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DEDICATED TAX INCREASES IN ARKANSAS: PROVIDING PUBLIC GOODS OR GROWING GOVERNMENT?

BRADLEY R. GITZ, PH.D

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LYON COLLEGE BATESVILLE, ARKANSAS JUNE, 2012
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BRADLEY R. GITZ
BIO STATEMENT
Bradley R. Gitz received his doctorate in Politic al Science from the University of Illinois at Urbana - Champaign in 1989. He has taught at Illinois, the University of Alabama - Huntsville, Lafayette College, and has held an endowed professorship (The William Jefferson Clinton Professorship) in Political Sc ience at Lyon College in Batesville, 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 an d 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 literature on the subject, a representative sample of such taxes from Ar kansas is presented and analyzed. While no firm conclusions are reached regarding the utility of dedicated taxes for providing particular "public goods" and services, tendencies are identified that suggest their increased use corresponds with both increase d overall government spending and a higher overall tax burden for Arkansans that reduce the state's economic competitiveness.

DEDICATED TAX INCREASES IN ARKANSAS: PROVIDING PUBLIC GOODS OR GROWING GOVERNMENT?


INTRODUCTION
Government relies upon tax revenue to perform its various duties at all levels, federal, state, and local. At the same time, taxes are never popular with the voters who elect government officials. A tension therefore exists at the outset between what government needs to perform its functions and what voters are willing to accept in terms of taxation. A reasonable argument could be made that government invariably seeks more revenue (and more sources of revenue), while voters seek to prevent government from obtaining that revenue in order to limit their tax burden. While citizens recognize that taxation is necessary because government is necessary, they invariably prefer that the revenue come from sources other than themselves. In order to overcome this dilemma, interest groups (defined as those seeking to collectively influence public policy in a preferred direction) and elected officials have increasingly resorted to dedicated tax increases to fund specific projects (roads, health care, schools, etc.). Voters in Arkansas will be asked in November, 2012, for instance, to support one for the roads; a one-half percent increase in the sales tax for ten years to finance road construction, road repairs, and other infrastructure improvements. In the words of one prominent supporter, the tax increase represents

one more step on the road to better highways, more jobs, and a brighter future for our state all without raising taxes on groceries, medicine, or gasoline. 1 The following analysis examines the recent history of such dedicated tax increases over time in Arkansas, with the goal of providing a basis for assessing their advantages and disadvantages. Based upon this analysis, an argument will be made that such taxes have become more attractive over time for elected officials because 1) they can be more easily sold to the public; 2) they remove the need to make the kinds of difficult trade-offs in funding decisions required by the use of general revenue; 3) their costs can be more effectively concealed from taxpayers; and 4) they can be easily increased, extended or even re-purposed to fund other governmental programs.

THE LOGIC OF DEDICATED TAXATION


Dedicated tax increases (whether enacted by voters in referenda or by legislation) can include a range of direct and indirect (excise) taxes and are usually presented as means of addressing specific public goods needs. As such, they usually involve passage of a specific tax (or tax increase) to fund popular causes; in most cases, programs like roads and health care which are thought to be necessary for enhancing a state or municipalitys economic development and broader quality of life. Promises are accordingly made by supporters that such taxes are relatively painless ways to address deficiencies in vital services and infrastructure necessary for progress. An assumption behind such efforts is that voters are more likely to accept modest, targeted tax increases for worthy causes that just about everyone approves of and that appear to provide clear benefits. According to one

Quote from Madison Murphy, Chairman of the Arkansas Highway Commission, and co-chair of the Move Arkansas Forward Committee, in the Arkansas-Democrat Gazette, May 21, 2012, page5B.

prominent study, education, local government, and highways tend to the most common targets for such earmarking at the state level.2 Critics of the dedicated tax increase approach question whether the claims made on its behalf are fully justified, and express concern over whether the relative ease with which they can be sold to the public produces a dynamic that, in increments, ends up dramatically raising the cumulative tax burden (and thereby actually undermining a states economic competitiveness in relation to surrounding states with potentially lower tax burdens). Such critics also raise concerns about the uses toward which the revenue raised by such taxes is put, including whether they fully reach intended projects, and whether such taxes are especially susceptible to being subtly repurposed or extended long after they have fulfilled their alleged, initial objectives. The broader argument contained within such criticism is that dedicated tax increases have become popular means of growing government in a way that voters have difficulty tracking and fully grasping over time.

WHAT WE (THINK WE) KNOW


The general issue of dedicated taxes and related sub-issues has been extensively studied by academic researchers. Much of this research centers around two concepts fungibility and the flypaper effect. Fungibility refers to the ability of legislators to substitute tax dollars, whether from general revenue or dedicated sources. A succinct explanation for such fungibility, and the manner in which it casts doubt on the impact of dedicated tax revenue, comes from Crowley and Hoffer:

Arturo Perez, Earmarking State Taxes: 4 Edition, (Washington, DC: National Conference of State Legislatures, 2008).

