September 29, 1999

September 29, 1999 | Lecture on Taxes

Cutting Taxes and Other Great Ideas for Congress from an Arkansas Governor

It is a pleasure to be here with you today. I want to welcome all the folks who are joining us by way of the Internet, and we are grateful, of course, to Al Gore for having "created" this very useful way for us to get our message across the country.

I also thank The Heritage Foundation for this opportunity to share what we have done in Arkansas during the past two and a half years to provide tax relief and to make our state government more accountable and efficient. In Arkansas, and even in Hope, Arkansas, there are conservatives who believe that government really does need to get smaller, not larger; who believe that the best government is the most local government; who believe that taxes should be smaller; and who try to bring more efficiencies into what we do in government. And the good news is that this message of smaller, more efficient, and accountable government is selling in our state.

Many of the solutions to the problems facing our country can be found working at the state and local levels. It is a good thing when Washington looks to the states for innovative programs that will work at the federal level. Across the country, governors have been on the cutting edge--not only making the tax structure more fair, but also reducing the burden on taxpayers; not only reducing welfare rolls, but also creating jobs. With the tax deadline looming tomorrow, I am painfully aware of how much of Arkansans' hard-earned money goes to Washington to fund federal programs and mandates. I would like to begin by talking about some of the tax reforms we have instituted in Arkansas during the past two and a half years and then go on to several other reforms that might be of interest to Congress.

Just last week, we completed our 1999 legislative session, and the difference between the 1997 session two years ago (the Arkansas legislature meets biannually) and this session is remarkable. Two years ago, to say that the legislature didn't like me would have been an understatement. But this time we got along so well that I pinched myself most days to make sure we really were having a session.

We developed an incredible working relationship, and I think perhaps term limits had a lot to do with it. I was a strong supporter of term limits in 1992, when we implemented them in Arkansas. I believe in them more now because I have seen 57 freshman legislators, out of 100 who came to the State House, come with an understanding that they had limited time here in government and had better make it count. Their goal was to make their state a better place, not to make mischief for the governor. And that attitude so prevailed in our legislative atmosphere that we passed 92 percent of the legislative package of 75 bills we introduced from the Administration. Now, I would suggest to you that in any state, this would be a pretty darn good record, but when you are a Republican governor introducing that much legislation and getting that much passed in the most lopsided legislature in the country--party-wise--it is remarkable.

And that's why I want to praise our legislature. I can't take all the credit, and it would be inappropriate for me to do so. The executive branch cannot accomplish anything without working with the legislative branch, sitting down with them, negotiating, and treating the members with respect because they were elected just like I was. I can tell you that what we've seen in Arkansas in this last legislative session is what I would hope and pray will someday happen in Washington.

REFORMING ARKANSAS' TAX SYSTEM

To better understand the reforms we've implemented, you need a basic understanding of Arkansas' tax system. Picture a three-legged stool. One leg represents income tax, another the Arkansas sales tax, and the third represents property tax. If any of these legs is removed or greatly shortened, the stool would be off-balance. Each area of revenue is equally needed to provide the necessary essential services to the people of my state. Therefore, tax relief and reform have to be carefully crafted to be responsible.

One of the greatest challenges that I faced as governor of a state like Arkansas was that for 162 years the tax burden on Arkansans always went up. It never went down. And when the legislature met, the discussion would be, "Which taxes will we raise and by how much?" But, for the first time in 1997 and again this session, the old paradigm was no longer valid. The big battle was no longer, "Which taxes will we raise and by how much?" but, "Which taxes will we cut and by how much?" To shift the mentality of the legislators, to change the paradigm if you will, was singularly, I think, the most significant thing that has happened in the past two and a half years.

Responsible Tax Cuts--The First Steps

During the 1997 legislative session, my first as governor, we passed a comprehensive income tax relief package, marking the first time in Arkansas' history that the state had seen a major, broad-based income tax cut. This $90.6 million tax relief measure lessened the tax burden on Arkansans in many ways:

  • Our state tax code no longer punishes a couple for being married. We need to reward couples for getting married and raising children in a family setting. Too often, our government policies do just the opposite.

