Employment Environment

Summary of CFC position regarding the most productive Employer/Employee relationship for the good of the Arkansas citizenry:

In General–Problems Defined:

An individual’s relationship with an employer has become more distant and adversarial over the past decades.

Entitlement mentality of the individual and the constraint of regulation has created an environment that causes the employer to adopt uniform processes and responses that do not, and cannot, make the individual actions of the employee the focus of growth and prosperity but rather lumps all into a group for an average relationship. This fosters mediocrity at all levels, including the individual.

Discrimination, abuse, and disparity are too often the first things considered from all perspectives. These perceptions are further enhanced by the response of business taking the safe and generic path to relationships with employees and correspondingly, the employee is enabled, and even encouraged to assume a wrong has been committed if they are not successful or continued as a productive part of the business relationship.

There are obvious differences in people that cannot be measured by any imposed system, and we should move to a relationship whereby the judgment of an employer/employee transaction is deemed reasonable if the people remain, in general, willingly employed. An employer will generally fail on their own within a free capitalist system if they consistently cause good people to be subjected to discrimination, danger, or abusive environments.

A–The two extreme general perception groups for the business to individual relationship are outlined as follows:

 

1.Business Focus Extreme:

Business is big, rich, socially blind, and mindlessly focused for profits.

The goal is to make as much money as possible for the owners.

Employees are a necessary evil who must be paid a little as possible.

Employees are used as interchangeable parts and are of minor importance as individuals.

Safety is a cost to be minimized.

Management will and does take advantage of an individual any time it can.

Jobs are a take it or leave it proposition

2.Employee Focus Extreme:

Jobs are an entitlement.

What, where, when, and how employment should be regulated by a third party

Employees are to be treated the same rather than equally (same pay for same job description.)

To be fired is a negotiated transaction wherein the reason for the separation is an equal responsibility.

Seniority plays a primary or large roll in job retention and compensation.

Government should monitor in detail, and punish any potential safety or discrimination infractions.

Burden should be on business to prove there is absolutely no abuse, discrimination, or danger encountered at all times.

B—An ideal and productive business environment, most beneficial to all sides, would consider the following as positive principals:

It is in the interest of business to create an environment where individuals not only wish to work, but can advance to their potential in that work.

It is the individual’s duty to advance when given opportunity, not the other way.

A job filled is a mutually beneficial arrangement that should be terminate-able by either party at any time if not beneficial.

Employees should be paid the higher of their general market rate or a value that will enhance the company viability and retain the employee services.

Safety is good for business. Injury is not only a cost to both parties, but an indicator of the poor value/job of the management.

Retaining employees is good for business. Retaining unproductive people is harmful for the company and all individuals within it. There are many factors that go into the decision to terminate an employee, it is unproductive to business and the ultimate benefits to the employee to be forced to consider the “larger group/description” an individual may be assigned/belong to when assessing an individual’s job value.

Neither party is obligated to the other except by formal written contracts.

Risk and reward should always be allowed to be an incentive when humans enter into financial relationships.

The same description or opportunity does not insure the same results.

Some are worth more compensation than others; some will accept less than others. This is an individual agreement between an individual and a business not directly relevant to any other or different arrangement.

Pay is an individual negotiation before the fact.

Continuing the relationship after the fact is an option for either party.

Equal pay for equal work is impossible to achieve in both the sense of value created by each and the effect of intangible activity on the rest of the people.

There are too many factors to equate one individual to another.

This should allow each individual to negotiate their best deal with the employer regardless of what deal any other individual may have.

Incentives exist for both parties to reach an acceptable private arrangement.

Therefore it is the intention of CFC to promote the return to and further establish true free market principles and move business in Arkansas toward the more general “public regulation by affirmative employee/consumer/community action” in place of the current “collective, government administration of penalty/requirement/and directed incentives.”

Crony Capitalism In Arkansas – HB1410

The Issue

Crony Capitalism is a broad term to describe the mixing of private business and government. It is the working of politicians and government officials with specific businesses or industries to advance the interests of those businesses. Crony Capitalism is carried out by giving special tax breaks, permits, or grants to specific developers or areas. Politically, this is displayed by corporations underwriting contributions (in some manner) to politicians in return for specific legislation that will aid their interests. This goes beyond mere lobbying, and instead legislation is written with such particularity that government is in effect picking winners and losers.

Randol O’Toole of the Cato Institute describes Crony Capitalism in the context of Tax-Increment Financing (TIF) as “providing subsidies to developers who in turn provide . . . to politicians.” According to O’Toole, “TIF works by allowing cities to use the property . . . taxes collected from new developments to subsidize those same developments.” He states that by allowing TIF those subsidized new developments impose costs on schools, fire departments, and other services. This, he states, causes other taxpayers to incur those costs through increased taxes or a lower level of services provided to the area.

O’Toole further argues that TIF is unfair and goes against the Free-Market system by providing tax subsidies to favored developers, preventing others from true competition. Crony Capitalism is against Economic Freedom for Arkansas small businesses and individuals. It makes it harder for the “outsiders” to engage in business.

The Law

HB1410 is an amendment to Arkansas Code § 26-51-2407 and § 26-51-2412, sections of the Arkansas Central Business Improvement District Rehabilitation and Development Investment Tax Credit Act. Ark. Code Ann § 26-51-2403-12 (2015). This became Act 1166 of 2011 after it was passed as HB1118 in the 88^th Arkansas General Session. Rep. Tracy Pennarts (D-HD65) and Sen. Jake Files (R-SD13) sponsored the legislation.

