Dedicated Tax Increases in Arkansas Full

7/31/2019 Dedicated Tax Increases in Arkansas Full

1/31

1

DEDICATEDTAXINCREASESIN

ARKANSAS:PROVIDINGPUBLIC

GOODSORGROWING

GOVERNMENT?

BRADLEY R. GITZ, PH.D

h

LYON COLLEGE BATESVILLE, ARKANSAS

JUNE, 2012


2/31

2

BRADLEY R. GITZ

BIO STATEMENT

Bradley R. Gitz received his doctorate in Political Science from the

University of I l l inois at Urbana- Champaign in 1989. He has taught at

Il l inois, the University of Alabama-Huntsvil le, Lafayette College, and has

held an endowed professorship (The Will iam Jeff erson Clinton

Professorship) in Political Science at Lyon College in Batesvil le, Arkansas

since 1994. He is the author of a various articles in scholarly journals and

the book Armed Forces and Political Power in Eastern Europe

(Greenwood Press). He belongs to a range of professional organizations

and regularly presents research at professional conferences. He has also

written a weekly opinion column on politics since 1999 for the Arkansas

Democrat-Gazette newspaper.

ABSTRACT

The following analysis focuses upon the use of tax increases for specific,

"dedicated" purposes at the state and municipal levels in the state of

Arkansas. Following a discussion of the theoretical issues involved and a

brief review of some of the scholarly l iterature on the subject, a

representative sample of such taxes from Arkansas is presented and

analyzed. While no firm conclusions are reached regarding the uti l ity of

dedicated taxes for providing particular "public goods" and services,

tendencies are identified that suggest their increased use corresponds

with both increased overall government spending and a higher overall taxburden for Arkansans that reduce the state's economic competitiveness.


3/31


4/31

4

onemorestepontheroadtobetterhighways,morejobs,andabrighterfutureforourstateall

withoutraisingtaxesongroceries,medicine,orgasoline.1

Thefollowinganalysisexaminestherecenthistoryofsuchdedicatedtaxincreasesovertimein

Arkansas,withthegoalofprovidingabasisforassessingtheiradvantagesanddisadvantages.Based

uponthisanalysis,anargumentwillbemadethatsuchtaxeshavebecomemoreattractiveovertime

forelectedofficialsbecause1)theycanbemoreeasilysoldtothepublic;2)theyremovetheneed

tomakethekindsofdifficulttrade-offsinfundingdecisionsrequiredbytheuseofgeneralrevenue;

3)theircostscanbemoreeffectivelyconcealedfromtaxpayers;and4)theycanbeeasilyincreased,

extendedorevenre-purposedtofundothergovernmentalprograms.

THE LOGIC OF DEDICATED TAXATION

Dedicatedtaxincreases(whetherenactedbyvotersinreferendaorbylegislation)canincludea

rangeofdirectandindirect(excise)taxesandareusuallypresentedasmeansofaddressing

specificpublicgoodsneeds.Assuch,theyusuallyinvolvepassageofaspecifictax(ortaxincrease)

tofundpopularcauses;inmostcases,programslikeroadsandhealthcarewhicharethoughttobe

necessaryforenhancingastateormunicipalityseconomicdevelopmentandbroaderqualityoflife.

Promisesareaccordinglymadebysupportersthatsuchtaxesarerelativelypainlesswaystoaddress

deficienciesinvitalservicesandinfrastructurenecessaryforprogress.Anassumptionbehindsuch

effortsisthatvotersaremorelikelytoacceptmodest,targetedtaxincreasesforworthycausesthat

justabouteveryoneapprovesofandthatappeartoprovideclearbenefits.Accordingtoone

1QuotefromMadisonMurphy,ChairmanoftheArkansasHighwayCommission,andco-chairoftheMove

ArkansasForwardCommittee,intheArkansas-DemocratGazette,May21,2012,page5B.


5/31

5

prominentstudy,education,localgovernment,andhighwaystendtothemostcommontargetsfor

suchearmarkingatthestatelevel.2

Criticsofthededicatedtaxincreaseapproachquestionwhethertheclaimsmadeonitsbehalfare

fullyjustified,andexpressconcernoverwhethertherelativeeasewithwhichtheycanbesoldto

thepublicproducesadynamicthat,inincrements,endsupdramaticallyraisingthecumulativetax

burden(andtherebyactuallyunderminingastateseconomiccompetitivenessinrelationto

surroundingstateswithpotentiallylowertaxburdens).Suchcriticsalsoraiseconcernsabouttheuses

towardwhichtherevenueraisedbysuchtaxesisput,includingwhethertheyfullyreachintended

projects,andwhethersuchtaxesareespeciallysusceptibletobeingsubtlyrepurposedorextended

longaftertheyhavefulfilledtheiralleged,initialobjectives.Thebroaderargumentcontainedwithin

suchcriticismisthatdedicatedtaxincreaseshavebecomepopularmeansofgrowinggovernmentin

awaythatvotershavedifficultytrackingandfullygraspingovertime.

WHAT WE (THINK WE) KNOW

Thegeneralissueofdedicatedtaxesandrelatedsub-issueshasbeenextensivelystudiedby

academicresearchers.Muchofthisresearchcentersaroundtwoconceptsfungibilityandthe

flypapereffect.