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..Assume a state government spends $100 from the general fund on education. Suppose the legislature is able to pass a new special tax on the basis of its revenue being earmarked for education spending. Further, suppose this new tax brings in $50 in revenue. Although it may seem natural to assume education spending will increase by $50 as a result of the earmarked revenue (to $150), policy makers actually have the option to decrease spending on education out of the general fund. Even if the $50 earmarked to education spending is actually spent on education, total education expenditures may remain unchanged if the legislature decides to decrease general fund spending from $100 to $50. This allows policy makers to spend $50 of revenue previously dedicated to education elsewhere, and the earmark is functionally equivalent to a $50 increase in unspecified general fund revenue.3 Crowley and Hoffer therefore conclude that politicians may use the earmarking of tax revenues to specific expenditure categories to covertly raise revenue and expand total government size; an option that becomes especially attractive when there is public resistance to general increases in taxes. Using the Leviathan model of government developed by Geoffrey Brennan and James Buchanan (which emphasizes the tendency of government to maximize its size and power), their research suggests that dedicated tax revenues are largely ineffective for increasing expenditures toward which they are tied but more effective at increasing total government size by masking increases in total government spending.4 The flypaper effect refers, in contrast, to the related question of how much dedicated revenue actually sticks (as in flypaper) to the intended target.5 A wide range of scholarly studies have consequently produced disparate results for this effect, with considerable variations in the cases of lump sum grants (which are theoretically fungible), state lottery revenue dedicated to education (more common in recent years), and state highway spending. The consensus from such research is
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George R. Crowley and Adam J. Hoffer, Dedicated Tax Revenue: Constraining Government or Masking Its Growth? (Working Paper, Mercatus Center, George Mason University, No.12-17, May 2012), p.8 Crowley and Hoffer also provide an extensive and highly useful for these purposes literature review on dedicated taxation. 4 On the Leviathan Model see Geoffrey Brennan and James Buchanan, Towards a Tax Constitution for Leviathan, Journal of Public Economics 8 (1977): 255-274; and Brennan and Buchanan, The Power to Tax: Analytical Foundations of a Fiscal Constitution (Cambridge, UK: Cambridge University Press, 1980). 5 On the flypaper effect, see Robert P. Inman, The Flypaper Effect (National Bureau of Economic Research Working Paper No. 14579, Cambridge, MA: December 2008).

that at least some of the dedicated revenue goes toward the intended target, producing at least some degree of flypaper effect, although in most cases an amount well below 100%.6 Less frequently found in the literature on dedicated taxation have been analyses of particular examples (case studies) from individual states designed to more precisely explain the ways in which dedicated taxes can be manipulated or modified by legislators to increase overall governmental revenue. The present study seeks to fill this gap by looking at a representative sample of such taxes dedicated for various purposes in the state of Arkansas. The goal will be to explore the manner in which dedicated taxes for popular causes can be established, extended, increased, and even repurposed after initial passage, thereby providing legislators with an expedient and often subtle mechanism with which to increase government revenue.

DEDICATED TAX INCREASES IN ARKANSAS


What is referred to as Special (earmarked) revenue has become a more important part of overall revenue for the state of Arkansas over time, increasing in value by 130% between 1994 and 2008, from $734 million to $1.692 billion (General revenue increased, in comparison, by only 77% over the same period).7 Overall, Arkansas receives just under 10% of its overall revenue from special (dedicated) revenue (the state of Alabama ranks first in the percentage of revenue derived from dedicated purposes at 84%; the state of Rhode Island last with 4%). 8 The single largest purpose for which dedicated revenue is raised is roads and highways, comprising 37% of overall special revenue (largely through gas taxes and vehicular registration fees), but Arkansas has also employed a fairly
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Crowley and Hoffer, p.6-7 Financing State Programs in Arkansas, Arkansas Bureau of Legislative Research, 2008 8 From Perez, Earmarking State Taxes, cited in Crowley and Hoffer, p.4

typical array of other taxes directed toward other purposes.9 Municipalities have also made use of the dedicated tax approach to fund city services, community projects, etc. As such, the following discussion addresses the use of such taxes in recent years in Arkansas, primarily at the state level but with some local/municipal cases included. For the sake of representativeness, the sample includes a range of dedicated taxes for different purposes.

BEER TAXES
Taxes on beer, wine, and liquor in general are often justified as a means of both recouping costs (externalities) associated with certain behavior (increased heath costs in the case of consuming alcoholic beverages) and discouraging such behavior (where the tax essentially imposes a penalty upon it by driving up costs). Within this context, there are several recent examples of such a taxation approach for the state of Arkansas, which, according to one survey, has the 18th highest level of taxation among states on beer, the 31st highest on wine, and the 44th highest on liquor.10 Senate Bill 576/Act 1841, with the title The Child Care for Working Families Act passed in 2001 by the Arkansas state legislature imposed a fairly straightforward 3% tax on beer, with the ensuing revenue to be directed toward the Department of Human Services Grant Fund, from which 20% would go to fund child care for low-income families and 80% to support and expand the Arkansas Better Chance Program of the state Department of Education. The language of the bill specifically mandated expiration of the tax on June, 2003, two years hence.


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Financing State Programs in Arkansas Data from the Center for Science in the Public Interest Alcohol Policies Project, August, 2004.

Beer
SB 576/Act 1841 Passage 2001 THE CHILD CARE FOR WORKING FAMILIES ACT Put into effect a tax on Beer to go to Department of Human Services Grants Fund. Tax was set to expire two (2) years later (June 30, 2003) Altered the Sunset Clause in SB 576 so that it expired on June 30, 2005; which extended the tax by two (2) years Altered the Sunset Clause of SB 576 so that the tax shall not extend beyond June 30, 2007. This extended the tax another two (2) years totaling six (6) since the original bill SB 576 Put into place on July 1, 2007 (Day after the extended tax from SB 576 expired) a new tax on Beer Put into effect a new tax on Beer with revenue being added to the General Revenue Fund