As background, it is important that one understands the impact of a tax credit.  State tax credits come straight off the top from money which would otherwise be collected by the state of Arkansas.  Unlike a tax deduction, a tax credit is similar to a subsidy given to the tax filer by the government.  Tax credits are subtracted not from taxable income but directly from a tax filer’s tax liability; they thus reduce taxes dollar for dollar. As a result, credits have the same value for everyone who can use them.

As currently written Act 1166 of 2011 provides State Income Tax Credits for qualified project expenditures. The current credit would be for 25% of qualified expenditures up to $500,000 for income-producing property, or $200,000 on non-income producing property. Ark. Code Ann § 26-51-2407. These credits would be issued on a first come, first serve basis with a total credit cap set at $1,000,000. Id at 2407(e)(2) . To be a qualified project, the property must:

1. Be in a central business district;
2. Have a full set of plans by a licensed architect;
3. Meet all zoning and building codes;
4. Be approved by the governing body of the business district; and
5. Expenditures must be greater than $30,000. Id. at 2404(b).

If all the requirements for a qualified project are met, the governing body of the business district will then decide if they want that property to qualify. A governing body means “the board of commissioners of the central business improvement district.” Id. Currently, the tax credit only takes effect “if the Chief Fiscal Officer of the state certifies funding . . . is available in the General Improvement Fund.” Id at 2412(a)(1). The credit may be carried back for tax years that came before the approval of the credit, if the requirements were met during that earlier year. Id. at 2412(b).

The tax credit “may be transferred, sold, or assigned only one (1) time.” Id. at 2409(a)(3)(A). The tax credit may be carried over for 5 years if it is not fully used in one tax year. Id. at 2409(2). If the tax credit is granted to a passed through tax entity, the credit may be passed through to the partners, members, or owners. Id. at 2409(a)(4). Any assignee of a credit may use the credit to offset up to one hundred percent (100%) of the state income tax due from the assignee. Id. at 2409(b)(1).

Under the proposed Amendment in HB1410, the distinction between income-producing property, and non-income producing property would go away. Eligible expenditures for the tax credit would increase from $500,000 to $2,000,000. Also, the act would not require approval from the Chief Fiscal Officer, would raise the state annual total credit cap to $10,000,000 for all projects on a first come, first serve basis, and would allow the taxpayer to now receive additional tax credits for the same project.

The Players

HB1410 is sponsored by Warwick Sabin (D-HD33). Sabin is the Executive Director of the Arkansas Regional Innovation Hub, Inc (“AR Innovation Hub”). According to their website they are located in the “Argenta Arts District”. This Arts District is within the larger Argenta District, which includes the Argenta Downtown Council Business District. These districts are located just west of the Verizon Arena in North Little Rock, AR.  According to the AR Innovation Hub’s website, the following are Partners and Collaborators for the AR Innovation Hub:

1. Arkansas Manufacturing Solutions
2. Delta Regional Authority
3. Tenenbaum Reclying Group Foundation
4. Arkansas Scient & Technology Authority
5. East Initiative
6. Arkansas STEM Coalition
7. Ben E. Keith Co. – Foodservice Distributors
8. Kiva Zip
9. Verizon
10. Arkansas Fellowship
11. Diamond Bear
12. Plastic
13. The City of North Little Rock
14. DataPath
15. Taggart Architects
16. Hydco Construction
17. Argenta Wealth Management
18. Garver Engineering
19. West Little Rock Rotary
20. Glazers

According to the Secretary of State’s website the incorporator of the AR Innovation Hub is Donna Hardcastle, and directors include Harry Hamlin, John Gaudin, and Jamie Fugitt.

The Argenta Downtown Council may be considered the “governing body” of the Argenta Business District. The current directors of the Argenta Downtown Council include:

1. Harry Hamlin (Chairman), Mitchell Williams Law Firm
2. Holly Fish (Vice Chair), EGP, PLLC, Director of Client Services
3. Chris Kent (Secretary)
4. Kyle Pitts (Treasurer), Ifrah Financial Services
5. James Alger, Delta Trust Invements, President
6. Joseph Brajcki, Artist, Designer
7. Phyllis Britton, Arkansas Times
8. Gary Clements, Clements & Associates/Architecture, Inc.
9. George Collins, Arkansas Garden Center
10. Josh Davenport, Davenport Contracting
11. Mike Davis, Police Chief, North Little Rock
12. Louis France, Reno’s Argenta Café
13. John Gaudin, Argenta Wealth Management
14. Fletcher Hanson, Newmark Grugg Arkansas
15. Bob Hardin, Hardin and Grace, P.A.
16. Charlie Hart
17. John Crow, 107 Liquor, Owner
18. Ashely Hight, NLR Chamber of Commerce, EVP
19. Michelle Ketzscher
20. Tom Marr, Department of Arkansas Heritage
21. Russ Melton, Diamond Bear Brewing Co.
22. Greg Nabholz, Newmark Grugg Arkansas
23. Larry Pennington, Pennington Studio/Claytime Pottery
24. Thomas R. Pownall, P.E., Thomas Engineering Company
25. Kathleen Rea, Regeneration Fitness
26. Christian Shuffield
27. Bob Stroud, Foundation Pro, Owner

Ex Officio Members:

Mayor Joe Smith, Sandra Taylor Smith, Todd Larson, Harold Tenenbaum, Terry Hartwick, Summer Toyne, Marbeth Bowman.

According to the Secretary of State’s website, the registered agent for the council is Donna Hardcastle, who is also the incorporator of Sabin’s AR Innovation Hub. The contact email for the Argenta Downtown Council is dhardcastle@argentadc.org.