Fungibilityreferstotheabilityoflegislatorstosubstitutetaxdollars,whetherfromgeneral

revenueordedicatedsources.Asuccinctexplanationforsuchfungibility,andthemannerinwhich

itcastsdoubtontheimpactofdedicatedtaxrevenue,comesfromCrowleyandHoffer:

2ArturoPerez,EarmarkingStateTaxes:4

thEdition,(Washington,DC:NationalConferenceofStateLegislatures,

2008).


6/31

6

..Assumeastategovernmentspends$100fromthegeneralfundoneducation.Supposethe

legislatureisabletopassanewspecialtaxonthebasisofitsrevenuebeingearmarkedforeducation

spending.Further,supposethisnewtaxbringsin$50inrevenue.Althoughitmayseemnaturalto

assumeeducationspendingwillincreaseby$50asaresultoftheearmarkedrevenue(to$150),policy

makersactuallyhavetheoptionto decreasespendingoneducationoutofthegeneralfund.Evenif

the$50earmarkedtoeducationspendingisactuallyspentoneducation, totaleducationexpenditures

mayremainunchangedifthelegislaturedecidestodecreasegeneralfundspendingfrom$100to$50.

Thisallowspolicymakerstospend$50ofrevenuepreviouslydedicatedtoeducationelsewhere,and

theearmarkisfunctionallyequivalenttoa$50increaseinunspecifiedgeneralfundrevenue.3

CrowleyandHofferthereforeconcludethatpoliticiansmayusetheearmarkingoftaxrevenuesto

specificexpenditurecategoriestocovertlyraiserevenueandexpandtotalgovernmentsize;an

optionthatbecomesespeciallyattractivewhenthereispublicresistancetogeneralincreasesin

taxes.UsingtheLeviathanmodelofgovernmentdevelopedbyGeoffreyBrennanandJames

Buchanan(whichemphasizesthetendencyofgovernmenttomaximizeitssizeandpower),their

researchsuggeststhatdedicatedtaxrevenuesarelargelyineffectiveforincreasingexpenditures

towardwhichtheyaretiedbutmoreeffectiveatincreasingtotalgovernmentsizebymasking

increasesintotalgovernmentspending.4

Theflypapereffectrefers,incontrast,totherelatedquestionofhowmuchdedicatedrevenue

actuallysticks(asinflypaper)totheintendedtarget.5Awiderangeofscholarlystudieshave

consequentlyproduceddisparateresultsforthiseffect,withconsiderablevariationsinthecasesof

lumpsumgrants(whicharetheoreticallyfungible),statelotteryrevenuededicatedtoeducation

(morecommoninrecentyears),andstatehighwayspending.Theconsensusfromsuchresearchis

3GeorgeR.CrowleyandAdamJ.Hoffer,DedicatedTaxRevenue:ConstrainingGovernmentorMaskingItsGrowth?

(WorkingPaper,MercatusCenter,GeorgeMasonUniversity,No.12-17,May2012),p.8CrowleyandHofferalso

provideanextensiveandhighlyusefulforthesepurposesliteraturereviewondedicatedtaxation.4OntheLeviathanModelseeGeoffreyBrennanandJamesBuchanan,TowardsaTaxConstitutionfor

Leviathan,JournalofPublicEconomics8(1977):255-274;andBrennanandBuchanan,ThePowertoTax:

AnalyticalFoundationsofaFiscalConstitution(Cambridge,UK:CambridgeUniversityPress,1980).5Ontheflypapereffect,seeRobertP.Inman,TheFlypaperEffect(NationalBureauofEconomicResearch

WorkingPaperNo.14579,Cambridge,MA:December2008).


7/31

7

thatatleastsomeofthededicatedrevenuegoestowardtheintendedtarget,producingatleastsome

degreeofflypapereffect,althoughinmostcasesanamountwellbelow100%.6

Lessfrequentlyfoundintheliteratureondedicatedtaxationhavebeenanalysesofparticular

examples(casestudies)fromindividualstatesdesignedtomorepreciselyexplainthewaysinwhich

dedicatedtaxescanbemanipulatedormodifiedbylegislatorstoincreaseoverallgovernmental

revenue.Thepresentstudyseekstofillthisgapbylookingatarepresentativesampleofsuchtaxes

dedicatedforvariouspurposesinthestateofArkansas.Thegoalwillbetoexplorethemannerin

whichdedicatedtaxesforpopularcausescanbeestablished,extended,increased,andeven

repurposedafterinitialpassage,therebyprovidinglegislatorswithanexpedientandoftensubtle

mechanismwithwhichtoincreasegovernmentrevenue.