HB 1200/ Act 272 Passage 2003 HB 1691/ Act 2188 Passage 2005

THE CHILD CARE FOR WORKING FAMILIES ACT

AN ACT TO EXTEND THE SUNSET CLAUSE ON THE RETAIL BEER TAX

SB 1004/ Act 869 Passage 2007 SB 248/Act 982 Passage 2011

AN ACT CONCERNING THE RETAIL BEER TAX

AN ACT TO MAKE VARIOUS CORRECTIONS TO TITLE 3 OF THE ARKANSAS CODE OF 1987 CONCERNING ALCOHOLIC BEVERAGES

Despite the sunset provision specifically contained in SB 576, two years later House Bill 1200/Act 272 extended the 3% beer tax for another two years until June 30, 2005. A further extension of the tax (until June 30, 2007) was enacted by House Bill 1691/Act 2188. In apparent response to criticism from some state legislators regarding these extensions, the latter bill also contained language requiring the State Board of Education and the Department of Education to fund the targeted programs after the tax expiration in 2007. Although the 3% beer tax was subsequently allowed (per the language of HB 1691) to expire on June 30, 2007, after having been in effect and producing revenue for six years, a substitute beer tax of 1% was imposed by Senate Bill 1004/Act 869 effective on July 1, 2007, the day after the expiration of the original tax. SB 1004 also altered the content of the beer tax by directing all revenue the General Revenue Fund, with no constraints upon use. The series of extensions of the original beer tax had therefore altered the purpose toward which the tax was dedicated. In 2011, the 1% beer tax imposed by SB 1004 was increased to 4% by Senate Bill 248/Act 982, thereby producing a tax on beer higher than the original 3% imposed by SB 576 ten years earlier. SB 248 also directed all generated revenue toward the General Revenue to be used in an open-ended fashion. Unlike SB 248 (and subsequent extensions thereof), there were no sunset or expiration provisions written into SB 248. An examination of the series of dedicated beer taxes in Arkansas beginning in 2001 with SB 576 reveals several tendencies that may be intrinsic to such an approach to raising tax revenue. The original beer tax of 3% was justified by the goal toward which the revenue would be directed child care and education for those with lower incomes; causes which could be expected to muster 10

considerable support in a relatively poor state with minimal such services. It would be reasonable to conclude that few elected officials and few aspiring to state-wide elected office would wish to be on the wrong side of such issues (defined as in opposition to such a tax). In a bible belt state with a still high percentage of dry counties, there would also seem to be less inherent opposition to sin taxes upon beer purchases. Important to note, however, is the evolution of the original 3% beer tax, and the manner in which it was extended on two specific occasions (HB 1200 and HB 1691) beyond the initial expiration date of 2003 until June 2007. As several lawmakers argued in opposing these extensions, they could be construed as violations of the promises originally made to Arkansas taxpayers and the beer industry back in 2001, when a specific expiration date was identified in order to help win passage.11 Of perhaps greater relevance, when the original 3% tax was finally terminated on June 30th, 2007 (four years later than the original sunset date), a replacement tax of 1% was immediately imposed that was later increased (by SB 248) to 4% in 2011, with no expiration date. Through this series of extensions and replacements, the original purpose of the beer tax (funding of the worthy causes of child care and lower-income education) was dropped and revenue directly entirely toward the General Revenue Fund. Over the course of a decade, a 3% tax on beer intended to go toward specific purposes and last two years had been extended several times and become a 4% tax on beer with no expiration date to be directed toward general revenue. A possible explanation for the longevity and shifting content/purposes of the beer tax can be found in the ease with which such taxes can be extended with little public notice once a dedicated tax, particularly one that imposes only modest burdens on only a subset of taxpayers (such as a 3%
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A representative comment along these lines came from Rep. Rick Saunders of Hot Springs, who noted All these industries and all these people understood this tax to sunset. A deal is a deal. Rep. Daryl Pace of Siloam Springs asked Do you think beer drinkers took us at our word it would sunset ...You think its OK to break our word to the people?

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tax on beer) and which is designed to fund a popular cause is in place, it becomes easier to ignore original promises made regarding termination and extend the tax for additional years, or to alter the original purpose and perhaps even increase the tax (as with SB 576,to 4%). Voters are, in short, less likely to notice that a small tax has been extended or even slightly increased once it is in place and they have become accustomed to paying it. The overall tax burden may have been added to, but likely in a manner largely imperceptible to the average taxpayer. The legislator interest in capturing a significant stream of revenue thereby vastly exceeds the taxpayer interest in preventing that particular stream from being established, extended or even increased.

THE MIXED DRINK TAX


A pattern somewhat similar to that for the evolution of SB 576 and the beer tax holds for the mixed drink tax enacted in House Bill 1111/Act 261. Originally passed in 1989, HB 1111 imposed a 4% tax on mixed drinks (martinis, rum and cokes, and other cocktails) for premises consumption (in bars and restaurants), with all revenue to be directed toward improvements at the University of Arkansas for Medical Sciences. More specifically, HB 111 called for the tax to be in place up the point when UAMS could pay off a loan used to finance construction of its Biomedical Research Center (completed four years later, in 1993). The date for retirement of the loan was estimated at 2002, at which point the tax would be terminated. In 2005, however, the state legislature, over the objections of the states hospitality and restaurant associations, passed House Bill 2633/Act 1274 permanently extending the still in place 4% mixed drink tax. Mark Abernathy, President of Consolidated Restaurant Industries, pointedly asked

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Cigarette Taxes
Placed a tax on cigarettes to fund Breast Cancer Research Redistributed revenue from Cigarette tax put into effect by SB 320 Provided funding for Arkansas Rx Program by redistributing revenue from cigarette tax created by SB 320 Redistributed revenue from additional cigarette tax created by SB 320 Increased the tax on cigarettes to credit of the Aging and Adult Services Fund Increased the tax on cigarettes with all revenue being credited into the General Revenue Account

SB 320/Act THE BREAST CANCER ACT OF 434 1997 Passage 1997 HB 2522/Act AN ACT TO AMEND THE 1698 DISTRIBUTION OF THE Passage 2001 ADDITIONAL TAX ON CIGARETTES HB 2629/Act AN ACT TO PROVIDE FUNDING 2219 FOR ADMINISTRATIVE COSTS OF Passage 2005 THE ARKANSAS RX PROGRAM

