LITTLE ROCK—About 600,000 Arkansas taxpayers received an income tax cut with the start of the new year, a move that the state's Republican governor says will boost the economy but critics believe will threaten other state services.
The 1 percent income tax cut for those making between $21,000 and $75,000 approved by the majority-Republican Legislature last February took effect Friday. GOP Gov. Asa Hutchinson, who campaigned on the tax cut proposal, has cast it as a way to help the state's middle class and help Arkansas compete with neighboring states.
"We don't have a competitive income tax rate in Arkansas as compared to our surrounding states, and it hurts us in attracting individuals and businesses to this state," Hutchinson told The Associated Press in an interview last week. "But also it was directed at the middle class because they're the ones who have been hit so hard in our economy, both from a tax standpoint but also with a tough time coming out of the recession."
The tax cut is projected to cost the state $33.7 million for the current fiscal year, which began July 1, and will cost $102 million a year when fully implemented the following fiscal year. The law is part of a broader Hutchinson campaign promise to gradually cut income taxes across the board, but he said the next reductions he'll push won't come during the fiscal legislative session in April.
"It is important you don't get ahead of the game," Hutchinson said. The governor said it would be premature to look at another income tax cut before the 2017 regular session.
"It's fair to look at where we are in the next general session in 2017, see where are budget-wise, see how our economy has absorbed these tax cuts and then make a judgment on where you need to go from there," he said.
The tax cuts have raised concerns from some Democrats and health and education advocates who say it's taking too much out of the state's budget and worry that any additional reductions will hurt state services, such as a pre-kindergarten program they say is underfunded and an overburdened child welfare system. Hutchinson's budget this year increased funding for education and Medicaid, while most other agencies saw a 1 percent cut.
Ellie Wheeler, senior policy analyst for Arkansas Advocates for Children and Families, said the total price tag associated with tax cuts approved during the 2013 and 2015 sessions amounts to $242 million in the coming fiscal year. Wheeler said that loss of revenue is coming at the expense of other services.
"That's just a huge amount to come out of the budget and we're seeing a lot of current unmet needs in Arkansas," she said.
Hutchinson said he doesn't think those fears are founded and noted the state was able to increase funding for pre-kindergarten with $3 million in one-time funds and also set aside money to help ease prison overcrowding.
"You can always point we've got other needs out there, but you're always going to have other needs out there," he said. "My job is to grow the private sector of the economy and restrain the growth of the public sector. I don't think that's realistic that we've had an adverse impact on our state impact, and we're taking it in a responsible way."
A Democratic lawmaker who supported the cut said lawmakers should be cautious about any more reductions. Rep. Joe Jett, who heads the House Revenue and Taxation Committee, said the future of the state's hybrid Medicaid expansion and highway funding need to be resolved first.
Hutchinson is negotiating with federal officials for changes to the expansion and is expected to unveil his proposals for increasing highway funding later this month.
"Until we get those issues figured out, I'd really slow down on the tax cuts," Jett said.