DEDICATED TAX INCREASES IN ARKANSAS

WhatisreferredtoasSpecial(earmarked)revenuehasbecomeamoreimportantpartofoverall

revenueforthestateofArkansasovertime,increasinginvalueby130%between1994and2008,

from$734millionto$1.692billion(Generalrevenueincreased,incomparison,byonly77%overthe

sameperiod).7Overall,Arkansasreceivesjustunder10%ofitsoverallrevenuefromspecial

(dedicated)revenue(thestateofAlabamaranksfirstinthepercentageofrevenuederivedfrom

dedicatedpurposesat84%;thestateofRhodeIslandlastwith4%).8Thesinglelargestpurposefor

whichdedicatedrevenueisraisedisroadsandhighways,comprising37%ofoverallspecialrevenue

(largelythroughgastaxesandvehicularregistrationfees),butArkansashasalsoemployedafairly

6CrowleyandHoffer,p.6-7

7FinancingStateProgramsinArkansas,ArkansasBureauofLegislativeResearch,2008

8FromPerez,EarmarkingStateTaxes,citedinCrowleyandHoffer,p.4


8/31

8

typicalarrayofothertaxesdirectedtowardotherpurposes.9Municipalitieshavealsomadeuseof

thededicatedtaxapproachtofundcityservices,communityprojects,etc.

Assuch,thefollowingdiscussionaddressestheuseofsuchtaxesinrecentyearsinArkansas,

primarilyatthestatelevelbutwithsomelocal/municipalcasesincluded.Forthesakeof

representativeness,thesampleincludesarangeofdedicatedtaxesfordifferentpurposes.

BEER TAXES

Taxesonbeer,wine,andliquoringeneralareoftenjustifiedasameansofbothrecoupingcosts

(externalities)associatedwithcertainbehavior(increasedheathcostsinthecaseofconsuming

alcoholicbeverages)anddiscouragingsuchbehavior(wherethetaxessentiallyimposesapenalty

uponitbydrivingupcosts).Withinthiscontext,thereareseveralrecentexamplesofsuchataxation

approachforthestateofArkansas,which,accordingtoonesurvey,hasthe18thhighestlevelof

taxationamongstatesonbeer,the31sthighestonwine,andthe44

thhighestonliquor.

10

SenateBill576/Act1841,withthetitleTheChildCareforWorkingFamiliesActpassedin2001

bytheArkansasstatelegislatureimposedafairlystraightforward3%taxonbeer,withtheensuing

revenuetobedirectedtowardtheDepartmentofHumanServicesGrantFund,fromwhich20%would

gotofundchildcareforlow-incomefamiliesand80%tosupportandexpandtheArkansasBetter

ChanceProgramofthestateDepartmentofEducation.Thelanguageofthebillspecifically

mandatedexpirationofthetaxonJune,2003,twoyearshence.

9FinancingStateProgramsinArkansas

10DatafromtheCenterforScienceinthePublicInterestAlcoholPoliciesProject,August,2004.


9/31

9

Beer

SB 576/Act

1841 Passage2001

THE CHILD CARE FOR

WORKING FAMILIESACT

Put into effect a tax on

Beer to go to Departmentof Human Services GrantsFund. Tax was set toexpire two (2) years later(June 30, 2003)

HB 1200/Act 272 Passage2003

THE CHILD CARE FORWORKING FAMILIESACT

Altered the Sunset Clausein SB 576 so that itexpired on June 30, 2005;which extended the tax bytwo (2) years

HB 1691/Act 2188 Passage2005

AN ACT TO EXTENDTHE SUNSET CLAUSEON THE RETAIL BEERTAX

Altered the Sunset Clauseof SB 576 so that the taxshall not extend beyondJune 30, 2007. Thisextended the tax anothertwo (2) years totaling six(6) since the original billSB 576

SB 1004/

Act 869 Passage2007

AN ACT CONCERNING

THE RETAIL BEER TAX

Put into place on July 1,

2007 (Day after theextended tax from SB 576expired) a new tax onBeer

SB 248/Act982 Passage2011

AN ACT TO MAKEVARIOUSCORRECTIONS TOTITLE 3 OF THEARKANSAS CODE OF1987 CONCERNING

ALCOHOLICBEVERAGES

Put into effect a new taxon Beer with revenuebeing added to theGeneral Revenue Fund


10/31

10

DespitethesunsetprovisionspecificallycontainedinSB576,twoyearslaterHouseBill1200/Act

272extendedthe3%beertaxforanothertwoyearsuntilJune30,2005.Afurtherextensionofthe

tax(untilJune30,2007)wasenactedbyHouseBill1691/Act2188.Inapparentresponsetocriticism

fromsomestatelegislatorsregardingtheseextensions,thelatterbillalsocontainedlanguage

requiringtheStateBoardofEducationandtheDepartmentofEducationtofundthetargeted

programsafterthetaxexpirationin2007.

Althoughthe3%beertaxwassubsequentlyallowed(perthelanguageofHB1691)toexpireon

June30,2007,afterhavingbeenineffectandproducingrevenueforsixyears,asubstitutebeertaxof

1%wasimposedbySenateBill1004/Act869effectiveonJuly1,2007,thedayaftertheexpirationof

theoriginaltax.SB1004alsoalteredthecontentofthebeertaxbydirectingallrevenuetheGeneral

RevenueFund,withnoconstraintsuponuse.Theseriesofextensionsoftheoriginalbeertaxhad

thereforealteredthepurposetowardwhichthetaxwasdedicated.

In2011,the1%beertaximposedbySB1004wasincreasedto4%bySenateBill248/Act982,

therebyproducingataxonbeerhigherthantheoriginal3%imposedbySB576tenyearsearlier.SB

248alsodirectedallgeneratedrevenuetowardtheGeneralRevenuetobeusedinanopen-ended

fashion.UnlikeSB248(andsubsequentextensionsthereof),therewerenosunsetorexpiration

provisionswrittenintoSB248.

