Governor Huckabee wants people to pay $225 million a year in new state taxes to preserve a paltry level of state services, and the state Supreme Court has all but ordered the legislature to raise taxes even more in order that Arkansas children can get a minimally good education.

Those political conditions – a political or a legal mandate, or both, to increase taxes – have occurred rarely in the past 70 years, and all but one time they have meant one thing: a sales tax increase.


Not since 1935 has the legislature faced such daunting pressure to raise taxes. The legislature levied the sales tax for the first time in that grim Depression year after President Franklin D. Roosevelt lost patience with Arkansas and cut off all federal aid to the state, which had reduced its own taxes for education while siphoning off federal relief dollars to the state to pay school teachers.

To open the federal spigot again, Arkansas was forced to raise taxes for education and to shoulder some of the cost of relief for the unemployed as all the other states were already doing. The legislature that spring levied a 2 percent tax on the sale of commodities, except lard, flour and a few other food staples. The sales tax has been the packhorse of state government ever since.


If the General Assembly can be persuaded to raise taxes at all in 2003 it likely will be some form of the sales tax, either raising the current rate of 5 1/8 cents on the dollar or broadening the tax to a few things that are exempt now, including perhaps a few services.

Even that prospect is chancy. The legislature has raised taxes for the general operations of government, as opposed to special programs like highways, only under powerful goading by governors. Legislators ordinarily have to be blandished and wheedled into voting for taxes. Huckabee has all but declared war on legislators, a formula for raising taxes that has not yet been tried.


Nine days after he won re-election, Governor Huckabee proposed raising the state sales tax by 5/8ths of a cent on a dollar. It would raise about $225 million next year, which would be used mainly to open new prisons and drug courts, shore up Medicaid and increase funding for schools slightly. But he said he was not firmly wedded to the tax and was amenable to other ways the legislature might find to fund services.

Huckabee proposed the tax increase before the Supreme Court declared schools unconstitutional because they did not provide children an equal and quality education. The Supreme Court did not fix an amount that the legislature should raise to satisfy the constitutional injunction, but outside estimates have exceeded $500 million.

The sales tax is the tax of first and last resort for three reasons. It raises a lot of money, $400 million next year for a single penny increase; it is nearly invisible because it is paid in dimes and quarters every day; and the state Constitution makes nearly every other source of taxation practically untouchable.

The same year that Gov. J. Marion Futrell and the legislature were forgiving local school taxes and ducking any role in providing relief to its destitute people they put a constitutional amendment on the ballot that was supposed to make it nearly impossible to raise taxes ever again. The amendment, ratified in 1934, said no tax in existence then could be raised except by a statewide election or by the votes of three-fourths of the members of each house of the legislature. But no sooner was it ratified than the crisis with the Roosevelt administration forced Futrell and the legislature to raise taxes or else virtually secede from the union.


They couldn’t muster the massive support required by the amendment to increase any of the existing individual or business taxes so they created a new tax on the sale of tangible goods by merchants. Being an entirely new tax, it needed only a bare majority in each house. Prohibition also ended, allowing the General Assembly to levy taxes on alcoholic beverages again, also by a simple majority. Liquor taxes, like sales and use taxes, remain subject to a simple majority vote because they did not exist in 1934.

Since 1935, the legislature has raised major taxes for general purposes five times, mainly for education on each occasion: in 1941, 1957, 1971, 1983, 1991 and 1999. In every instance except 1971 the legislature, prompted by the governor, chose to raise the sales tax. (The sales tax base, not the rate, was expanded in 1941 and the half-cent increase in 1999 merely replaced money lost by the public schools with a statewide reduction in property taxes.) On two other occasions, the legislature rebuffed governors wanting to raise the sales tax, Winthrop Rockefeller in 1969 and Bill Clinton in 1989.

A package of taxes passed at the behest of Gov. Dale Bumpers in 1971 was the only major revenue program that did not rely on the sales tax. Bumpers said the sales tax rested too much burden on low-income people, and he proposed raising the personal income tax, broadening the base of the sales tax to repair services, requiring utilities, railroads and airlines to pay sales taxes on equipment and materials, raising some severance taxes on mining and exploration and, ultimately, raising the cigarette tax.

The Senate and House of Representatives, worried about offending wealthier voters, repeatedly defeated Bumpers’ income tax bill. Ultimately, the bill was brought back up and voted on eight times over two weeks before it finally got the necessary 27 votes in the Senate and 75 in the House of Representatives. To get the bill passed in the Senate, Bumpers had to amend it to remove the top 9 percent tax bracket. He substituted a cigarette tax increase to obtain the money, and it passed on repeated roll calls. The income tax bill raised the top rate from 5 to 7 percent.