According to the Argenta Downtown Council website, over 70% of the property owners in the Argenta District voted to become the Argenta Downtown Central Business Improvement District No. 31 of North Little Rock, Arkansas. By electing this status, properties within the district would have initial qualification for the tax credits. They must then meet the other requirements to become a qualified project, with final approval decided by the Argenta Downtown Council Board of Directors.

Note a needed caveat.  This article is not to be interpreted that the persons, legislators, or entities mentioned are engaging in Crony Capitalism. Names are simply used to identify individuals and entities involved with the Argenta Business Improvement District and potential application of this law. The individuals mentioned on the Council would simply be those who would determine if a person might qualify for a tax credit in that district.

The Game

Under the setup that Rep. Sabin’s bill brings, there is a potential for Crony Capitalism to take place within the Argenta Business District. Sabin’s AR Innovation Hub includes board members (Harry Hamlin, Chair; John Gaudin) who are on the governing board that will have the final say on whether a property owner may qualify for a tax credit. Some of the “partners and collaborators” of the AR Innovation Hub include businesses within the Argenta Business District, including Sabin’s own non-profit AR Innovation Hub, or are located just beyond the district. Those entities would also have the inside track on the architecture, construction, engineering, and distribution work to be done at the properties. AR Innovation Partner “Taggart Architect” could gain more business because any qualifying project must have plans designed by a licensed architect.

A big advantage within this structure is that these tax credits are transferable and assignable. For example, a property owner (probably a business entity) may qualify for the tax credit. That credit may then be assigned to another person to offset up to 100% of that person’s income tax due. The credit is allowed to be carried over for 5 years. So, for up to 5 years a person who receives this tax credit may be paying $0 in state income tax, even on taxable income from beyond the intended improvement district.

According to the Secretary of State website, John Gaudin is associated with at least 10 “Argenta” entites. Remember, Gaudin is both on the board for Sabin’s AR Innovation Hub, and the Argenta Downtown Council. He could theoretically receive tax credits on each of these 10 entities, if they own property, then turn around and assign the credits to offset his individual state income taxes, or any other entities that are not even in the Argenta Business District.

In addition, Greg Nabholz, Harold Tenenbaum, and John Gaudin are all listed as directors on the Secretary of State’s website for the “Argenta Place Property Owners Association.” All three of these individuals are directors for the governing body (Tenenbaum is ex-officio) that has the say on whether a person qualifies for the tax credit. If they got enough votes together, they could hypothetically only ever approve their own entities for the tax credits. Then they may assign those tax credits to their other entities to avoid state income taxes.

These same scenarios could play out with various other individuals and entities. This structure is open to abuse and avoidance of state income taxes. The intended purpose of promoting development in this district could be used to avoid state income taxes for individuals and entities not even in the district.

Hypothetical Scenario

Company X decides to build a new café in the Argenta Business District. The expense of this will cost $900,000. The company will apply and be granted the tax credit described above for the amount of $225,000. Company X’s CEO has incurred state income tax due of $45,000. The board of Company X decides to assign the tax credit of $225,000 to the CEO, who then uses the credit to offset his state income tax due of $45,000 for each of the next five years.  The state of Arkansas has given $225,000 of its general tax revenue to the CEO of Company X… Crony Capitalism.

Five years have passed, and Company X decides to build four new properties in the Argenta Business District with total expenditures of $32 Million. The four properties are all in the name of four separate LLC’s the company has set up. So, each entity gets a $2 Million tax credit. One of the credits is used to offset the state income tax due. Another credit is sold for $3.4 Million to Company W. The third credit is given again to the Company X’s CEO for personal tax relief. The fourth and final $2 Million credit is given to a business in Southern Arkansas, to establish a “good working relationship.”  The state of Arkansas has given $8 Million of its general tax revenue to underwrite the personal agenda of Company X…… Crony Capitalism.

Company X now wants to build a new skyscraper in the Argenta Business District. Since the expense would be so high, he contacts his Senator, and he quickly adjusts the law to allow for a 75% expenditure use limit rather than 25% and increases the total cap to $100 Million. The law passes through the legislature and includes an emergency clause, to avoid the economic development that may be lost if the skyscraper is not built. Twenty-seven different entities have a property interest in this new skyscraper, and they all receive a $1 Million tax credit and all use them for different purposes.  The state of Arkansas has given $27 Million of its general tax revenue to the schemes of Company X…… Crony Capitalism.

Conclusion

This hypothetical scenario shows how quickly and dramatically Crony Capitalism can reap negative effects for Arkansans.  Certain entities and individuals benefit, while others may be left out of the process entirely. The tax credit program developed through HB1410 may undermine the economic development it is intended to foster. Rather than those funds staying in the local businesses and community, the tax credits may be sold or transferred to others throughout the state, and possibly the nation.   Rather than letting the free market dictate this development, crony capitalism is on the verge of being unleased in the Argenta Business District. An elected official’s friends and business partners could gain significant tax credits through HB1410.

HB1410 and current law go beyond just providing special considerations for certain businesses that are friendly with the bill sponsoring House member. This bill and law may allow entities and individuals outside the improvement district to receive tax credits to offset their state income taxes for up to five years while piling up other credits on the same project.  If they structure their assignment of the credits correctly, they could potentially sustain that with new credits assigned from a new qualifying project every year, creating a new five year window to carry forward the credit.

