It is a pleasure to be here with you today. I want to welcome all
the folks who are joining us by way of the
Internet, and
we are grateful, of course, to Al Gore for having "created" this
very useful way for us to get our message across the country.
I
also thank The Heritage Foundation for this opportunity to share
what we have done in Arkansas during the past two and a half years
to provide tax relief and to make our state government more
accountable and efficient. In Arkansas, and even in Hope, Arkansas,
there are conservatives who believe that government really does
need to get smaller, not larger; who believe that the best
government is the most local government; who believe that taxes
should be smaller; and who try to bring more efficiencies into what
we do in government. And the good news is that this message of
smaller, more efficient, and accountable government is selling in
our state.
Many
of the solutions to the problems facing our country can be found
working at the state and local levels. It is a good thing when
Washington looks to the states for innovative programs that will
work at the federal level. Across the country, governors have been
on the cutting edge--not only making the tax structure more fair,
but also reducing the burden on taxpayers; not only reducing
welfare rolls, but also creating jobs. With the tax deadline
looming tomorrow, I am painfully aware of how much of Arkansans'
hard-earned money goes to Washington to fund federal programs and
mandates. I would like to begin by talking about some of the tax
reforms we have instituted in Arkansas during the past two and a
half years and then go on to several other reforms that might be of
interest to Congress.
Just
last week, we completed our 1999 legislative session, and the
difference between the 1997 session two years ago (the Arkansas
legislature meets biannually) and this session is remarkable. Two
years ago, to say that the legislature didn't like me would have
been an understatement. But this time we got along so well that I
pinched myself most days to make sure we really were having a
session.
We
developed an incredible working relationship, and I think perhaps
term limits had a lot to do with it. I was a strong supporter of
term limits in 1992, when we implemented them in Arkansas. I
believe in them more now because I have seen 57 freshman
legislators, out of 100 who came to the State House, come with an
understanding that they had limited time here in government and had
better make it count. Their goal was to make their state a better
place, not to make mischief for the governor. And that attitude so
prevailed in our legislative atmosphere that we passed 92 percent
of the legislative package of 75 bills we introduced from the
Administration. Now, I would suggest to you that in any state, this
would be a pretty darn good record, but when you are a Republican
governor introducing that much legislation and getting that much
passed in the most lopsided legislature in the
country--party-wise--it is remarkable.
And
that's why I want to praise our legislature. I can't take all the
credit, and it would be inappropriate for me to do so. The
executive branch cannot accomplish anything without working with
the legislative branch, sitting down with them, negotiating, and
treating the members with respect because they were elected just
like I was. I can tell you that what we've seen in Arkansas in this
last legislative session is what I would hope and pray will someday
happen in Washington.
REFORMING ARKANSAS' TAX SYSTEM
To
better understand the reforms we've implemented, you need a basic
understanding of Arkansas' tax system. Picture a three-legged
stool. One leg represents income tax, another the Arkansas sales
tax, and the third represents property tax. If any of these legs is
removed or greatly shortened, the stool would be off-balance. Each
area of revenue is equally needed to provide the necessary
essential services to the people of my state. Therefore, tax relief
and reform have to be carefully crafted to be responsible.
One
of the greatest challenges that I faced as governor of a state like
Arkansas was that for 162 years the tax burden on Arkansans always
went up. It never went down. And when the legislature met, the
discussion would be, "Which taxes will we raise and by how much?"
But, for the first time in 1997 and again this session, the old
paradigm was no longer valid. The big battle was no longer, "Which
taxes will we raise and by how much?" but, "Which taxes will we cut
and by how much?" To shift the mentality of the legislators, to
change the paradigm if you will, was singularly, I think, the most
significant thing that has happened in the past two and a half
years.
Responsible Tax Cuts--The First Steps
During the 1997 legislative session, my
first as governor, we passed a comprehensive income tax relief
package, marking the first time in Arkansas' history that the state
had seen a major, broad-based income tax cut. This $90.6 million
tax relief measure lessened the tax burden on Arkansans in many
ways:
-
Our state tax code no longer punishes a
couple for being married. We need to reward couples for getting
married and raising children in a family setting. Too often, our
government policies do just the opposite.
