|
|
From Governing’s
So the regressive sales taxes have never been repealed. Last November, when Arkansas went to the polls to vote on the exemption of food and drugs, they decided it might be safer to keep the cash. “Morally,” says Richard Wilson, administrator of the legislature’s Office of Tax Policy, “the exemptions are a good idea. But it’s difficult to give up such a large amount of money.”
Just a few weeks after voters made the decision to hang on to the tax dollars, the Arkansas Supreme Court gave them reason to feel they had made a prudent choice. It ruled the state’s school funding formula inadequate and inequitable. The price tag on a solution that would satisfy the court is unclear — no specific means were mandated — but estimates from an independent analyst range from $700 million a year to as much as $1 billion. Some moves elected officials have made in recent years complicate paying that bill. In 1997, the state cut poorer residents’ income taxes by $90 million, and two years later, it exempted the first 30 percent of capital gains income. In 1999, although the legislature also approved a $300 individual property tax credit, it had the foresight to increase the sales tax rate a half penny (to 5.125 percent) to make up for the lost $160 million in revenue. Still, even prior to last year’s school finance ruling, fiscal pressures were evident. Substantial spending cuts and one-time revenue schemes were needed to balance the 2002 and 2003 budgets. In order to keep the state from sliding deeply into the red, Governor Mike Huckabee included a 5/8-cent increase in the statewide sales tax for the 2004 budget. But Huckabee and the legislature will need more than this if they’re to comply with the court’s order. And the clock is ticking. The state must present a solution to the school problem by January 1, 2004. The sales tax, regressive as it may be, remains the obvious source of additional revenue. It is also one of the only taxes that can be increased without running afoul of constitutional restrictions. According to an amendment to the Arkansas Constitution written in 1934, a three-quarters vote — one of the toughest supermajority requirements in the country — is needed for the legislature to approve a tax increase. It takes just nine senators to kill any proposed hike in taxes on income, beer, cigarettes or oil and gas. But there’s a loophole: The rule applies only to taxes that existed at the time the constitution was ratified. General sales taxes didn’t exist then, so they can be increased by a simple majority vote. The legislature did that a decade ago, raising the sales tax base substantially by adding almost a dozen services to those subject to the levy. Among the categories added were armored car couriers, cleaning and janitorial services, automobile parking and fur storage. “As long as no one was there to object to them, taxes went through,” says B.J. Pritchett, a state and local tax consultant and former state auditor. “I don’t think armored car services had a lot of lobbyists running around.” The state’s revenue department could use some lobbyists — or champions — itself. It’s a stovepiped department, in which income, sales and excise taxes are all administered separately. That means the department’s employees — including customer service representatives — are experts in one area of the tax code but can’t handle a broad range of taxpayers’ questions. “I wish we had made some inroads,” says Preston Means, the assistant commissioner. “We don’t have a central customer service function.” Administering the individual income tax is particularly complex. Unlike most states, Arkansas doesn’t use the federal definition of adjusted gross income as a base. This increases the costs and the complexity of maintaining the tax code. Taxpayers have to complete an entirely separate set of calculations and deductions to figure out their state liability. The effort could be simplified with an online income filing system, and a working model was unveiled last year. Taxpayers have not made much use of it yet, but the Revenue Department hopes that a marketing effort, and free filing, will increase interest. An imaging system also has helped to speed the processing of returns that continue to be filed on paper. But other technology lags behind. The department is still using a legacy mainframe system from which it’s tough to retrieve necessary data, and it hasn’t leveraged data mining or a data warehouse to help find non-filers. In addition, auditing has been hamstrung by statutory restrictions: The department can’t prosecute its own cases or freeze taxpayer assets. An effort to change that rule is likely to be made this year. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
 |
poor state with a populist heritage, Arkansas has long agonized about a revenue structure that contains one of the more regressive sales tax codes in the country. It offers no exemption for the necessities of life. Groceries and over-the-counter medicines are all taxable, forcing lower-income citizens to use up a much higher proportion of their resources on things they can’t live without. Eliminating this provision would go a long way toward creating a fairer system. The problem is that it would also be very expensive. Such a change could cost as much as $400 million in state and local revenues every year.