  • Those below the poverty line are exempt from state income tax. We adjusted the tax tables for all taxpayers to incorporate the new standard deduction amounts and a tax credit based on the amount of Social Security taxes paid.

  • To prevent taxpayers from creeping into higher tax brackets as a result of inflation, we indexed the regular income tax brackets. Indexing is performed each year, beginning in 1999, based on the positive change in the Consumer Price Index. The maximum percentage of change allowable is 3 percent a year.

  • Arkansas uses the federal credit for child and dependent care to compute the Arkansas child and dependent care credit. In the 1997 session, we increased the available credit by doubling, from 10 percent to 20 percent, the amount of federal credit allowable.

  • We eliminated the capital gains tax on the sale of homes. If the property was owned and occupied as the taxpayer's main residence for three of the five years preceding the sale, the gain from the sale is exempt.

  • We increased the qualifying income level and maximum rebate allowable under Arkansas' Circuit Breaker Act. The Circuit Breaker Act provides cash rebates to low-income Arkansas taxpayers 62 years of age and older based on the real property taxes on their personal residence.

  • We enacted a special working taxpayer credit based on the portion of Social Security tax that is paid to the federal government for retirement benefits. Taxpayers receive a credit equal to 2 percent of the Social Security tax paid. The credit is allowed on the first $40,000 of earned income. Taxpayers who qualify for the special reduced tax rate receive a credit equal to 4 percent of their earned income.

It is of special note that this package of reforms gave $90.6 million in tax relief to Arkansans in a responsible manner. Arkansas law mandates that we have a balanced budget. In both 1997 and 1999, we produced balanced budgets with tax relief in the budgets. In other words, we budgeted for tax relief. By finding savings to pay for new programs, we proved it was possible to propose new and needed programs by reallocating resources while still providing tax relief. This has never before been accomplished in Arkansas.

1999 Tax Reforms

IRA's. During the 1999 session, our legislature passed bills to adopt the new federal Roth IRA provisions and the educational IRA provisions. It extended the $6,000 per taxpayer exemption for income from employer-sponsored pension plans to include income from individual retirement accounts.

Capital Gains. Legislation was also considered or enacted to reduce the capital gains tax and simplify capital gains tax computation. One of the chief impediments to growth in Arkansas is the income tax on capital gains. It adds about $50 million to the state treasury, but it costs Arkansans far more. The federal capital gains tax, now 20 percent, affects everyone. But Arkansas' additional 6 percent levy is a high hurdle for businesses to clear, particularly while neighboring Texas and Tennessee do not tax capital gains at all and Mississippi does not tax in-state investments. Despite the fact that economic development is one of the state's priorities, Arkansas' capital gains tax both repels outside businesses and actually gives Arkansas' businesses an incentive to relocate out of state.

I proposed the complete elimination of income tax on capital gains for individual taxpayers. This reform will be phased in beginning in tax year 1999 with an exclusion of 30 percent of capital gains from taxation and a simplification of the capital gains tax computation for taxpayers. I plan to address further reduction of the capital gains tax when the legislature convenes again in 2001.

Property Tax. Going into the 1999 legislative session, we knew we had to do something to eliminate the inequities in Arkansas' property tax system. We also understood that much of the frustration over property taxes was a direct result of problems with appraisals and the assessment system, rather than with property taxes in general. Taxpayers are rightly distressed by the inequities that result when property values are not kept up-to-date for many years and suddenly, large increases in assessments are made. To older retired citizens on fixed incomes, these increases can be devastating.

To address these concerns, we proposed in the 1999 legislative session a Property Taxpayers' Bill of Rights designed to bring fairness to all Arkansas property owners. It establishes a uniform notice and due process procedure, guaranteeing citizens they will be treated fairly in the assessment of property taxes. It provides a fairer, more user-friendly process for taxpayers to appeal the valuation of their property, including easier access to the appeals process and a consistent written standard for the property owner to prevail. It also gives property owners the opportunity to better understand how their local taxes are used by specifying what portion of their total tax bill goes to each unit of local government. The Taxpayers' Bill of Rights is a step toward eliminating inequitable assessments and an empowerment of taxpayers in the increasingly complex world of property taxation.