SB 223/Act AN ACT TO MAKE AN 1236 APPROPRIATION FOR PERSONAL Passage 2007 SERVICES AND OPERATING EXPENSES SB 671/Act AN ACT TO LEVY AN ADDITIONAL 1211 TAX OF ONE CENT (1) PER PACK Passage 1991 OF CIGARETTES HB 1204/Act AN ACT TO INCREASE THE TAX 180 ON CIGARETTES Passage 2009

Mixed Drinks
HB 1111/Act AN ACT TO IMPOSE AN 261 ADDITIONAL TAX ON MIXED Passage 1989 DRINKS HB 2633/Act AN ACT TO CONTINUE THE 1274 SUPPLEMENTAL MIXED DRINK Passage 2005 TAX Additional tax on mixed drinks sold on premises to fund improvements to the UAMS Campus Extended the tax put into effect by HB 1111 making it permanent

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whether the word of the legislature was valid. State Sen. Him Holt, D-Springdale echoed Abernathys sentiments by noting that We gave our word wed sunset this tax.12 Although the indefinite extension of the mixed drink tax did not involve a redirection of revenue (with all revenue still earmarked for UAMS), it further reflects the ease with which modest directed taxes for laudable purposes (in this case, medical research) can be extended well beyond their specified sunset dates, in some cases permanently. A tax intended to help a medical institution pay off a construction loan eventually became a permanent subsidy for that institution to use for whatever purposes it sees fit, on the assumption that the services it provides are deemed vital to the health and broader welfare of the states residents. Although the extension of the mixed drink tax in 2005 provoked greater attention and controversy due to the opposition of well-organized interests (restaurant owners and the hospitality industry), those who would actually pay the tax (consumers) had likely already become accustomed to doing so since the imposition of the tax in the late-1980s. Consistent with the logic of such taxes as a whole, terminating such a minor tax mattered to them much less than perpetuating the estimated $1.4 million annual revenue stream it provided mattered to UAMS. Almost entirely lost in discussion of HB 2633 was the contribution the mixed drink tax made to the broader tax burden for Arkansans, who were now paying, according to data from the Arkansas Hospitality Association (AHA), the highest taxes in the nation on their Martinis and Whiskey Sours.13
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Abernathy is quoted in Arkansas News, March 23, 2005; Holt in Arkansas News, March 24, 2005. Claims made by Montine McNulty, Executive Director of the Arkansas Hospitality Association.

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CIGARETTE TAXES
Like the other 49 states, Arkansas places excise taxes upon cigarettes and directs the resulting revenue toward specific, often health-related, causes. Cigarette taxes are often highly popular because they theoretically perform three functions they recoup some of the health care costs (externalities) imposed by smokers upon non-smokers; they discourage smoking by raising its financial costs; and they punish presumably culpable tobacco companies by raising the costs of their products (and thereby reducing their profits). The trend toward imposing excise taxes on tobacco products began in earnest in the 1990s, resulting in an accumulating array of federal, state and local taxes that dramatically increased the price of cigarettes and the tax burden for cigarette smokers nationwide. At present, New York imposes the highest such tax upon cigarettes ($4.35 per pack), Missouri the lowest ($0.17 per pack).14 One of the more important (and praised) cigarette taxes in Arkansas was established by Senate Bill 320/Act 434 in 1997. Known as The Breast Cancer Act of 1997, SB 320 captured the anti-smoking, anti-tobacco company spirit of the time by imposing a tax of one dollar twenty-five cents ($1.25) per one thousand (1,000) cigarettes sold in the state. 90% of the monies collected by the tax would be allocated to special revenues directed toward various programs for breast cancer research, with the remaining 10% directed toward general revenue. One of the more unusual features of the excise tax, and one which directs attention to the fungibility issue, was a provision in the legislation promising that no taxes would be collected during any fiscal year in which the General Assembly had appropriated at least eight hundred thousand dollars from general revenues to the Breast Cancer Research Fund and at least three million two hundred thousand dollars of general revenues to the Breast Cancer Control Fund.
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Latest data on state cigarette taxes from the Center for Disease Control (CDC).

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Considered within context, SB 320 aroused little opposition, perhaps due to the nature of that which was being taxed (cigarettes and cigarette smoking), the declining and increasingly unpopular group paying the tax (cigarette smokers), and the popularity of the cause toward which the tax monies were directed (breast cancer research). Support for this interpretation could be found in the structure of the bill itself, which begins with a long discussion of the threat posed to the states citizens by breast cancer. In addition, neither the title of the bill (The Breast Cancer Act of) nor its content (the actual imposed tax was not mentioned until Section Five) emphasized that it was a tax bill per se. One of the much criticized tendencies of directed tax approaches the subsequent re-purposing of raised revenue occurs again with the modification of SB 320 in the form of House Bill 2522/Act 1698, passed just four years later (in 2001). Despite a title including the phrase .., To Ensure Funding of the Breast Cancer Research Fund, HB 2522 actually reduced the share of revenue allocated by SB 320 for such programs (from 90% to 71%). The remaining revenue (29% of the total) was directed toward two programs Meals on Wheels and a prescription drug waiver for the elderly that had no relationship to the original purpose of SB 320. A further repurposing of the revenue generated by the original SB 320 would occur in both 2005 and 2007, with passage of House Bill 2629/Act 2219 and Senate Bill 223/Act 1236. HB 2629 (2005) would shift money as special revenue to the Arkansas Rx Program Fund and the Miscellaneous Agencies Fund for the Arkansas Prostate Cancer Foundation (in addition to Meals on Wheels), while SB223 (2007) would earmark revenue to the University of Arkansas Medical Center Fund (in addition to Meals and Wheels and Prostate Cancer). As with the previous modification of SB 320 in the form of HB 2522, there was little public debate or attention in general paid to either HB 2629 or SB 223.