Conduit for Commerce believes in free markets because they are better for business and individuals. In a free market, if the value is there to sustain these new businesses then the new businesses will be built. A free market allowing all to compete for new development is fair.

Sources

Randy O’Toole, “Crony Capitalism and Social Engineering: The Case against Tax-Increment Financing”, Policy Analysis (Cato Institute), May 18, 2011,  http://object.cato.org/sites/cato.org/files/pubs/pdf/PA676.pdf .

http://www.taxpolicycenter.org/briefing-book/background/issues/credits.cfm

Arkansas Secretary of State Business Entity Search

Arkansas General Assembly Website

Ark. Code Ann § 26-51-2403-12 (2015).

Argenta Downtown Council Website

Arkansas Innovation Hub, Inc. Website

January 9, 2015

Performance-Based Budgeting in State Agencies

Traditionally, state budgeting focused on incremental changes in detailed categories of expenditures. Performance-based budgeting (PBB) is a more recent approach which diverges from older budgeting techniques by concentrating on results as opposed to merely requests by agencies.¹ In essence, a complete PBB system links the amount of appropriations received by state agencies to their success in achieving pre-determined goals. This process requires the state legislature and related agencies to identify specific, quantifiable goals or objectives to be achieved. Budget dollars are then allocated to agencies based upon the required resources to attain such goals, in what is formulated as a strategic plan.

PBB promotes legislators to rethink policies of the past and provides agencies the flexibility to make challenging decisions that are not easily reached under traditional budgeting systems. Benefits of this system include unification of government direction, increased information to public officials and constituents of agency performance, and a more effective budget decision process.²Over time, studies show that successful use of PBB can positively impact long-term fiscal health of states.² Problems with the use of PBB consist of subjectivity in what goals are important, the vagueness in developing goals, what measures are to be used in evaluation, lack of direction as to dealing with ineffective agencies, and the costs of tracking and overseeing performance data of agencies.^{2 3}

Arkansas’ budgeting process focuses primarily on requests made by state agencies and does not currently follow a result-oriented PBB system.⁴ Although budgets are reviewed by the legislature, budgeting decisions do not require strategic plans from the agencies, nor do they involve assessments of how well agencies achieved defined performance measures.⁴

While it is difficult to ascertain which states precisely follow comprehensive PBB systems, sources affirm that most states apply the system in some capacity. According to the Murphy Commission report, 14 states incorporated PBB into operations, and over 20 other states were considering using the system.⁴ In contrast, a study done around the same time by researchers at Georgia State University found that 47 states have some form of PBB methods in effect.⁵ Of this number, 31 states passed legislation requiring PBB use, and 16 states use PBB through non-legislative initiatives in place.⁵ Provided below is a chart organized by these researchers showing which of the states have implemented some form of performance-based budgeting, through which bills, and in what year. Arkansas is one of the three states that does not have any form of centralized performance-based budgeting initiatives, according to their study.⁵

A more recent study conducted in 2012 revealed that 40 states have performance budgeting legislation passed into law.² Furthermore, the researchers recommended implementation to the states which do not use PBB (including Arkansas) because of the positive impact this system has on state liquidity, expenditures per capita, and long-term financial liability ratios.²

The success of these states prompted the federal government to adopt similar measures into the budgeting process for federal agencies. The Government Performance and Results Act (GPRA) of 1993 requires federal agencies to create a 5-year strategic plan of performance goals.⁴ These plans specify exactly how the agencies are to achieve measurable performance goals. Agencies then must report quantifiable results to the Office of Management and Budget, along with explanations if goals are not met.⁴ The OMB office is in charge of developing and conveying an overall federal performance report to Congress.⁴

Texas is recognized as one of the leading users of PBB, enacting the system after bills passed in 1991 and 1993 provided for tying agency budgets to performance goals.^{7 8} Agencies are required to create performance goals and a strategy for achieving the goals. A Legislative Budget Board is in charge of monitoring the performance of state agencies in achieving strategic goals and conveying metrics of performance to the legislature.⁶ The legislature uses the reports on agency performance when deciding upon the next year’s budget.^{3 6}

Requisite to the success of PBB is an accurate, transparent accounting system that will provide legislators and budget oversight committees with information to assess the proper costs associated with state agency activities. For this reason, as discussed elsewhere, CFC recommends the implementation of activity-based accounting systems across all state agencies to accurately report the true expenditures of government activity.

 

Sources:

1. “Performance Based Budgeting: Fact Sheet.” Performance Based Budgeting Fact Sheet. National Conference of State Legislators, n.d.

2. Lu, Yi and Katherine Willoughby. “Performance Budgeting in the States: An Assessment” IBM Center for. IBM Center for The Business of Government (2012): 71-75. <http://faculty.cbpp.uaa.alaska.edu/afgjp/PADM628%20Spring%202013/Performance%20Budgeting%20in%20the%20States%20–%20An%20Assessment.pdf>

3. National Conference of State Legislators. “Legislative Performance Budgeting.” NCSL.org. 6 Oct. 2008. <http://www.ncsl.org/research/fiscal-policy>.

4. Murphy Commission. 1996-1999. “Making Arkansas’ State Government Performance Driven and Accountable.” <http://www.arkansaspolicyfoundation.org/policy/performance_driven.html>

5. Melkers, Julia, and Katherine Willoughby. “The State of the States: Performance-Based Budgeting Requirements in 47 out of 50.” Public Administration Review 58.1 (1998): 66-73.