AnexaminationoftheseriesofdedicatedbeertaxesinArkansasbeginningin2001withSB576

revealsseveraltendenciesthatmaybeintrinsictosuchanapproachtoraisingtaxrevenue.The

originalbeertaxof3%wasjustifiedbythegoaltowardwhichtherevenuewouldbedirectedchild

careandeducationforthosewithlowerincomes;causeswhichcouldbeexpectedtomuster


11/31

11

considerablesupportinarelativelypoorstatewithminimalsuchservices.Itwouldbereasonableto

concludethatfewelectedofficialsandfewaspiringtostate-wideelectedofficewouldwishtobeon

thewrongsideofsuchissues(definedasinoppositiontosuchatax).Inabiblebeltstatewitha

stillhighpercentageofdrycounties,therewouldalsoseemtobelessinherentoppositiontosin

taxesuponbeerpurchases.

Importanttonote,however,istheevolutionoftheoriginal3%beertax,andthemannerinwhich

itwasextendedontwospecificoccasions(HB1200andHB1691)beyondtheinitialexpirationdateof

2003untilJune2007.Asseverallawmakersarguedinopposingtheseextensions,theycouldbe

construedasviolationsofthepromisesoriginallymadetoArkansastaxpayersandthebeerindustry

backin2001,whenaspecificexpirationdatewasidentifiedinordertohelpwinpassage.11Of

perhapsgreaterrelevance,whentheoriginal3%taxwasfinallyterminatedonJune30th,2007(four

yearslaterthantheoriginalsunsetdate),areplacementtaxof1%wasimmediatelyimposedthatwas

laterincreased(bySB248)to4%in2011,withnoexpirationdate.Throughthisseriesofextensions

andreplacements,theoriginalpurposeofthebeertax(fundingoftheworthycausesofchildcare

andlower-incomeeducation)wasdroppedandrevenuedirectlyentirelytowardtheGeneralRevenue

Fund.Overthecourseofadecade,a3%taxonbeerintendedtogotowardspecificpurposesandlast

twoyearshadbeenextendedseveraltimesandbecomea4%taxonbeerwithnoexpirationdateto

bedirectedtowardgeneralrevenue.

Apossibleexplanationforthelongevityandshiftingcontent/purposesofthebeertaxcanbe

foundintheeasewithwhichsuchtaxescanbeextendedwithlittlepublicnoticeonceadedicated

tax,particularlyonethatimposesonlymodestburdensononlyasubsetoftaxpayers(suchasa3%

11ArepresentativecommentalongtheselinescamefromRep.RickSaundersofHotSprings,whonotedAllthese

industriesandallthesepeopleunderstoodthistaxtosunset.Adealisadeal.Rep.DarylPaceofSiloamSprings

askedDoyouthinkbeerdrinkerstookusatourworditwouldsunset...YouthinkitsOKtobreakourwordtothe

people?


12/31


13/31

13

CigaretteTaxes

SB 320/Act434 Passage 1997

THE BREAST CANCER ACT OF1997

Placed a tax on cigarettes tofund Breast CancerResearch

HB 2522/Act1698 Passage 2001

AN ACT TO AMEND THEDISTRIBUTION OF THEADDITIONAL TAX ON CIGARETTES

Redistributed revenue fromCigarette tax put into effectby SB 320


AN ACT TO PROVIDE FUNDINGFOR ADMINISTRATIVE COSTS OFTHE ARKANSAS RX PROGRAM

Provided funding forArkansas Rx Program byredistributing revenue fromcigarette tax created by SB320


AN ACT TO MAKE ANAPPROPRIATION FOR PERSONALSERVICES AND OPERATINGEXPENSES

Redistributed revenue fromadditional cigarette taxcreated by SB 320


AN ACT TO LEVY AN ADDITIONALTAX OF ONE CENT (1) PER PACKOF CIGARETTES

Increased the tax oncigarettes to credit of theAging and Adult ServicesFund

HB 1204/Act180

Passage 2009

AN ACT TO INCREASE THE TAXON CIGARETTES

Increased the tax oncigarettes with all revenue

being credited into theGeneral Revenue Account

MixedDrinks


AN ACT TO IMPOSE ANADDITIONAL TAX ON MIXEDDRINKS

Additional tax on mixeddrinks sold on premises tofund improvements to theUAMS Campus

HB 2633/Act

1274 Passage 2005

AN ACT TO CONTINUE THE

SUPPLEMENTAL MIXED DRINKTAX

Extended the tax put into

effect by HB 1111 making itpermanent


14/31

14

whetherthewordofthelegislaturewasvalid.StateSen.HimHolt,D-Springdaleechoed

AbernathyssentimentsbynotingthatWegaveourwordwedsunsetthistax.12

Althoughtheindefiniteextensionofthemixeddrinktaxdidnotinvolvearedirectionofrevenue

(withallrevenuestillearmarkedforUAMS),itfurtherreflectstheeasewithwhichmodestdirected

taxesforlaudablepurposes(inthiscase,medicalresearch)canbeextendedwellbeyondtheir

specifiedsunsetdates,insomecasespermanently.Ataxintendedtohelpamedicalinstitutionpay

offaconstructionloaneventuallybecameapermanentsubsidyforthatinstitutiontousefor

whateverpurposesitseesfit,ontheassumptionthattheservicesitprovidesaredeemedvitalto

thehealthandbroaderwelfareofthestatesresidents.