All of the Bumpers tax bills passed, and the only legislators defeated in the next election were several who had voted against the taxes. While the sales tax rate in the end is apt to be the legislature’s resort because lots of money can be raised with a single majority vote in each house, legislators may at least look at other options. The fight over repeal of the sales tax on food and over-the-counter medicine, defeated decisively in the general election, focused attention on the regressive nature of the sales tax. The poorer the taxpayer the greater percentage of his income is paid in sales taxes. Governor Huckabee acknowledged that the sales tax tended to be regressive.

Arkansas’s tax system has become steadily more regressive as more corporations and high-income taxpayers find ways to legally avoid federal and state income taxes, the inheritance taxes on millionaires’ estates are phased out, more and more upscale purchases are made by the Internet thus escaping state sales and use taxes, and the legislature at every session has made more business purchases exempt from sales taxes. Federal tax changes favoring corporations and high-income taxpayers also are routinely adopted by the state, reducing state revenues.

(The first fiscal test of 2003 will be whether Huckabee and the legislature adopt changes in the depreciation schedule enacted by Congress early last year. Corporations could immediately write off a portion of the cost of equipment. If the state adopts the changes, as it has always done, it will mean a further sharp reduction in state corporate income taxes. States ordinarily adopt the changes in the federal tax code, but many states, facing the worst budget crises in half-a-century, now are decoupling from the federal tax system. Many other states must formally act to sever t heir tax codes from the federal but since Arkansas is forbidden by its Constitution from yoking its taxes automatically to federal tax changes, Arkansas can simply not act and avoid the tax cut.)

If the legislature decides to raise revenues more fairly than raising the sales tax rate there are several ways to do it, although each faces formidable political hurdles, either powerful interests or the 75-percent constitutional requirement for passage, or both. Here are a few of its options that spread the burden more justly.


Last year, the state sales tax and the companion use tax on purchases outside the state for use in the state brought into the state treasury just $50 million short of $2 billion. Sales and use taxes have been collected all along on the sale price of personal property, everything from bubble gum to nuclear reactors, but the legislature has exempted many items, usually those that were acquired or sold by powerful interest groups – for example, agriculture, manufacturers, newspapers and broadcast companies (their advertising space and time) – or nonprofit groups promoting a worthy cause, such as boys and girls clubs, scout organizations, humane societies, orphan homes and the Poets Roundtable.

Over the years, the legislature has expanded the base of the sales tax to include a few personal services – landscaping and lawn maintenance, telephone answering services, janitorial work, lodging, printing, storing furs and cars, and a few other services – but it has not extended the tax to the services of more potent groups like the health professions, attorneys, architects, accountants and engineers.

Many states have been expanding their tax to a few services in recent years but a few at a time and not big revenue producers. Hawaii, New Mexico and South Dakota levy a gross receipts tax on businesses that applies to the services they sell. The Florida legislature went all the way in 1987 and extended the sales tax to a broad array of professional, consumer and financial services. Newspapers and broadcast stations, whose advertising space and time were taxed, led a campaign to repeal the tax. It was repealed within a year and a one-percent sales tax increase replaced it.

Every proposal in Arkansas to tax advertising or other services or to repeal any of the exemptions on goods has met fierce resistance. The Arkansas Democrat and other media hired the state’s most potent lobbyist in 1987 to stop legislation to tax advertising and newspaper sales.

If Arkansas taxed the sale of all personal property – everything now specifically exempt under the law – it could double sales and use tax collections: another $1.9 billion or so a year.

And if it taxed all kinds of professional and consumer services it could gain at least another $700 million a year, a calculation based on the U. S. Census Bureau’s last survey of the gross receipts of service industries in Arkansas, in 1997.

But those are political impossibilities. The legislature has been unwilling to beard even one of the host of powerful economic interests who would be arrayed against such legislation.

A few exemptions, totaling about $60 million, are off limits because taxing them might run afoul of the interstate commerce clause or else federal law explicitly forbids the tax – sales to the federal government, for instance. The largest exemptions are protected by powerful lobbies – industrial and agricultural machinery ($167 million), almost any kind of sale to farms, poultry, hog and cattle operations and cotton gins (another $167 million) and exemptions that are supposed to entice industries to Arkansas ($68 million).

If Governor Huckabee and the General Assembly found the courage to buck the powerful interests, they could raise almost any sum they wished, do it by a simple majority vote in each house and spread the burden of government more fairly.

To eliminate the popular symbol of the tax system’s unfairness – people’s food is taxed but the food consumed by farm animals is not – the legislature could repeal the exemptions for feed bought for the commercial production of livestock and poultry. That would produce about $52 million a year. Other states have the same exemption, which would raise the cry that Arkansas was making its livestock and poultry farmers less competitive. But it is an objection that would be raised with almost any exemption or the taxation of almost any service.