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Taken together, the original cigarette tax imposed by the Breast Cancer Act of 1997 (SB 320) would be repurposed three times over the course of the next decade, resulting in a reduction of the monies allocated to its original purpose and allocations to a range of causes with no relationship to that purpose. Rather than muster support for and seek to pass new (and potentially unpopular) taxes or utilize monies from general revenue for such causes, an existing tax originally passed with widespread support because deemed for a worthy cause was modified to fund such diverse programs as prescription drugs, Meals on Wheels, and prostate cancer research. The re-purposing of revenue from dedicated taxes thus appears to have become a more expedient means of funding programs than using general revenue, raising existing taxes, or creating new ones. Again, once a tax has been established for a particular purpose, it becomes susceptible to extension and reallocation with little public knowledge or resistance. The public, accordingly, tends to pay more attention to proposed tax increases than extensions or modifications of existing ones. The repurposing evident with the cigarette tax (the original SB 320) also confirms the fungibility problem intrinsic to dedicated taxation, by virtue of the fact that the tax was ultimately used to fund an array of programs that could have been funded from general revenue. By creating alternative streams of revenue that can be extended, modified, and repurposed, dedicated taxes remove the need for legislators to make trade-offs when funding programs it becomes unnecessary to make cuts in some programs in order to fund others when programs can be funded outside of general revenue. The overall impact is, as critics often claim, a hidden increase in both overall government spending and tax burden for taxpayers.

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OTHER CIGARETTE TAXES


Although the evolution of the cigarette tax originally imposed by SB 320 represents perhaps the best example of the way in which initially popular dedicated taxes can be manipulated into additional revenue streams for legislative use over time, similar problems appear to exist for other cigarette taxes in Arkansas. Along these lines, Senate Bill 671/Act 1211, passed in 1991 (six years before the Breast Cancer Act of 1997) imposed an additional one cent tax on cigarettes in order to fund transportation services for elderly persons. Although the actual title of the SB 671 used the word exclusively in reference to the revenues raised being directed to that purpose, Section Four of the bill introduced the important caveat that any revenue generated beyond the first three million dollars shall be deposited into the State Treasury as general revenues. With respect to the fungibility issue, one state legislator at the time opposed passage of SB 671 on the grounds that I think these funds can be taken out of general revenues. If we can fund the penitentiary. surely to God the seniors of Arkansas deserve more than they do.15 As early as 1991, then, cigarette taxes were being used in Arkansas to fund popular causes that a) could have been otherwise funded from general revenue; and b) to create, through little noticed language deeply embedded in the legislation, new general revenue tax streams. Most recently, in 2009, Arkansas dramatically increased its overall level of cigarette taxation with passage of House Bill 1204/Act 180. As a result of HB 1204, the state tax on a pack of cigarettes nearly doubled, from $0.59 to $1.15, a tax rate considerably higher than that imposed by neighboring states like Missouri ($0.17), Mississippi ($0.68), Louisiana ($0.60), and Tennessee ($0.62).16 News reports at the time suggested that the estimated $86 million in revenue generated by the tax would go toward a statewide trauma system, community health centers, in-home care for the elderly, expansion of
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Quote from Rep. Bill Foster of England, Arkansas Center for Disease Control (CDC) data.

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the ARKids First childrens health insurance program, and operating costs for a Fayetteville campus of the University of Arkansas for Medical Sciences, among other programs.17 Statements by Gov. Mike Beebe and other supporters of the bill reinforced these perceptions that revenue would be directed toward the creation of the trauma system and related health care initiatives. It was noted in such claims that Arkansas had made considerable progress in recent years in such areas as education and economic development, but was lagging in the health care sector. Despite the manner in which the large tax increase contained in HB 1204 was presented to the public (as a means with which to establish a state-wide trauma system and fund other needed health care initiatives), the actual wording of the bill inexplicably directed all revenue toward general revenue rather than special (dedicated) revenue, thereby providing no guarantees that the money would be allocated as originally intended. As if to allay such concerns, even Gov. Beebe was forced to comment that One of the things we have to ensure is that we do what we said we were going to do and make sure these funds go into the right appropriation pots, the right agencies, the right bills, so that the money was expended exactly like it was sold.18 The lack of any specific language to that effect in the bill itself was left unexplained and largely unnoticed during debate over its passage.

LOCAL DEDICATED TAXES


Although the primary focus of the present analysis has been the use of dedicated taxation at the state level in Arkansas, the use of dedicated taxes has expanded at the local/municipal level as well. In most cases, revenue raised from increases in city sales taxes are earmarked for various city services, including police and fire departments, as well as for different kinds of construction projects
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Arkansas News, February 17 , 2009. 18 Ibid.

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(community centers, athletic facilities, zoo repairs, etc.). Such proposals are invariably supported with claims that increased revenues are necessary to both maintain an adequate level of city services and to encourage community economic development. They are also usually voted on in special elections in which they are the only proposals on the ballot. A number of such proposals have been recently approved by voters in Arkansas cities. Those discussed here consist of a representative sample from large (Little Rock), mid-size (Jonesboro), and small (Batesville) municipalities. In September, 2011 voters in the state capital of Little Rock approved a two-part hike in the citys sales tax, tripling the rate from the existing half a cent to one and a half cents, effective January 1, 2012. 5/8 of the one cent increase was permanent and directed toward various unspecified city services; the remaining 3/8 would be in place for ten years to fund a list of construction projects and new technologies. The combined taxes were expected to raise city revenue by roughly $500 million over the course of the next ten years.19 In August, 2010 voters in Jonesboro (the largest city in northeast Arkansas, with a population of roughly 70,000) passed into law a half cent increase in the city sales tax, raising the tax from the previous one cent to one and a half cents. The tax hike would be in in place for four years and monies raised would be directed by city ordinance toward funding of its police and fire departments. It was claimed that the amount of revenue to be generated, estimated at $6 million per annum, would save the jobs of 40 police officers and 27 firefighters, enhance public safety, and cover a projected $4 million city budget deficit.20 In March, 2012 voters went to the polls in Batesville, Arkansas (a county seat with a population of roughly 10,000 in northern Arkansas) to approve a one cent increase in the city sales tax (boosting it to two cents overall). Half of the one cent increase would be temporary, with revenues directed
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Little Rock: One Cent Tax Passes, KATV.com, September 19, 2011 Jonesboro Voters OK Sales Tax Increase, Arkansas News, August 11, 2010.