Althoughtheextensionofthemixeddrinktaxin2005provokedgreaterattentionandcontroversy

duetotheoppositionofwell-organizedinterests(restaurantownersandthehospitalityindustry),

thosewhowouldactuallypaythetax(consumers)hadlikelyalreadybecomeaccustomedtodoingso

sincetheimpositionofthetaxinthelate-1980s.Consistentwiththelogicofsuchtaxesasawhole,

terminatingsuchaminortaxmatteredtothemmuchlessthanperpetuatingtheestimated$1.4

millionannualrevenuestreamitprovidedmatteredtoUAMS.AlmostentirelylostindiscussionofHB

2633wasthecontributionthemixeddrinktaxmadetothebroadertaxburdenforArkansans,who

werenowpaying,accordingtodatafromtheArkansasHospitalityAssociation(AHA),thehighest

taxesinthenationontheirMartinisandWhiskeySours.13

12AbernathyisquotedinArkansasNews,March23,2005;HoltinArkansasNews,March24,2005.

13ClaimsmadebyMontineMcNulty,ExecutiveDirectoroftheArkansasHospitalityAssociation.


15/31


16/31

16

Consideredwithincontext,SB320arousedlittleopposition,perhapsduetothenatureofthat

whichwasbeingtaxed(cigarettesandcigarettesmoking),thedecliningandincreasinglyunpopular

grouppayingthetax(cigarettesmokers),andthepopularityofthecausetowardwhichthetax

moniesweredirected(breastcancerresearch).Supportforthisinterpretationcouldbefoundinthe

structureofthebillitself,whichbeginswithalongdiscussionofthethreatposedtothestates

citizensbybreastcancer.Inaddition,neitherthetitleofthebill(TheBreastCancerActof)norits

content(theactualimposedtaxwasnotmentioneduntilSectionFive)emphasizedthatitwasatax

billperse.

Oneofthemuchcriticizedtendenciesofdirectedtaxapproachesthesubsequentre-purposing

ofraisedrevenueoccursagainwiththemodificationofSB320intheformofHouseBill2522/Act

1698,passedjustfouryearslater(in2001).Despiteatitleincludingthephrase..,ToEnsureFunding

oftheBreastCancerResearchFund,HB2522actuallyreducedtheshareofrevenueallocatedbySB

320forsuchprograms(from90%to71%).Theremainingrevenue(29%ofthetotal)wasdirected

towardtwoprogramsMealsonWheelsandaprescriptiondrugwaiverfortheelderlythathad

norelationshiptotheoriginalpurposeofSB320.

AfurtherrepurposingoftherevenuegeneratedbytheoriginalSB320wouldoccurinboth2005

and2007,withpassageofHouseBill2629/Act2219andSenateBill223/Act1236.HB2629(2005)

wouldshiftmoneyasspecialrevenuetotheArkansasRxProgramFundandtheMiscellaneous

AgenciesFundfortheArkansasProstateCancerFoundation(inadditiontoMealsonWheels),while

SB223(2007)wouldearmarkrevenuetotheUniversityofArkansasMedicalCenterFund(inaddition

toMealsandWheelsandProstateCancer).AswiththepreviousmodificationofSB320intheform

ofHB2522,therewaslittlepublicdebateorattentioningeneralpaidtoeitherHB2629orSB223.


17/31

17

Takentogether,theoriginalcigarettetaximposedbytheBreastCancerActof1997(SB320)

wouldberepurposedthreetimesoverthecourseofthenextdecade,resultinginareductionofthe

moniesallocatedtoitsoriginalpurposeandallocationstoarangeofcauseswithnorelationshipto

thatpurpose.Ratherthanmustersupportforandseektopassnew(andpotentiallyunpopular)taxes

orutilizemoniesfromgeneralrevenueforsuchcauses,anexistingtaxoriginallypassedwith

widespreadsupportbecausedeemedforaworthycausewasmodifiedtofundsuchdiverse

programsasprescriptiondrugs,MealsonWheels,andprostatecancerresearch.

There-purposingofrevenuefromdedicatedtaxesthusappearstohavebecomeamore

expedientmeansoffundingprogramsthanusinggeneralrevenue,raisingexistingtaxes,orcreating

newones.Again,onceataxhasbeenestablishedforaparticularpurpose,itbecomessusceptibleto

extensionandreallocationwithlittlepublicknowledgeorresistance.Thepublic,accordingly,tendsto

paymoreattentiontoproposedtaxincreasesthanextensionsormodificationsofexistingones.The

repurposingevidentwiththecigarettetax(theoriginalSB320)alsoconfirmsthefungibility

problemintrinsictodedicatedtaxation,byvirtueofthefactthatthetaxwasultimatelyusedtofund

anarrayofprogramsthatcouldhavebeenfundedfromgeneralrevenue.Bycreatingalternative

streamsofrevenuethatcanbeextended,modified,andrepurposed,dedicatedtaxesremovethe

needforlegislatorstomaketrade-offswhenfundingprogramsitbecomesunnecessarytomake

cutsinsomeprogramsinordertofundotherswhenprogramscanbefundedoutsideofgeneral

revenue.Theoverallimpactis,ascriticsoftenclaim,ahiddenincreaseinbothoverallgovernment

spendingandtaxburdenfortaxpayers.