-
Those below the poverty line are exempt
from state income tax. We adjusted the tax tables for all
taxpayers to incorporate the new standard deduction amounts and a
tax credit based on the amount of Social Security taxes paid.
-
To prevent taxpayers from creeping into
higher tax brackets as a result of inflation, we indexed the
regular income tax brackets. Indexing is performed each year,
beginning in 1999, based on the positive change in the Consumer
Price Index. The maximum percentage of change allowable is 3
percent a year.
-
Arkansas uses the federal credit for
child and dependent care to compute the Arkansas child and
dependent care credit. In the 1997 session, we increased the
available credit by doubling, from 10 percent to 20 percent, the
amount of federal credit allowable.
-
We eliminated the capital gains tax on
the sale of homes. If the property was owned and occupied as
the taxpayer's main residence for three of the five years preceding
the sale, the gain from the sale is exempt.
-
We increased the qualifying income
level and maximum rebate allowable under Arkansas' Circuit Breaker
Act. The Circuit Breaker Act provides cash rebates to
low-income Arkansas taxpayers 62 years of age and older based on
the real property taxes on their personal residence.
- We enacted a special working taxpayer
credit based on the portion of Social Security tax that is paid to
the federal government for retirement benefits. Taxpayers
receive a credit equal to 2 percent of the Social Security tax
paid. The credit is allowed on the first $40,000 of earned income.
Taxpayers who qualify for the special reduced tax rate receive a
credit equal to 4 percent of their earned income.
It
is of special note that this package of reforms gave $90.6 million
in tax relief to Arkansans in a responsible manner. Arkansas law
mandates that we have a balanced budget. In both 1997 and 1999, we
produced balanced budgets with tax relief in the budgets. In other
words, we budgeted for tax relief. By finding savings to pay for
new programs, we proved it was possible to propose new and needed
programs by reallocating resources while still providing tax
relief. This has never before been accomplished in Arkansas.
1999 Tax Reforms
IRA's. During the 1999 session, our
legislature passed bills to adopt the new federal Roth IRA
provisions and the educational IRA provisions. It extended the
$6,000 per taxpayer exemption for income from employer-sponsored
pension plans to include income from individual retirement
accounts.
Capital Gains. Legislation was also
considered or enacted to reduce the capital gains tax and simplify
capital gains tax computation. One of the chief impediments to
growth in Arkansas is the income tax on capital gains. It adds
about $50 million to the state treasury, but it costs Arkansans far
more. The federal capital gains tax, now 20 percent, affects
everyone. But Arkansas' additional 6 percent levy is a high hurdle
for businesses to clear, particularly while neighboring Texas and
Tennessee do not tax capital gains at all and Mississippi does not
tax in-state investments. Despite the fact that economic
development is one of the state's priorities, Arkansas' capital
gains tax both repels outside businesses and actually gives
Arkansas' businesses an incentive to relocate out of state.
I
proposed the complete elimination of income tax on capital gains
for individual taxpayers. This reform will be phased in beginning
in tax year 1999 with an exclusion of 30 percent of capital gains
from taxation and a simplification of the capital gains tax
computation for taxpayers. I plan to address further reduction of
the capital gains tax when the legislature convenes again in
2001.
Property Tax. Going into the 1999
legislative session, we knew we had to do something to eliminate
the inequities in Arkansas' property tax system. We also understood
that much of the frustration over property taxes was a direct
result of problems with appraisals and the assessment system,
rather than with property taxes in general. Taxpayers are rightly
distressed by the inequities that result when property values are
not kept up-to-date for many years and suddenly, large increases in
assessments are made. To older retired citizens on fixed incomes,
these increases can be devastating.
To
address these concerns, we proposed in the 1999 legislative session
a Property Taxpayers' Bill of Rights designed to bring fairness to
all Arkansas property owners. It establishes a uniform notice and
due process procedure, guaranteeing citizens they will be treated
fairly in the assessment of property taxes. It provides a fairer,
more user-friendly process for taxpayers to appeal the valuation of
their property, including easier access to the appeals process and
a consistent written standard for the property owner to prevail. It
also gives property owners the opportunity to better understand how
their local taxes are used by specifying what portion of their
total tax bill goes to each unit of local government. The
Taxpayers' Bill of Rights is a step toward eliminating inequitable
assessments and an empowerment of taxpayers in the increasingly
complex world of property taxation.