A good place to start would be the removal of exemptions for the media, principally advertising. The exemptions total about $24 million and are among the less defensible. Newspapers, broadcast companies and billboard companies as well as advertising agencies say that the tax would impinge on press freedom and free speech, but there is no constitutional protection as long as the tax is generally levied and does not single out the press for special taxation.

To show its independent spirit, the legislature also could tax the sale of packaging materials to manufacturers, an exemption worth about $18 million that would be spread broadly across the manufacturing segment with minimal economic consequences.

Finally, the state could tax all professional and consumer services, not at the full rate of 5 1/8ths percent perhaps, but at only 1 or 2 percent. It would be based on the billings of lawyers, accountants, doctors, engineers, beauticians and scores of services. The best estimate is that a 2 percent tax would produce about $270 million, but it might bring much, much more.


Since Arkansas adopted an income tax in 1929, it has changed the brackets once, in 1999, and that marginally, to index the brackets to inflation. The result is that the income tax is extremely regressive. Taxpayers in 1929 started paying the top marginal rate (5 percent) when their incomes exceeded $25,000, and adjusting the bracket to the consumer price index raised it this year to $27,500. Twenty-five thousand dollars was an extraordinary income in 1929, but now it is not far above the family poverty rate.

The legislature has eliminated income taxes for families below the poverty line from time to time since 1973, which has relieved some of the harshness of the tax schedule, but the Arkansas income tax soon will effectively a flat rate of 7 percent.

Owing to the three-fourths vote required, Arkansas has raised income taxes three times in 73 years, once when Bumpers got the legislature to raise rates and twice with a simple majority vote by avoiding raising the rates. It removed the deduction for federal income taxes in 1949 and instituted a payroll withholding system in 1965, which effectively enforced the tax for the first time.

The legislature could restore some progressivity to the system and raise lots of money by adding new brackets and marginal rates for very high incomes.

By creating a new bracket for adjusted gross incomes of more than $100,000 with a rate of 8 percent (the top rate now is 7 percent), the state could pick up a little more than $100 million a year. Only 47,000 of the more than 1.1 million people who file state income tax returns would pay more taxes, and they would get about a third of the taxes back because state income taxes are deducted from federal tax payments. In effect, the federal government would shoulder more than a third of the tax increase, some $35 million.

By creating a still higher bracket, adjusted gross incomes higher than $500,000 a year, and imposing a marginal rate of 9 percent the state could gain another $30 million, all of it, according to 1999 federal income tax data, from 2,207 millionaires. Uncle Sam would pay between 33 and 38 percent of the tax increase for them because much of the state tax would be deductible. They would not be able to claim all the deduction because some of the deduction would be lost for incomes greater than about $130,000, and the alternative minimum tax would come into play for a few taxpayers with large deductions.


Arkansas levies the smallest tax on natural gas among all the gas-producing states. The tax, three-tenths of a penny on each thousand cubic feet (mcf) of gas, is a tiny fraction of the next lowest tax. The low tax reflects the political clout of the gas industry.

About 160 billion cubic feet of gas was extracted from Arkansas fields in fiscal 2002, producing $478,839. If Arkansas taxed gas on its price at the wellhead instead of a flat rate and if the tax rate matched that of neighboring Texas (7.5 percent) the state would pick up another $49 million, based on the average market price of gas in Arkansas last week, $4.13 an mcf.

Texas has the highest tax rate of the gas states, but all the surrounding states have tax rates many times the Arkansas rate. Oklahoma taxes producers 7 percent of the gross value of the gas, Mississippi 6 percent of the market value, Tennessee 3 percent of the sales price and Louisiana only 12.2 cents per thousand cubic feet, which is still 40 times the Arkansas tax rate.

A rate of 7 percent of the market value of gas, which would be competitive with other states, would raise $46 million a year based on current wellhead prices.

To the extent that gas distribution companies pass along the tax to consumers, Arkansas homeowners and businesses already pay the high severance taxes of Texas and Oklahoma, which produce much of the gas consumed in Arkansas. Much of the Arkansas severance tax would be passed along to consumers in the Ohio River valley and other states that consume Arkansas gas.

Arkansas severance taxes on oil, timber and gravel are close to those in other states, but the state could collect millions of dollars more in severance taxes on bromine without economic consequences. Two companies that operate seven bromine plants in south Arkansas supply most of the world market.

Arkansas is the only serious bromine-producing state. The tax, first levied on the fledgling industry in 1971, is $2.55 per thousand barrels. If the tax only kept up with inflation it would be about $11 per barrel now. A tax of $20 per barrel on extractions by a mature and flourishing industry would be reasonable. It would produce more than $6 million, compared with the $750,000 raised by the current tax.