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toward the construction of a multi-purpose community center, while the other half cent increase would be permanent and allocated to unspecified city maintenance and operations. The ballot measure was a scaled back version of one that had been defeated the previous year and was named The 2012 Community Development Initiative. As with the earlier ballot measures that were approved in Little Rock and Jonesboro, supporters stressed the public safety issue in Batesville, including the direction of funds toward firefighters and police.21 In theory, the casting of ballots in Little Rock, Jonesboro, and Batesville on dedicated tax proposals reflect democracy in action; more precisely, the progressive referendum concept in which those expected to bear the costs of a proposed tax are allowed to approve or reject it in a direct vote. There is also reason to believe that, based on a long-standing body of political science research, voters tend to be more interested in and knowledgeable about issues in local politics that are thought to more directly affect them than issues at the state and national levels (a view nicely captured in the quip by former U.S. House Speaker Thomas Tip ONeill that all politics is local). In addition, it is possible that accountability and transparency would be greater at the local level and that greater scrutiny would be applied to the allocation of any monies raised by dedicated taxation. Although such expectations seem consistent with the expectations behind the American system of federalism, the ballot measures in Little Rock, Jonesboro, and Batesville (and presumably in other Arkansas and American cities as well) also demonstrate certain deficiencies that run counter to such assumptions. The most obvious shortcoming is the use of special elections outside the normal election cycle and calendar. By holding elections outside of November and for which there are no other issues/contests on the ballot, voter turnout is inevitably depressed - in each of the cases presented here, and although the taxes proposed would affect all taxpayers, turnout represented a
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Batesville Fire Dept. Eyes Benefits from One Cent Sales Tax Vote, KAIT8.com March 8, 2012.

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minuscule percentage of registered voters (less than 20% in the Little Rock and Jonesboro balloting). Given such meager turnout figures, it would be difficult to draw any firm conclusions regarding the actual levels of popular support or opposition to the proposed measures. As with the extension or re-purposing of dedicated tax measures at the state level, dedicated tax proposals at the local level seem to tilt the democratic process toward organized interests advocating higher taxes at the expense of the interests of taxpayers. It appears that the lower the level of turnout seen with dedicated tax proposals at the local level, the greater the likelihood of passage. Various categories of public officials and city employees (including firefighters, police officers, city bureaucrats, etc.), as well as supporters of particular community projects to be funded by the proposed tax hikes, are invariably better organized, have a greater interest in the outcome, and are more motivated to vote in such contests compared to the average taxpayer confronted with an almost un-detectable increase of a penny per dollar in the local sales tax and who stays home on that particular day, perhaps even unaware that a vote affecting their tax burden is taking place. The logic and the structure of such elections consequently tilt the outcome in favor of those supporting passage over those opposing it. Just as legislators at the state level can raise, extend, or re-purpose already in-place dedicated taxes to satisfy special interests at the expense of inattentive taxpayers (thereby increasing their cumulative tax burden, albeit in a difficult to track fashion), motivated interests at the municipal level (including public employees perpetually interested in increased tax revenue and new revenue streams) can successfully push for passage of new taxes because of the dramatic disparity in incentives influencing supporters and opponents of those increases. In short, victory in such electoral contests produces a much greater payoff for those advocating new tax hikes (a $500

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million stream of captured tax revenue over ten years in the Little Rock case, for example) than for those resisting them (avoiding a penny increase in the sales tax). Consistent with such conclusions were news accounts accompanying passage of the Little Rock tax increase indicating that ordinary citizens who would be expected to pay the tax were unaware of it. In the words of one supermarket owner, I doubt that many of them (customers) are aware it took effect today I remembered that it was going up, but then forgot about it till this morning. 22 A certain fatigue factor might be added in the case of the Batesville tax increase, since voters had narrowly turned back a similar proposed increase just the year before and were accordingly less likely to mount a comparable level of resistance the second time around. Supporters of such provisions, operating with obviously greater motivation, can keep coming back until they succeed; opponents are fighting a desperate rear-guard battle likely to eventually end in defeat and probably perceive the contest in that fashion. Although, in theory, such balloting allows everyone to have a say on the taxes they will be affected by, the underlying logic of special elections on dedicated tax increases suggests that a tiny percentage of more motivated voters will be able to enhance their interests and receive benefits by pushing higher taxes on everyone. Within this context, it is possible that dedicated tax proposals at the local level would be less likely to be approved if voted on in general elections (rather than in special, stand-alone ballots). Given the vastly larger turnout in general (November) elections, the inherent motivation gap that tilts the balance in favor of such proposals would likely diminish. Under current circumstances, however, the resort to special elections at the local level for dedicated taxation works inexorably in favor of increasing taxation and the overall tax burden for citizens.
22