OTHER REFORMS

We went into the 1999 legislative session with five major goals: tax reform, which you just heard about; juvenile justice reform; a highway program; education reform; and electricity deregulation. I would like to tell you briefly about some of these areas and just where we've made significant progress in Arkansas.

Juvenile Justice Reform. Many of you may remember that it was just over a year ago when our state was rocked with a horrible tragedy on the campus of Westside Middle School with the shooting of fifteen persons, five of whom were killed--one teacher and four students. Our laws inadequately addressed that kind of circumstance so we changed them. The New York Times recently wrote a piece about the process we went through and the changes we made, which included blended sentencing laws.

Education Reform. We eliminated a lot of the unnecessary bureaucracy and senseless mandates on local school districts. One example was the mandate forcing local districts to have summer programs, even if the districts didn't have any students who qualified for them. Through our Start Smart Initiative, we are placing more emphasis on the K through four years and creating higher standards for those students. Students can no longer be promoted past the fourth grade unless they meet the standards in mathematics, reading, and also in character education.

Character-based education has become a very important component of our education structure in Arkansas, and school districts have options on how they implement it. They can either choose a set curriculum--there are probably twenty different programs, samples of which we have in the Department of Education--or they can do it on their own. What we encourage them to do is to put basic virtues like responsibility, punctuality, honor, and honesty into every part of their curriculum. It's not religion-based, but rather focuses on character traits and values. The idea is if you're teaching history, you talk about the impact of, let's say, honesty: "How did honesty help Abraham Lincoln? What did it do for his credibility?" Children need to understand there are consequences for living out virtues, and we've already seen some pretty convincing results: discipline problems are going down and the learning atmosphere has improved dramatically. My point, however, is not that character-based education simply means maintaining discipline and order. Rather, it means building into kids certain character attributes that are desirable for them; that will make a big difference in their getting scholarships and decent jobs; that will help them succeed in life.

We successfully challenged the teachers unions, which historically have been very powerful in Arkansas, and won on virtually every issue. In addition to making it possible, through the Fair Dismissal Act, to get rid of teachers who are not doing the job and who are violating their contract, we also passed a bill that will provide financial incentives up to $2,000 a year of additional money for teachers who show extraordinary excellence in teaching. It's not enough to penalize people who do not do well. We must reward people who do exceptionally well and create a sense of expectancy for those who succeed because they'll be rewarded.

Electricity Deregulation. As all of you know, electricity deregulation is a very complicated issue. A number of states have taken it on, and I would challenge anyone to take a look at our deregulation bill. Time will tell, but I believe it is one of the best bills in the country. It properly addresses the balance between ensuring real fairness for the consumer, creating a competitive environment for large industrial customers, and giving the utilities a reason to want to compete.

Welfare Reform. Welfare reform is working in our state. 44 percent of the people on welfare a year and a half ago are now off the welfare rolls and are in jobs and working. And the good news is that--even though the liberals said that if we did that, we would have huge unemployment lines, people would be out in the streets, they would be starving, and the food banks would just be overwhelmed--here are the facts: 44 percent of welfare recipients later, we have the lowest unemployment rate in the history of Arkansas right now, and last year we had the largest number of new job start-ups in the history of our state.

CONCLUSION

These are some of the things we've done, and they are proof positive that cutting taxes, making government performance-driven and accountable to the people, and bringing some sense of real fairness to government's overall approach is making life better for all our citizens.

Thank you for listening to another governor from Hope, Arkansas--one, by the way, whose ideas on reforming government are very different from those of our last governor from Hope.

The Honorable Mike Huckabee, a Republican, is the Governor of Arkansas. This lecture is based on remarks given at The Heritage Foundation on April 14, 1999, and on testimony before the House Committee on Government reform on the same day.