18/31


19/31


20/31

20

(communitycenters,athleticfacilities,zoorepairs,etc.).Suchproposalsareinvariablysupportedwith

claimsthatincreasedrevenuesarenecessarytobothmaintainanadequatelevelofcityservicesand

toencouragecommunityeconomicdevelopment.Theyarealsousuallyvotedoninspecial

electionsinwhichtheyaretheonlyproposalsontheballot.Anumberofsuchproposalshavebeen

recentlyapprovedbyvotersinArkansascities.Thosediscussedhereconsistofarepresentative

samplefromlarge(LittleRock),mid-size(Jonesboro),andsmall(Batesville)municipalities.

InSeptember,2011votersinthestatecapitalofLittleRockapprovedatwo-parthikeinthecitys

salestax,triplingtheratefromtheexistinghalfacenttooneandahalfcents,effectiveJanuary1,

2012.5/8oftheonecentincreasewaspermanentanddirectedtowardvariousunspecifiedcity

services;theremaining3/8wouldbeinplacefortenyearstofundalistofconstructionprojectsand

newtechnologies.Thecombinedtaxeswereexpectedtoraisecityrevenuebyroughly$500million

overthecourseofthenexttenyears.19

InAugust,2010votersinJonesboro(thelargestcityinnortheastArkansas,withapopulationof

roughly70,000)passedintolawahalfcentincreaseinthecitysalestax,raisingthetaxfromthe

previousonecenttooneandahalfcents.Thetaxhikewouldbeininplaceforfouryearsandmonies

raisedwouldbedirectedbycityordinancetowardfundingofitspoliceandfiredepartments.Itwas

claimedthattheamountofrevenuetobegenerated,estimatedat$6millionperannum,wouldsave

thejobsof40policeofficersand27firefighters,enhancepublicsafety,andcoveraprojected$4

millioncitybudgetdeficit.20

InMarch,2012voterswenttothepollsinBatesville,Arkansas(acountyseatwithapopulationof

roughly10,000innorthernArkansas)toapproveaonecentincreaseinthecitysalestax(boostingit

totwocentsoverall).Halfoftheonecentincreasewouldbetemporary,withrevenuesdirected

19LittleRock:OneCentTaxPasses,KATV.com,September19,2011

20JonesboroVotersOKSalesTaxIncrease,ArkansasNews,August11,2010.


21/31

21

towardtheconstructionofamulti-purposecommunitycenter,whiletheotherhalfcentincrease

wouldbepermanentandallocatedtounspecifiedcitymaintenanceandoperations.Theballot

measurewasascaledbackversionofonethathadbeendefeatedthepreviousyearandwasnamed

The2012CommunityDevelopmentInitiative.Aswiththeearlierballotmeasuresthatwere

approvedinLittleRockandJonesboro,supportersstressedthepublicsafetyissueinBatesville,

includingthedirectionoffundstowardfirefightersandpolice.21

Intheory,thecastingofballotsinLittleRock,Jonesboro,andBatesvilleondedicatedtaxproposals

reflectdemocracyinaction;moreprecisely,theprogressivereferendumconceptinwhichthose

expectedtobearthecostsofaproposedtaxareallowedtoapproveorrejectitinadirectvote.There

isalsoreasontobelievethat,basedonalong-standingbodyofpoliticalscienceresearch,voterstend

tobemoreinterestedinandknowledgeableaboutissuesinlocalpoliticsthatarethoughttomore

directlyaffectthemthanissuesatthestateandnationallevels(aviewnicelycapturedinthequipby

formerU.S.HouseSpeakerThomasTipONeillthatallpoliticsislocal).Inaddition,itispossible

thataccountabilityandtransparencywouldbegreateratthelocallevelandthatgreaterscrutiny

wouldbeappliedtotheallocationofanymoniesraisedbydedicatedtaxation.

AlthoughsuchexpectationsseemconsistentwiththeexpectationsbehindtheAmericansystemof

federalism,theballotmeasuresinLittleRock,Jonesboro,andBatesville(andpresumablyinother

ArkansasandAmericancitiesaswell)alsodemonstratecertaindeficienciesthatruncountertosuch

assumptions.Themostobviousshortcomingistheuseofspecialelectionsoutsidethenormal

electioncycleandcalendar.ByholdingelectionsoutsideofNovemberandforwhichthereareno

otherissues/contestsontheballot,voterturnoutisinevitablydepressed-ineachofthecases

presentedhere,andalthoughthetaxesproposedwouldaffectalltaxpayers,turnoutrepresenteda

21BatesvilleFireDept.EyesBenefitsfromOneCentSalesTaxVote,KAIT8.comMarch8,2012.


22/31


23/31

23

millionstreamofcapturedtaxrevenueovertenyearsintheLittleRockcase,forexample)thanfor

thoseresistingthem(avoidingapennyincreaseinthesalestax).

