway funding totals." As for concerns about that extra expense hurting low-income families, Advocates recommends an earned-income tax credit for the bottom 20 percent of earners in the state, offsetting the higher gas tax.
It's not just Arkansas Advocates. When the governor's own Working Group on Highway Funding delivered four different propositions for increasing AHTD funding in December, higher fuel taxes were a big part of several of its proposals. But that appears to be off the table — an especially frustrating fact considering the cost of gas has plummeted, due to rock-bottom global oil prices that economists predict will be around for some time.
The largest chunk of Hutchinson's proposed spending comes from surplus funds. This year, the governor will allocate $20 million from his "rainy day" discretionary fund and ask the legislature to kick in another $20 million in unobligated surplus. (That's about half of both pots of money, said Duncan Baird, Hutchinson's budget chief.) In future years, under the governor's plan, the legislature will allocate 25 percent of surplus dollars in the General Improvement Fund toward highways. The GIF transfer would work out to about $48 million per year, he estimates, based on the average annual budget surplus over the last 10 years.
This, too, requires some background to understand. Since state revenue is dependent on economic performance, predicting the tax haul for a given year takes professional expertise and not a little guesswork. Arkansas tends to make very conservative budget forecasts, meaning there's often a surplus once tax receipts are actually collected. Much of the surplus goes into the GIF, which the legislature and governor then allocate toward local projects around the state (some worthy, others less so).
But is a surplus still a surplus if 25 percent of it is automatically directed toward a core function of state government? Should budget priorities depend on surplus funds?
Advocates also raises the point that surpluses "naturally go up and down. Sometimes they are in the hundreds of millions, a lot of times they are zero. If we could perfectly predict them, they wouldn't exist. It's hard to imagine a fund as huge as the highway department's rolling the dice on federal match dollars year after year."
Part of the urgency in devising a highway funding plan is that new federal money is available for roads, but only if Arkansas kicks in a match. Hutchinson said the state could be forfeiting an average of $200 million per year in federal money, or $2 billion over the next decade, if it doesn't come up with an average of $50 million annually in matching funds.
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