Little Rock Businesses Adjust to Sales Tax Hike, Fox16.com, January 1, 2012

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SOME FINDINGS
Based upon the limited but reasonably representative sample analyzed here, several tentative conclusions can be reached regarding the impact of dedicated taxation in the case of Arkansas, with presumed application beyond it to other states. First, dedicated taxes are fairly easily imposed because they have the virtue of being directed at popular causes and appear to impose only modest costs upon taxpayers. Of equal importance, such taxes create a new revenue stream that directly increases the overall tax burden because of the fungibilty of tax dollars and the unlikelihood that taxpayers will ask whether funding for such causes can be found in general revenue, perhaps by reducing expenditures on less worthy endeavors. Second, once established, dedicated taxes become unusually susceptible to manipulation by legislators in the form of both extensions of the tax beyond the promised sunset date and re- purposing of the tax to fund other causes. This outcome is largely a consequence of the lower level of attention that taxpayers pay to the alteration/extension of modest taxes that they have become accustomed to paying and the much greater stake that organized interests and the legislators they support have in retaining and redirecting such taxes. In short, the taxpayers dont pay much attention to what happens after a tax has been established, but legislators and beneficiaries of such taxation most certainly do. Finally, an assessment of local taxes indicates a similar dynamic at work at that level, albeit in somewhat different fashion. More precisely, the logic of local dedicated tax proposals tilts such contests in favor of their passage due to the typically low voter turnouts. That low turnout stems, in turn, from a pronounced motivation gap favoring supporters who have a greater stake in the

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outcome. The smaller number of citizens who benefit, often directly from such increased taxes will be sure to vote, the larger majority only modestly and adversely affected by such hikes usually wont. Also of interest with respect to local dedicated tax proposals is the pattern detected in the Little Rock, Jonesboro, and Batesville cases that turnout varies inversely with the size of city and the number of registered voters. Batesville, by far the smallest city, had the highest turnout as a percentage of registered voters (at around 40%). Little Rock, by far the largest city, had by far the lowest turnout rate, in the vicinity of 20%. If special elections at the municipal level tend to favor passage of the proposals in question because of low turnout, then passage seems even more likely the larger the municipality, with an obvious corresponding impact on a states overall tax burden (a tax increase in a city of 300,000 citizens has a greater impact on the overall state tax burden than one passed, as in Batesville, in a city of 10,000). The broader conclusion of this analysis is that the use of dedicated tax increases at both the state and local levels contributes to higher levels of government spending and higher burdens for taxpayers. They do so in large part because, as Cowley and Hoffer suggest, they effectively mask their contribution to the tax burden over time. Rather than insist that new expenditures for worthy causes be funded from general revenue, and that current funding for less worthy causes be accordingly reduced, new revenue streams are established outside of general revenue. Once established, such taxes seldom go away (as usually promised) and are often increased and/or re- purposed for new projects (or projects previously funded from general revenue) with little taxpayer knowledge/resistance. The focus of the typical taxpayer is on the next proposed tax increase, not what is happening with those already in place and to which theyve become accustomed. The old story about the frog in the pot which boils to death as the temperature is slowly but imperceptibly (for the frog) increased over time, but which would jump out of the pot if the 25

temperature were abruptly turned up, comes to mind here. Arkansas taxpayers are the frog, suffering from a steady accumulation of taxes, none of which is sufficiently onerous and many of which are sufficiently popular as to discourage concerted resistance. The frog stays in the pot, precisely because it is largely unaware until it is too late that the temperature is increasing and that it is being scalded to death. Within this context, the overall tax burden borne by Arkansans must be noted. According to the non-partisan Tax Foundation, Arkansas, one of the nations poorest states, actually suffers from one of its highest tax burdens. The combined state/local tax burden in Arkansas has risen from 8.3% in 1977 (45th highest at the time) to 9.9% at present, 14th highest in the country. Of perhaps equal importance are the significantly lower tax rates in every state bordering Arkansas, with Mississippi at 8.7% (36th), Louisiana at 8.2% (42nd), Missouri at 9.0% (34th), Tennessee at 7.6% (47th), Oklahoma at 8.7% (37th), and Texas at 7.9% (45th). In short, Arkansas has by far the highest state/local tax burden of any state in its region; indeed, in the entire south, even when including border states like Missouri, Virginia, West Virginia and Kentucky.23 Not surprisingly, the business tax climate of Arkansas is judged to be well down in the lower half of states. Using a Tax Foundation index consisting of corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes (both commercial and residential), Arkansas ranks 31st in business tax climate, considerably lower than that for neighboring states like Texas (9th), Tennessee (14th), Missouri (15th), and Mississippi (17th) and only slightly ahead of Louisiana (32nd) and Oklahoma (33rd).24 Based on such rankings, one could find at least a partial explanation for why the state has largely failed to benefit from the sun belt economic boom of recent decades to the same degree as its neighbors.
23 24

Data from The Tax Foundation, TaxFoundation.org. Ibid.

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CONCLUSION
Placing the use of dedicated taxes into the context of Arkansas high tax burden and negative business tax climate further reinforces the central conclusion of this analysis that the increasing resort to such a form of taxation drives up overall government spending and tax burdens. Along these lines, those proposing such tax hikes, at both the state and local level, invariably target popular, worthy causes that are said to contribute to long-term economic development. It is often said by such supporters that Arkansans need to fund such endeavors, even if by dedicated revenues outside the traditional general revenue tax stream, for the sake of progress and to enhance Arkansas ability to attract business, investment, and jobs. The problem with such an approach is, of course, that such small taxes (a penny here, another couple there) for such worthy causes ultimately add up to a crushing cumulative tax burden that ends up driving business, investment, and jobs to neighboring states with lower tax burdens. A contradiction therefore exists between ends and means, as Arkansans and their representatives, with often the best of intentions, approve additional tax hikes for specific purposes for the sake of progress only to see the resulting high tax burden more than cancels out whatever economic benefits accrue from the new programs, roads, or facilities. In the end, a too high tax burden (particularly in comparison to neighboring states) drives not just investment and jobs toward such states, but also the greater tax revenues that a growing economy produces. The classic vicious cycle ensues, in which a stagnant economy reduces tax revenues, requiring new tax levies - often in the form of dedicated taxes - that only further weaken the economy (and further shrink the tax base).