ConsistentwithsuchconclusionswerenewsaccountsaccompanyingpassageoftheLittleRocktax

increaseindicatingthatordinarycitizenswhowouldbeexpectedtopaythetaxwereunawareofit.

Inthewordsofonesupermarketowner,Idoubtthatmanyofthem(customers)areawareittook

effecttodayIrememberedthatitwasgoingup,butthenforgotaboutittillthismorning.22

AcertainfatiguefactormightbeaddedinthecaseoftheBatesvilletaxincrease,sincevoters

hadnarrowlyturnedbackasimilarproposedincreasejusttheyearbeforeandwereaccordinglyless

likelytomountacomparablelevelofresistancethesecondtimearound.Supportersofsuch

provisions,operatingwithobviouslygreatermotivation,cankeepcomingbackuntiltheysucceed;

opponentsarefightingadesperaterear-guardbattlelikelytoeventuallyendindefeatandprobably

perceivethecontestinthatfashion.Although,intheory,suchballotingallowseveryonetohaveasay

onthetaxestheywillbeaffectedby,theunderlyinglogicofspecialelectionsondedicatedtax

increasessuggeststhatatinypercentageofmoremotivatedvoterswillbeabletoenhancetheir

interestsandreceivebenefitsbypushinghighertaxesoneveryone.

Withinthiscontext,itispossiblethatdedicatedtaxproposalsatthelocallevelwouldbeless

likelytobeapprovedifvotedoningeneralelections(ratherthaninspecial,stand-aloneballots).

Giventhevastlylargerturnoutingeneral(November)elections,theinherentmotivationgapthat

tiltsthebalanceinfavorofsuchproposalswouldlikelydiminish.Undercurrentcircumstances,

however,theresorttospecialelectionsatthelocallevelfordedicatedtaxationworksinexorablyin

favorofincreasingtaxationandtheoveralltaxburdenforcitizens.

22LittleRockBusinessesAdjusttoSalesTaxHike,Fox16.com,January1,2012


24/31


25/31

25

outcome.Thesmallernumberofcitizenswhobenefit,oftendirectlyfromsuchincreasedtaxeswillbe

suretovote,thelargermajorityonlymodestlyandadverselyaffectedbysuchhikesusuallywont.

AlsoofinterestwithrespecttolocaldedicatedtaxproposalsisthepatterndetectedintheLittle

Rock,Jonesboro,andBatesvillecasesthatturnoutvariesinverselywiththesizeofcityandthe

numberofregisteredvoters.Batesville,byfarthesmallestcity,hadthehighestturnoutasa

percentageofregisteredvoters(ataround40%).LittleRock,byfarthelargestcity,hadbyfarthe

lowestturnoutrate,inthevicinityof20%.Ifspecialelectionsatthemunicipalleveltendtofavor

passageoftheproposalsinquestionbecauseoflowturnout,thenpassageseemsevenmorelikelythe

largerthemunicipality,withanobviouscorrespondingimpactonastatesoveralltaxburden(atax

increaseinacityof300,000citizenshasagreaterimpactontheoverallstatetaxburdenthanone

passed,asinBatesville,inacityof10,000).

Thebroaderconclusionofthisanalysisisthattheuseofdedicatedtaxincreasesatboththestate

andlocallevelscontributestohigherlevelsofgovernmentspendingandhigherburdensfor

taxpayers.Theydosoinlargepartbecause,asCowleyandHoffersuggest,theyeffectivelymask

theircontributiontothetaxburdenovertime.Ratherthaninsistthatnewexpendituresforworthy

causesbefundedfromgeneralrevenue,andthatcurrentfundingforlessworthycausesbe

accordinglyreduced,newrevenuestreamsareestablishedoutsideofgeneralrevenue.Once

established,suchtaxesseldomgoaway(asusuallypromised)andareoftenincreasedand/orre-

purposedfornewprojects(orprojectspreviouslyfundedfromgeneralrevenue)withlittletaxpayer

knowledge/resistance.Thefocusofthetypicaltaxpayerisonthenextproposedtaxincrease,not

whatishappeningwiththosealreadyinplaceandtowhichtheyvebecomeaccustomed.

Theoldstoryaboutthefroginthepotwhichboilstodeathasthetemperatureisslowlybut

imperceptibly(forthefrog)increasedovertime,butwhichwouldjumpoutofthepotifthe


26/31


27/31

27

CONCLUSION

PlacingtheuseofdedicatedtaxesintothecontextofArkansashightaxburdenandnegative

businesstaxclimatefurtherreinforcesthecentralconclusionofthisanalysisthattheincreasing

resorttosuchaformoftaxationdrivesupoverallgovernmentspendingandtaxburdens.Along

theselines,thoseproposingsuchtaxhikes,atboththestateandlocallevel,invariablytargetpopular,

worthycausesthataresaidtocontributetolong-termeconomicdevelopment.Itisoftensaidbysuch

supportersthatArkansansneedtofundsuchendeavors,evenifbydedicatedrevenuesoutsidethe

traditionalgeneralrevenuetaxstream,forthesakeofprogressandtoenhanceArkansasabilityto

attractbusiness,investment,andjobs.