Arkansas levies an excise tax of 34 cents on a package of cigarettes. Thirty-one states levy higher taxes, 10 of them from $1 to $1.50 a package.

While the cigarette tax is one that requires a three-fourths vote in each house, the legislature has found it easy to raise the tax because most people don’t smoke. But the demand for cigarettes is elastic. Each penny of tax now produces slightly more than $2 million of revenue, but sharply higher taxes would raise the cost and probably reduce consumption. That is desirable but it would not help the state’s budget crisis.

Here’s a solution. Instead of raising the existing excise tax, levy a 30 percent sales tax on cigarettes. Rather than a fixed amount on a package, the tax would be based on the retail price of cigarettes. Cigarette companies have continued to make bountiful profits in the face of declining consumption by raising the price. Tying the state tax to the retail price would produce a stable revenue stream.

It also would significantly improve public health and lower medical costs. A 10 percent increase in price tends to reduce consumption about 4 percent. A 30 percent sales tax would reduce cigarette smokers about 12 percent, forcing about 60,000 Arkansans to quit smoking. Since half of smokers eventually die of smoking-related causes, the legislature would be saving 30,000 lives.

A 30 percent tax would produce about $210 million a year. The tax would rank Arkansas among the top states in cigarette taxes.


Arkansas has taxed large inheritances since 1909. Although the tax applies only to very rich estates (only 246 paid taxes on inheritances in Arkansas last year), it is a significant source of revenues. Over the past seven years, the state has collected $290,549,301 in estate taxes, an average of $41.5 million a year.

But that source of revenues is vanishing. Although the taxation of vast inheritances has been a staple of the federal government and all 50 states for nearly a century, President Bush proposed and Congress last year approved repeal of the federal estate tax. The repeal mechanically phased out the inheritance taxes in most states as well, three years before the federal tax ends.

States are allowed to impose estate taxes of their own up to the amount of the adjustable credit allowed by federal estate taxes. Whatever tax a state collects from a wealthy estate, up to a limit, is deducted from the estate tax owed to the federal government. Most states automatically adjust their tax as the federal estate tax credit changes, but the state Constitution does not allow Arkansas to do that. The legislature must periodically adjust the tax to the federal credit.

Eleven states already have decoupled from the federal estate tax in the past year and adopted tax schedules that do not rely on the federal credit. Other states have decoupled at least temporarily to avert the impending loss of revenues. The tax that states are allowed to levy began shrinking last year and will disappear after 2005.

Fewer than 2 percent of Arkansans who die leave estates large enough to owe any estate tax now. Only estates valued at more than $1 million are subject to the estate tax.

If the state reinstates an estate tax equal to what it was before Congress began closing the federal credit for state taxes people still will not pay a higher amount in state and federal taxes than they would have under the old law. State taxes will be converted to a deduction rather than a credit against federal estate taxes when the federal tax ends in 2010.

The argument for repealing estate taxes has been that the tax often forced people who inherited family farms and busineses to sell the farms and businesses in order to pay the tax, but there is almost no record of that happening. Farms and family businesses make up less than 3 percent of the estate tax filings in the United States. Estate taxes on family farms and businesses can be stretched out over 14 years.


Corporate income tax collections in Arkansas and other states have declined since midway in the 1990s as more corporations have adopted aggressive strategies to avoid or reduce state income taxes. A number of states have closed loopholes. Arkansas could restore millions of tax revenues by doing the same.

Many large corporations have avoided taxes in Arkansas and other states by transferring ownership of their trademarks and patents to a subsidiary – passive investment companies – headquartered in a state that does not tax royalties, interest or other forms of intangible income. (Nevada and Delaware are the most popular tax havens.) Profits from operations in the state that otherwise would be taxable by the state are siphoned out of the state by having the subsidiary in the tax-haven state charge a royalty to the rest of the corporation for the use of the trademark or patent. The royalty is deductible and reduces the tax liability in the states in which the company operates and is subject to taxes.

Arkansas could recoup millions of dollars of taxes by enacting a law similar to one in many states that requires corporations to combine the profits of the company paying the royalties with the profits of the subsidiary in the tax-haven state that holds the trademark or patent. Or the legislature could pass a law similar to Mississippi’s, which denies a deduction from gross incomes for payments to subsidiaries for royalties and interest on trademarks and patents.

It is impossible to forecast the taxes siphoned off by subsidiaries in tax havens because the information is confidential. Companies do not have to report payments to affiliated corporations for royalties and interest. The state could also recoup corporate taxes by redefining the taxable business income, as Texas and Florida have done, to include all the income from irregular transactions that a corporation is permitted to apportion among the states in which it operates under U. S. Supreme Court standards.