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Thus, among the questions that Arkansas taxpayers should ask this November, when voting on the proposed half-cent increase in the state sales tax for highway construction, is whether the benefits will actually materialize as promised and whether the tax will remain in place after (as seems the pattern) the promised sunset date. More to the point, they might wish to ask whether Arkansas has been moving in the right direction on the tax front in recent years and whether they wish to see it move even higher up the list of states with the most crushing tax burdens.25


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Increasing that half-cent sales tax would move Arkansas past Illinois, Maine, Maryland, Massachusetts(!), th Pennsylvania and Vermont, into a tie with Minnesota for the 7 highest tax burden on the Tax Foundation ranking.

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Appendix of Cited Arkansas State Bills

Cigarette Taxes
1. SB 320/Act 434 Passage 1997 81st General Assembly, Regular Session Title - "THE BREAST CANCER ACT OF 1997." Effect Placed a tax on cigarettes to fund Breast Cancer Research Full Bill http://www.arkleg.state.ar.us/assembly/1997/R/Pages/BillInformation.aspx?measureno=S B320 2. HB 2522/Act 1698 Passage 2001 83rd General Assembly, Regular Session Title - AN ACT TO AMEND THE DISTRIBUTION OF THE ADDITIONAL TAX ON CIGARETTES Effect Redistributed revenue from Cigarette tax put into effect by SB 320 Full 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 Session Title - AN ACT TO PROVIDE FUNDING FOR ADMINISTRATIVE COSTS OF THE ARKANSAS RX PROGRAM Effect 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 Session Title - AN ACT TO MAKE AN APPROPRIATION FOR PERSONAL SERVICES AND OPERATING EXPENSES Effect Redistributed revenue from additional cigarette tax created by SB 320 Full Bill http://www.arkleg.state.ar.us/assembly/2007/R/Pages/BillInformation.aspx?measureno=S B223 5. SB 671/Act 1211 Passage 1991 78Th General Assembly, Regular Session Title - "AN ACT TO LEVY AN ADDITIONAL TAX OF ONE CENT (1) PER PACK OF CIGARETTES Effect Increased the tax on cigarettes to credit of the Aging and Adult Services Fund Full Bill http://www.arkleg.state.ar.us/assembly/1991/R/Pages/BillInformation.aspx?measureno=S B671 6. HB 1204/Act 180 Passage 2009 87th General Assembly, Regular Session
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Title - AN ACT TO INCREASE THE TAX ON CIGARETTES Effect Increased the tax on cigarettes with all revenue being credited into the General Revenue Account Full Bill http://www.arkleg.state.ar.us/assembly/2009/R/Pages/BillInformation.aspx?measureno= HB1204

Mixed Drink Taxes


1. HB 1111/Act 261 Passage 1989 77th General Assembly, 1st Extraordinary Session Title - "AN ACT TO IMPOSE AN ADDITIONAL TAX ON MIXED DRINKS Effect Additional tax on mixed drinks sold on premises to fund improvements to the UAMS Campus Full Bill http://www.arkleg.state.ar.us/assembly/1989/S1/Pages/BillInformation.aspx?measureno= HB1111 2. HB 2633/Act 1274 Passage 2005 85th General Assembly, Regular Session Title - AN ACT TO CONTINUE THE SUPPLEMENTAL MIXED DRINK TAX Effect Extended the tax put into effect by HB 1111 making it permanent Full Bill http://www.arkleg.state.ar.us/assembly/2005/R/Pages/BillInformation.aspx?measureno= HB2633

Beer Taxes
1. SB 576/Act 1841 Passage 2001 83rd General Assembly, Regular Session Title THE CHILD CARE FOR WORKING FAMILIES ACT Effect Put into effect a tax on Beer to go to Department of Human Services Grants Fund. Tax was set to expire two (2) years later (June 30, 2003) Full Bill http://www.arkleg.state.ar.us/assembly/2001/R/Pages/BillInformation.aspx?measureno=S B576 2. HB 1200/Act 272 Passage 2003 84th General Assembly, Regular Session Title THE CHILD CARE FOR WORKING FAMILIES ACT Effect Altered the Sunset Clause in SB 576 so that it expired on June 30, 2005; which extended the tax by two (2) years Full Bill http://www.arkleg.state.ar.us/assembly/2003/R/Pages/BillInformation.aspx?measureno= HB1200 3. HB 1691/Act 2188 Passage 2005 85th General Assembly, Regular Session Title AN ACT TO EXTEND THE SUNSET CLAUSE ON THE RETAIL BEER TAX

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4.

5.

Effect Altered the Sunset Clause of SB 576 so that the tax shall not extend beyond June 30, 2007. This extended the tax another two (2) years totaling six (6) since the original bill SB 576 Full Bill http://www.arkleg.state.ar.us/assembly/2005/R/Pages/BillInformation.aspx?measureno= HB1691 SB 1004/Act 869 Passage 2007 86th General Assembly, Regular Session Title - AN ACT CONCERNING THE RETAIL BEER TAX Effect Put into place on July 1, 2007 (Day after the extended tax from SB 576 expired) a new tax on Beer Full Bill http://www.arkleg.state.ar.us/assembly/2007/R/Pages/BillInformation.aspx?measureno=S B1004 SB 248/Act 982 Passage 2011 88th General Assembly, Regular Session Title AN ACT TO MAKE VARIOUS CORRECTIONS TO TITLE 3 OF THE ARKANSAS CODE OF 1987 CONCERNING ALCOHOLIC BEVERAGES Effect Put into effect a new tax on Beer with revenue being added to the General Revenue Fund Full Bill http://www.arkleg.state.ar.us/assembly/2011/2011R/Pages/BillInformation.aspx?measure no=SB248

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