Theproblemwithsuchanapproachis,ofcourse,thatsuchsmalltaxes(apennyhere,another

couplethere)forsuchworthycausesultimatelyadduptoacrushingcumulativetaxburdenthatends

updrivingbusiness,investment,andjobstoneighboringstateswithlowertaxburdens.A

contradictionthereforeexistsbetweenendsandmeans,asArkansansandtheirrepresentatives,with

oftenthebestofintentions,approveadditionaltaxhikesforspecificpurposesforthesakeof

progressonlytoseetheresultinghightaxburdenmorethancancelsoutwhatevereconomic

benefitsaccruefromthenewprograms,roads,orfacilities.Intheend,atoohightaxburden

(particularlyincomparisontoneighboringstates)drivesnotjustinvestmentandjobstowardsuch

states,butalsothegreatertaxrevenuesthatagrowingeconomyproduces.Theclassicviciouscycle

ensues,inwhichastagnanteconomyreducestaxrevenues,requiringnewtaxlevies-ofteninthe

formofdedicatedtaxes-thatonlyfurtherweakentheeconomy(andfurthershrinkthetaxbase).


28/31

28

Thus,amongthequestionsthatArkansastaxpayersshouldaskthisNovember,whenvotingonthe

proposedhalf-centincreaseinthestatesalestaxforhighwayconstruction,iswhetherthebenefits

willactuallymaterializeaspromisedandwhetherthetaxwillremaininplaceafter(asseemsthe

pattern)thepromisedsunsetdate.Moretothepoint,theymightwishtoaskwhetherArkansashas

beenmovingintherightdirectiononthetaxfrontinrecentyearsandwhethertheywishtoseeit

moveevenhigherupthelistofstateswiththemostcrushingtaxburdens.25

25Increasingthathalf-centsalestaxwouldmoveArkansaspastIllinois,Maine,Maryland,Massachusetts(!),

PennsylvaniaandVermont,intoatiewithMinnesotaforthe7thhighesttaxburdenontheTaxFoundationranking.


29/31

29

Appendix of Cited Arkansas State Bills

Cigarette Taxes

1. SB 320/Act 434 Passage 1997 81st General Assembly, Regular SessionTitle - "THE BREAST CANCER ACT OF 1997."Effect Placed a tax on cigarettes to fund Breast Cancer ResearchFull Bill -

http://www.arkleg.state.ar.us/assembly/1997/R/Pages/BillInformation.aspx?measureno=SB320

2. HB 2522/Act 1698 Passage 2001 83rd General Assembly, Regular SessionTitle - AN ACT TO AMEND THE DISTRIBUTION OF THE ADDITIONAL TAX ONCIGARETTESEffect Redistributed revenue from Cigarette tax put into effect by SB 320Full Bill -

http://www.arkleg.state.ar.us/assembly/2001/R/Pages/BillInformation.aspx?measureno=HB2522

3. HB 2629/Act 2219 Passage 2005 85th General Assembly, Regular SessionTitle - AN ACT TO PROVIDE FUNDING FOR ADMINISTRATIVE COSTS OF THEARKANSAS RX PROGRAMEffect Provided funding for Arkansas Rx Program by redistributing revenue from

cigarette tax created by SB 320

Full Bill -

http://www.arkleg.state.ar.us/assembly/2005/R/Pages/BillInformation.aspx?measureno=HB2629

4. SB 223/Act 1236 Passage 2007 86th General Assembly, Regular SessionTitle - AN ACT TO MAKE AN APPROPRIATION FOR PERSONAL SERVICESAND OPERATING EXPENSESEffect Redistributed revenue from additional cigarette tax created by SB 320Full Bill -


5. SB 671/Act 1211 Passage 1991 78Th

General Assembly, Regular SessionTitle - "AN ACT TO LEVY AN ADDITIONAL TAX OF ONE CENT (1) PER PACKOF CIGARETTESEffect Increased the tax on cigarettes to credit of the Aging and Adult Services FundFull Bill -


6. HB 1204/Act 180 Passage 2009 87th General Assembly, Regular Session


30/31


31/31

Effect Altered the Sunset Clause of SB 576 so that the tax shall not extend beyond June30, 2007. This extended the tax another two (2) years totaling six (6) since the original

bill SB 576Full Bill -

http://www.arkleg.state.ar.us/assembly/2005/R/Pages/BillInformation.aspx?measureno=

HB1691

4. SB 1004/Act 869 Passage 2007 86th General Assembly, Regular SessionTitle - AN ACT CONCERNING THE RETAIL BEER TAXEffect Put into place on July 1, 2007 (Day after the extended tax from SB 576 expired)

a new tax on BeerFull Bill -


5. SB 248/Act 982 Passage 2011 88th General Assembly, Regular SessionTitle AN ACT TO MAKE VARIOUS CORRECTIONS TO TITLE 3 OF THEARKANSAS CODE OF 1987 CONCERNING ALCOHOLIC BEVERAGESEffect Put into effect a new tax on Beer with revenue being added to the GeneralRevenue FundFull Bill -http://www.arkleg.state.ar.us/assembly/2011/2011R/Pages/BillInformation.aspx?measure

no=SB248

Documents

Dedicated Tax Increases in Arkansas Full