6. Legislative Budget Board, n.d. <http://www.lbb.state.tx.us/>.

7. H.R. 2009, 72nd Reg. Sess. (Tex. 1991)

<http://www.lrl.state.tx.us/legis/BillSearch/text.cfm?legSession=72-0&billtypeDetail=HB&billNumberDetail=2009&billSuffixDetail=&startRow=1&IDlist=&unClicklist=&number=100>

8. S. 1332, 73rd Reg. Sess. (Tex. 1993).

<http://www.lrl.state.tx.us/legis/BillSearch/text.cfm?legSession=73-0&billtypeDetail=SB&billNumberDetail=1332&billSuffixDetail=&startRow=1&IDlist=&unClicklist=&number=100>

January 9, 2015

Activity-Based Costing in Government Internal Accounting

Activity-based costing (ABC) is an accounting method used for internal management to tie costs with the activities associated with those costs. This method allocates indirect or overhead costs in a more accurate manner than traditional accounting methods.

Overhead costs are those costs which cannot be directly traceable to a specific item, activity, or department. An example of overhead cost is an electricity bill incurred for an entire building that is being used to manufacture multiple different products, or is being used by multiple departments. Traditional accounting methods allocate overhead costs of an organization in a simple fashion, usually based on a volume related factor. In the electricity bill example, a traditional method may allocate the cost of the bill between products in a manufacturing building based only on the number of machine hours used, or between departments based on their respective square footage. This allocation does not take into account differing electricity usages by different product machines or by different departments within the buildings.

ABC accounting separates all of the different activities which use resources by an entity and specifically identifies the common factors driving costs for each activity (also called the cost drivers). Cost drivers can include factors such as labor hours for wage costs, machine hours for production costs, square feet of space for rent costs, or miles driven for vehicle costs to name a few examples. Costs must be identified as belonging to a certain activity, then all costs associated with each activity are pooled together in cost pools. Cost pools are divided by cost driver units to arrive at a unit cost per each activity. Once a unit cost for each cost driver and activity is determined, then a product or department can receive accurate cost allocations based upon their usage of cost drivers. Unit costs can also be used for more accurate budgeting and decision making in the future. An in-depth example of activity-based costing in a government agency, the Iowa Department of Transportation, can be found in the Murphy Commission report.¹

Obvious drawbacks of implementing activity-based costing systems are the expense and time required to identify all cost activities of state agencies, their related cost drivers, develop software to accurately track these costs, and train employees to effectively maintain the system. However, existing statewide use of SAP systems in Arkansas could possibly mitigate the startup expenses. Opponents of ABC accounting could address the complexity of implementation, but as addressed by John Turner of the Public Interest Institute, ABC concepts are those that accountants should be familiar with from school.²

Many states use the activity-based costing system within internal accounting of state agency expenditures. Agencies in Texas, Iowa, Virginia, and Utah have switched to ABC accounting methods.^{1 3} North Carolina, South Carolina, Florida, Indiana, Minnesota, and Mississippi all adopted statutes requiring the use of activity-based costing accounting by local governments.²Mark Abrahams of the Abrahams Group assisted Iowa, Montana, Washington, and multiple cities and counties nationwide in incorporating activity-based costing into government operations.⁴

Utah adopted this system in 2008 as part of its Free Market Protection and Privatization Board Act, which was last amended in 2013.⁵ Leonard Gilroy, Director of Government Reform for the Reason Foundation, recommended its implementation for Utah government services so that costs associated with government or non-government activities would be accurately reflected.⁶ The Act also created a Privatization Policy Board to conduct inventories of state agencies and make the determination of whether an agency function is inherently governmental or commercial.⁶ That determination allows citizens to see how much state resources are spent on government versus private activities, and also gives public officials a chance to engage the private sector to perform certain activities instead of the government.⁶

Iowa implemented activity-based costing when it established its Department of Administrative Services in 2003 to manage the resources of the state. Section 8A.505 of the Act requires the department to “establish an indirect cost allocation system based upon standard cost accounting methodologies to allocate direct and indirect costs of state agencies.”⁷ The Department issued Regulation 11.1.4(6), which incorporates activity-based costing into its operations.⁸ Furthermore, under §8A.102-4, a governor appointed director oversees all of the financial and administrative activities of the state, including “developing best practices for the efficient operation of government and encourage state agencies to adopt and implement these practices.”⁷

States which have adopted ABC accounting did so in a manner unique to those states, for each state has differing economies and activities which contains different cost drivers. To be implemented in Arkansas, the state would have to develop a system of allocation and cost drivers unique to Arkansas. Then, like other states, Arkansas would need to create new government positions to monitor its use and ensure that ABC is being implemented effectively. Doing so would provide Arkansas public officials and citizens with more accurate data on where expenditures are going, and would provide officials with a useful tool of budgeting going forward.

 

Sources:

1. Murphy Commission. 1996-1999. “Making Arkansas’ State Government Performance Driven and Accountable.” <http://www.arkansaspolicyfoundation.org/policy/performance_driven.html>
2. Turner, John H. “Requiring Local Governments to Utilize Full Cost Accounting Methods.” Public Interest Institute 2.1 (1997): 5-7. <http://www.limitedgovernment.org/publications/pubs/limits/limmar97.pdf.>
3. Briner, Russell F., Mark Alford, and Jo Anne Noble. “Activity-Based Costing for State and Local Governments.” Management Accounting Quarterly 4.3 (2003): 8-9.
4. Abrahams, Mark D. The Abrahams Group. N.p., n.d. <http://www.theabrahamsgroup.com/Introduction_Resume.htm>
5. Utah House Bill 75 (2008 General Session) (enacted). Inventory and Review of Commercial Activities. <http://le.utah.gov/~2008/bills/static/HB0075.html>; Utah House Bill 94 (2013 General Session) (amended). Free Market Protection and Privatization Board Act Amendments. <http://le.utah.gov/~2013/bills/static/HB0094.html>
6. Agency Activity Inventory a Powerful Tool to “Right-Size” State Government, Utah Senate Business and Labor Standing Committee Cong. (2008) (testimony of Leonard Gilroy). <http://reason.org/news/show/agency-activity-inventory-a-po>
7. Legis. Serv. 145 (H.F. 534), 80th Gen. Assemb., Reg. Sess. (Iowa 2003)
8. https://www.legis.iowa.gov/law/statutory/acts (Iowa Acts Quick Search: GA 80, Session 1, Chapter 0145)
9. Iowa Admin. Code 11-1.4(8A) (2013).