OTHER REFORMS
We
went into the 1999 legislative session with five major goals: tax
reform, which you just heard about; juvenile justice reform; a
highway program; education reform; and electricity deregulation. I
would like to tell you briefly about some of these areas and just
where we've made significant progress in Arkansas.
Juvenile Justice Reform. Many of
you may remember that it was just over a year ago when our state
was rocked with a horrible tragedy on the campus of Westside Middle
School with the shooting of fifteen persons, five of whom were
killed--one teacher and four students. Our laws inadequately
addressed that kind of circumstance so we changed them. The New
York Times recently wrote a piece about the process we went through
and the changes we made, which included blended sentencing
laws.
Education Reform. We eliminated a
lot of the unnecessary bureaucracy and senseless mandates on local
school districts. One example was the mandate forcing local
districts to have summer programs, even if the districts didn't
have any students who qualified for them. Through our Start Smart
Initiative, we are placing more emphasis on the K through four
years and creating higher standards for those students. Students
can no longer be promoted past the fourth grade unless they meet
the standards in mathematics, reading, and also in character
education.
Character-based education has become a
very important component of our education structure in Arkansas,
and school districts have options on how they implement it. They
can either choose a set curriculum--there are probably twenty
different programs, samples of which we have in the Department of
Education--or they can do it on their own. What we encourage them
to do is to put basic virtues like responsibility, punctuality,
honor, and honesty into every part of their curriculum. It's not
religion-based, but rather focuses on character traits and values.
The idea is if you're teaching history, you talk about the impact
of, let's say, honesty: "How did honesty help Abraham Lincoln? What
did it do for his credibility?" Children need to understand there
are consequences for living out virtues, and we've already seen
some pretty convincing results: discipline problems are going down
and the learning atmosphere has improved dramatically. My point,
however, is not that character-based education simply means
maintaining discipline and order. Rather, it means building into
kids certain character attributes that are desirable for them; that
will make a big difference in their getting scholarships and decent
jobs; that will help them succeed in life.
We
successfully challenged the teachers unions, which historically
have been very powerful in Arkansas, and won on virtually every
issue. In addition to making it possible, through the Fair
Dismissal Act, to get rid of teachers who are not doing the job and
who are violating their contract, we also passed a bill that will
provide financial incentives up to $2,000 a year of additional
money for teachers who show extraordinary excellence in teaching.
It's not enough to penalize people who do not do well. We must
reward people who do exceptionally well and create a sense of
expectancy for those who succeed because they'll be rewarded.
Electricity Deregulation. As all of
you know, electricity deregulation is a very complicated issue. A
number of states have taken it on, and I would challenge anyone to
take a look at our deregulation bill. Time will tell, but I believe
it is one of the best bills in the country. It properly addresses
the balance between ensuring real fairness for the consumer,
creating a competitive environment for large industrial customers,
and giving the utilities a reason to want to compete.
Welfare Reform. Welfare reform is
working in our state. 44 percent of the people on welfare a year
and a half ago are now off the welfare rolls and are in jobs and
working. And the good news is that--even though the liberals said
that if we did that, we would have huge unemployment lines, people
would be out in the streets, they would be starving, and the food
banks would just be overwhelmed--here are the facts: 44 percent of
welfare recipients later, we have the lowest unemployment rate in
the history of Arkansas right now, and last year we had the largest
number of new job start-ups in the history of our state.
CONCLUSION
These are some of the things we've done,
and they are proof positive that cutting taxes, making government
performance-driven and accountable to the people, and bringing some
sense of real fairness to government's overall approach is making
life better for all our citizens.
Thank you for listening to another
governor from Hope, Arkansas--one, by the way, whose ideas on
reforming government are very different from those of our last
governor from Hope.
The Honorable Mike
Huckabee, a Republican, is the Governor of Arkansas. This
lecture is based on remarks given at The Heritage Foundation on
April 14, 1999, and on testimony before the House Committee on
Government reform on the same day.