Leader Blues

Friday, July 07, 2006

EDITORIAL >> What to do with surplus

The appearance of a sizable surplus in the treasury provides fun and political opportunity for every state officeholder.

Merely to talk about taxpayer rebates and tax cuts is manna for troubled political careers. When the year-end revenue report calculated the general-revenue surplus for fiscal 2006 at $403 million, Gov. Huckabee, the major-party candidates for governor and several lawmakers were talking, although very vaguely, about giving some of the money back to taxpayers in the form of rebates, reduced tax rates or both.

No one would wish for the opposite, a big shortfall in tax collections, but citizens and taxpayers should be aware that big surpluses can also spell danger. In fact, they have nearly always been precursors of fiscal troubles.

Memories are not so short that we can forget the big surpluses of President Clinton’s last two years in office, the first federal surplus in 30 years and the first back-to-back surpluses in more than half a century. Clinton was able to brag in 1999 and 2000 about using the surpluses to pay down the national debt and shore up Social Security.

President Bush had a different idea. He got a Republican Congress to cut taxes sharply for corporations, the wealthy and their heirs, which he said would stimulate investment and create tens of millions of new jobs.

He predicted prosperity and even bigger surpluses. Instead, record deficits returned.

But Arkansas does not have the luxury of deficits. Unlike the president, the governor and legislature cannot print money or borrow from the central bank of China to cover the state’s spending when the economy turns south again. They have to raise taxes or eliminate services.
The last time the state began to stack up modest surpluses was under Gov. Jim Guy Tucker and his successor, Mike Huckabee.
Huckabee championed a tax cut, and the legislature in 1997 passed a phased reduction in personal income taxes that Gov. Tucker and the Democratic House speaker had fashioned. Huckabee signed it and forever after became a tax cutter.

He tells Republican audiences about it this summer as he campaigns for president. He tells people (wrongly) that he is the only Arkansas governor in modern times to cut taxes.

But let us scan the whole picture. Not long after the tax cuts took effect, the economy soured and the state faced the prospect of cutting Medicaid and other services to keep the budget balanced. Instead, the governor and the legislature raised taxes, and raised them again. They levied a temporary income surtax. They reimposed a beer tax. Since 1997, they have raised the sales tax three times by a total of 1.5 percent and expanded it to a few services, and they raised motor fuel taxes by a nickel a gallon.

While tax collections exceeded spending by $403 million in the year just ended and a smaller surplus is forecast for the new fiscal year, regional indicators suggest that the economy is cooling and that state revenues will slump, as they always do.

Gov. Huckabee said he would like to give some of the surplus back to taxpayers, but he wants legislators to demand that he call them into session to do it. He would like to carry some credit for tax relief into a presidential campaign, but he doesn’t want to risk looking ineffective if the legislators did something else. Sen. Tracy Steele of North Little Rock suggests sending a little check to taxpayers.

But it would indeed be only a gesture, and the little refund would not go to tens of thousands of taxpayers who need it the most, the poorest working families who are not on the income tax rolls.

Mike Beebe and Asa Hutchinson, the candidates for governor, want to use the occasion to reduce taxes on groceries when the legislature assembles in January. Since the Arkansas tax system is one of the most regressive in the country, the idea has some appeal.

But billionaires do not need relief from taxes on their porterhouses, nor do most of us. There is nothing innately unfair about a tax on food except for those on whom it really is a burden. A better way to achieve this relief is an earned income tax credit that refunds grocery and utility taxes for those struggling to pay their bills. It would help those in need without jeopardizing the state’s solvency.

As for the surplus, which will approach $700 million when the legislature gathers again in January, the needs exceed even that sum.

The state still must comply with the court mandate to improve substandard schools throughout the state. Prisons and jails are packed and if the state is not going to change the sentencing grid it should build more prisons so that criminals are not routinely released because there is no room for them.

Construction at colleges and universities should be funded from the surplus rather than through long-term debt, as Gov. Huckabee and the legislature proposed last year. And the state should establish a rainy-day fund of perhaps $200 million to protect services from long economic downturns.

When politicians talk like the business cycle has been repealed, we need to be prudent and realistic, and then take a firm grip on our pocketbooks.