Summary

This act is intended to contain the growth of Arkansas government by limiting government expenditures from year to year to the growth in inflation plus population. In addition, there will be revenue limits restricting the raising of taxes. This method alone will not change the appropriations and budgeting process, but rather responsibly limit the total number of expenditures. This bill will prevent policy makers from increasing state spending that does not reflect voters’ willingness to pay for government services.[1] Over 30 states have passed similar measures.[2]

In effect, this limit gives the people of Arkansas control on how much they want government to spend, and the legislators remain in control on what to spend the money on. It would prevent government from spending away everything it brings in, and will return extra revenue back to the people.

This is a responsible limit because it addresses the need to contain the growth in government expenditures, as well as addressing the needs in providing services to a growing population and changing value of the dollar. A working formula would look as follows:

Expenditure Limit = Previous Year Expenditures + (Previous Year Expenditures x (Inflation + Population Growth))

Inflation – means the percentage change in CPI in the United States Bureau of Labor Statistics Consumer Price Index (CPI) for South Region, all items, all urban consumers, or its successor index.

Population Growth – means the annual federal census estimates for Arkansas and such number shall be adjusted every decade to match the federal census.

The power to change this limit should be placed in the hands of the people rather than legislatures. Legislatures have incentives to continue government growth and spending by providing loopholes, exemptions, and special considerations that would undermine the limit. Measures that legislators can work around do not restrain spending.[3]

A comparable constitutional amendment was passed in Colorado in 1992 known as the Taxpayer Bill of Rights. That bill provided taxpayer refunds in 1997-2000 of over $2.3 Billion to the people of Colorado.[4] A simulation shows that if a similar formula had been enacted in 1980, Arkansas would have spent over $120 Billion LESS between 1980-2008. (Tax Foundation, TABOR calculator).

An ideal bill for Arkansas should contain the following provisions:

• Growth in government expenditures limited to inflation plus population growth.
• Any revenue collected over the limit goes immediately back to the taxpayers, and all tax increases have to be approved by a vote of the people.
• When transferring government programs the overall limit must be reduced down accordingly.
• Supermajority vote of legislature or popular vote of the people to change the limit or raise/change any taxes.

 

Introduction

Over 30 states have enacted some type of tax or expenditure limit (TELs).[5] TELs place a limit on how much taxes, revenues, or expenditures can increase in a state each year.[6] There are various types of TELs and no two are the same. The states change and adapt them for each state. The most common types of TELs include limitations based on (1) inflation + population growth, (2) Personal Income Growth, (3) Share of Income, (4) a Fixed Number, or (5) some variation of these.[7][8]

Effectiveness of TELs

TELs passed by initiative are more restrictive and contain fewer loopholes than those enacted by state legislatures.[9] TELs that limit government spending to the inflation rate plus population growth and mandate immediate rebates of government surpluses are more effective at limiting government expenditures than are other TELs.[10] This in turn creates incentives to cut taxes when it appears that revenues are going to exceed the limit. TELs that allow legislatures to increase the limit or work around them in some way do not restrain spending.[11] TELs that limit growth to the growth in state income is associated with slightly smaller budgets in low-income states, but is associated with larger budgets in high-income states.[12] TELs built as “some share of income” “have no statistically significant impact on either state-only spending or stand-and-local spending.”[13] TELs at a fixed number result in higher budget growths.[14]

Characteristics that tend to have more of an impact on keeping spending down include: (a) extra-legislative adoption, (b) constitutional codification, (c) a supermajority or public vote requirement for overrides, (d) a provision that automatically and immediately refunds surpluses in excess of the limit, and (e) prohibition on unfunded mandates to the local levels.[15]

Some research advocates that TELs are not effective at actually reducing government spending.[16] That conclusion is made because of the level of significance measured, and because of how TELs are structured.[17] At least one report states there is no statistical significance between states that have TELs and those that do not.[18] A measure was statistically significant if it was at least 5% of a difference.[19] Even though few states met that 5%, small percentages out of billions of dollars spent would still be significant to others. Most TELs do reduce per capita expenditures, but the ones that use formulas and calculations that included extra measures beyond just inflation plus population growth did not see much reduction in the growth of government expenditures. Many states enact TELs structured to allow them to say to constituents that they are reducing government growth, while actually allowing for them to spend more.

The “Anti-Tel” research advocated other measures to limit government expansion that include (1) increase competition among bureaus, (2) forcing state and localities to compete with each other, and (3) allow bureaus to compete for budget dollars in the provision of given services.[20] Zycher states that “TELs will be unable to substitute for the hard work of long-term public education and persuasion about the central benefits of reduced government spending.”[21] However, it seems like that advice coupled with a strict TEL like Colorado’s TABOR and described in the summary would help towards more economic freedom for Arkansans.

TEL Calculator

A “TEL Calculator” has been developed by the Tax Foundation to show how a certain TEL would impact a certain state over a certain period of time. There are options to apply differing styles of TELs to the same data. The TEL calculator can be found at http://interactive.taxfoundation.org/tabor/ .

Arguments For TELs

TELS are generally supported by those advocating smaller government and less spending such as conservatives and libertarians. This includes the national group Americans for Prosperity, and the CATO Institute’s support for TELs limited to inflation plus population growth. Common arguments in favor of TELs include[22]:

• Enhance the stability of the policy environment;
• Assure state residents that taxes will not rapidly increase unless a majority is in favor of change;
• Make government more accountable;
• Force more discipline over budget and tax practices;
• Make government more efficient;
• Control the growth of government;
• Enable citizens to vote on tax increases and determine their desired level of government service;
• Force government to evaluate programs and prioritize services;
• Raise questions about the advisability of some functions provided by state government;
• Help citizens feel empowered and result in more taxpayer satisfaction;
• Help diffuse the power of special interests.

Arguments Against TELs

TELs are generally opposed by those advocating larger government and more spending such as liberals and those interests benefiting from more government spending. Interests that rely on government funding and subsidizing generally do not support TELs.  Bell Policy Center is a leading advocate against TELs, specifically those like Colorado’s TABOR. Common arguments in opposition to TELs include[23]:

• Shift fiscal decision making away from elected representatives;
• Cause disproportional cuts for non-mandated or general revenue fund programs;
• Make it harder for states to raise new revenue;
• Cause a “ratchet-down” effect where the limit causes the spending base to decrease so that maximum allowable growth will not bring it up to the original level;
• Result in excess revenues that are difficult to refund in an equitable or cost-effective manner;
• Result in declining government service levels over time;
• Fail to provide enough revenues to meet continuing levels of spending in hard economic times;
• Shift the state tax base away from the income tax to the more popular (but regressive) sale tax if voter approval is required.
• Does not allow local municipals to raise taxes and spend more if those constituents with for that
• Increase in Health Care Services will reduce other services proportionally

Case Study: Colorado

Colorado’s TEL, the “Taxpayer Bill of Rights” (TABOR) is perhaps the most well-known TEL. It is praised by limited government supporters and demonized by big government advocates. TABOR was a constitutional amendment approved by the people of Colorado in 1992 that “limits revenue growth for state and local governments and requires that any tax increases be approved by the voters of the affected government.”[24] The expenditure limit was set at inflation plus population growth. Specifically, voter approval was required for (1) tax rate increases, (2) imposition of new taxes, and (3) increases in property tax assessment ratios.[25] Also, TABOR explicitly prohibits implementation of new or increased (1) Real Estate Transfer Taxes, (2) Local Income Taxes, (3) State Property Taxes, and (4) State Income Tax Surcharges.[26]

“Without any voter-approved adjustments to the limit, the TABOR cap ensures that state revenue growth will remain below the rate of economic growth in the state.”[27] TABOR also prevented creation of “Rainy Day” funds, with the excess revenue over 3% going back to the voters.[28]Emergencies require a supermajority vote of the legislature, and are general limited to natural disasters.

TABOR provided taxpayer refunds in 1997-2000 of over $2.3 Billion to the people of Colorado.[29]

In 2005, the people of Colorado approved a Referendum that basically “suspended” TABOR for five years. This allowed the state to take in all raised revenue with no rebates to the people, and exceed spending limits.[30] This allowed the state to keep over $1.3 Billion that would have returned to taxpayers as rebates.[31]

Colo. Const art. 10, §20

Colorado’s Taxpayers Bill of Rights (TABOR)

Colorado’s Taxpayers Bill of Rights (TABOR), with Annotations

Case Study: Utah

Utah passed a TEL by legislation back in 1989 that would set an expenditure limit at inflation plus population growth plus the growth in personal income.[32] In 2004, the limitation removed the growth in personal income from the limit.[33] This made the limit more restrictive and began “limiting the growth in state spending to the relatively low percentages of population growth and inflation.”[34] Utah’s bill did not appear to include provisions for refunds to the public when the spending limit was not met. This aspect incentivized legislators to spend more. So, those differences became smaller as more spending occurred. In 2004 there was $150 million below the spending limit, $88 million below in 2005, $50 million below in 2006, and then estimated for just $9.5 million below the limit.[35] In addition, there were numerous programs and funds exempt from the expenditure limit including public education, debt service expenditures, emergency expenditures, Rainy Day Fund, Education Rainy Day Fund, one-time project cots for capital developments, Centennial highway fund restricted account, and transportation investment fund.[36]

Utah’s change to keep the limit at inflation plus population growth was good, but the numerous exemptions and lack of refunds show the effects likely to occur – a lack of better containing government growth. A provision that would refund those large sums of money would incentivize tax breaks to avoid the refunds or provide the actual refunds back to the people. Making sure the bill included practically all government expenditures within the limit would avoid re-classifying expenditures to avoid the limit.

Utah Code Ann. §63J-3-101-402

Utah TEL

Case Study: Ohio

Ohio passed a TEL through the legislature in 2006. Their version would limit government expenditures by either inflation plus population growth or 3.5%, whichever is greater.[37] This means that there is a guaranteed spending increase in government of at least 3.5% per year, regardless of any other factors. The Ohio bill also included a provision that excess revenues brought in above the expenditure limit would go into a “rainy day” fund up until it is 15% of the budget, and only then would refunds be distributed out to the people of Ohio.[38] Also, it did not put the power of tax increases in the hands of voters, and so if there are any new constitutionally mandated spending increases into the fiscal legislation, the TEL becomes null and void.[39] The bill does not limit tax increases.[40]

Ohio’s bill shows that changing the formula and other attributes just slightly can affect the actual goal of containing government growth. This law could allow for an increase in expenditures even during periods of deflation and population reduction, although it will keep government from growing at a larger pace than 3.5% a year, it may do little in true containment of growth. A better solution would be like the one proposed in the summary that is more kin to the Colorado TABOR bill. The TEL proposal in Ohio “provides incentives to the legislature and those who benefit from public spending to budget the entire “guaranteed” maximum increase in public spending of 3.5%.

Ohio Rev. Code Ann. §131.55-60

Ohio TEL

Sources

Hill, Edward, Ph.D., Matthew Sattler, Jacob Duritsky, Kevin O’Brien, and Claudette Robey. A Review of Tax Expenditure Limitations and Their Impact on State and Local Government In Ohio. Issue brief. Cleveland: Cleveland State U – Maxine Goodman Levin College of Urban Affairs, 2006. Web. 6 Jan. 2015. <http://urban.csuohio.edu/publications/center/center_for_public_management/tel31806.pdf>.

Kinnaird, Andrew, and Cameron Smith. Exploring a Constitutional Expenditure Limit for Alabma. Rep. Birmingham, AL: Alabama Policy Institute, 2013. Print.

McGuire, Therese J., Ph.D., and Kim S. Rueben, Ph.D. THE COLORADO REVENUE LIMIT: The Economic Effects of TABOR. Issue brief. Washington DC: Economic Policy Institute, 2006. Briefing Paper. Web. 5 Jan. 2015. <http://www.epi.org/publication/bp172/>.

Mitchell, Matthew., Ph.D. TEL IT LIKE IT IS: Do State Tax and Expenditure Limits Actually Limit Spending? Working paper no. 10-71. Washington DC: Mercatus Center – George Mason U, 2010. Web. 2 Jan. 2015. <http://mercatus.org/sites/default/files/publication/TEL%20It%20Like%20It%20Is.Mitchell.12.6.10.pdf>.

New, Michael J., Ph.D. “Limiting Government Through Direct Democracy: The Case of State Tax and Expenditure Limitations.” Policy Analysis 420 (2001): 1-17. Cato Institute. Web. 2 Jan. 2015. <http://www.cato.org/publications/policy-analysis/limiting-government-through-direct-democracy-case-state-tax-expenditure-limitations>.

Patton, W. David, Ph.D. “Hitting the State Spending Limit.” Policy Perspectives 2.11 (2006): 1-6. Center for Public Policy and Administration – University of Utah, 20 Dec. 2006. Web. 6 Jan. 2015. <http://www.imakenews.com/cppa/e_article000718531.cfm?x=b11,0,w>.

“TABOR Bill with Annotations.” N.p., 13 July 2011. Web. 6 Jan. 2015. <http%3A%2F%2Fwww.colorado.gov%2Fcs%2FSatellite%3Fblobcol%3Durldata%26blobheader%3Dapplication%252Fpdf%26blobkey%3Did%26blobtable%3DMungoBlobs%26blobwhere%3D1251726086092%26ssbinary%3Dtrue>.

“The Taxpayer’s Bill of Rights (TABOR).” TABOR Text. N.p., n.d. Web. 2 Jan. 2015. <http://www.douglasbruce.com/ECO/ECOcontent.php?it=85>.

Waisanen, Bert. State Tax and Expenditure Limits. Issue brief. National Conference of State Legislators, 2010. Web. 2 Jan. 2015. <http://www.ncsl.org/research/fiscal-policy/state-tax-and-expenditure-limits-2010.aspx>.

Washington, Emily, and Frederic Sautet, Ph.D. Tax and Expenditure Limits for Long-Run Fiscal Stability. Issue brief no. 61. Washington DC: Mercatus Center – George Mason U, 2009. Mercatus On Policy. Web. 2 Jan. 2015. <http://mercatus.org/publication/tax-and-expenditure-limits-long-run-fiscal-stability>.

Zycher, Benjamin, Ph.D. State and Local Spending: Do Tax and Expenditure Limits Work? Rep. Washington DC: American Enterprise Institute, 2013. Web. <https://www.aei.org/wp-content/uploads/2013/05/-state-and-local-spending-do-tax-and-expenditure-limits-work_152855963641.pdf>.

Endnotes

[1] Washington at p.1

[2] Zycher at p.1

[3] Washington at p.2

[4] New at p.12

[5] Zycher at p. 1

[6] New at p. 3

[7] Waisanen at p.2

[8] Mitchell at p.22

[9] New at p. 3

[10] Id.

[11] Washington at p. 2

[12] Mitchell at p. 22

[13] Id.

[14] Id.

[15] Id. At 23

[16] Zycher at p.1

[17] Id. At 20

[18] Id.

[19] Id.

[20] Id. At 46

[21] Id.

[22] Waisanen at p.4

[23] Id.

[24] Id.

[25] McGuire at p.2

[26] Id.

[27] Waisanen at p.4

[28] Id.

[29] New at p.12

[30] Waisanen at p.5

[31] Washington at p.3

[32] Patton at p.1

[33] Id.

[34] Id.

[35] Id. at p. 3

[36] Id.

[37] Hill at p.39

[38] Id. at p.40

[39] Id.

[40] Id.

 

What Other States Are Doing