LITTLE ROCK, Ark. (AP) — Arkansas Gov. Mike Beebe proposed a $4.9 billion budget Thursday that calls for eliminating nearly all of the state's grocery tax next year if the state's payments to three school districts for desegregation and other key obligations decline over a six-month period.
Finance officials told lawmakers that Beebe is calling for reducing the state's grocery tax from 1.5 percent to 0.125 percent. The cut would eliminate all state sales tax on groceries except for a one-eighth cent tax for conservation approved by voters as part of a constitutional amendment.
The tax cut, which officials estimate would cost the state $69 million, would be triggered if obligations in several key areas decline by at least $35 million for six consecutive months. They include payments the state must make to three Little Rock-area school districts as part of a desegregation settlement and some state bond payments.
Beebe said the proposal was the best way to ensure the grocery tax would be cut while dealing with a $138 million shortfall in the state Medicaid budget.
"I don't think in good conscience with the current revenue and talking about the kind of cuts we're talking about in Medicaid, at the same time we could talk about taking $70 million away from the budget," Beebe told reporters at the Capitol. "It's just not responsible. It's consistent with what I said, and I said we're going to attack the grocery tax and we're going to reduce it in a responsible manner as we can afford to do it without adversely impacting state services."
Beebe said he believed the state's desegregation and bond costs could drop by $35 million next year. He noted the state has asked a federal judge to end the desegregation payments. It claims they are no longer necessary because two districts, North Little Rock and Little Rock, have been declared substantially desegregated and Pulaski County schools also have made significant progress.
Arkansas is required by a 1989 settlement to fund magnet schools, transfers between districts and other programs to support desegregation and keep a racial balance in the three school districts. Those costs add up to about $70 million a year.
Beebe's budget proposal calls for increasing overall state spending by $180 million. The state Department of Human Services, which manages the state's Medicaid program, would get the largest share of the budget increase, $98 million in additional funding. Beebe also proposed setting aside $140 million from the state's surplus over the next two years to help Medicaid close its funding gap.
DHS has detailed a series of cuts it will have to make in the state's Medicaid program, including removing thousands of seniors from nursing homes, to deal with the shortfall that it will face even with the additional money. Beebe has said the state can avoid the nursing home cuts by agreeing to expand the state's Medicaid program under the federal health care law.
Beebe proposed increasing money for public schools by $49 million. The governor also called for setting aside $10 million for a rainy day fund the state could tap in emergencies. The budget also calls for a 2 percent cost-of-living increase for most state employees, a pay raise that would cost the state $12 million next year.
Beebe's budget proposal was released about a week after Republicans took control of the state Legislature for the first time since Reconstruction. The Democratic governor was elected in 2006 on a pledge to phase out the state's sales tax on groceries. It has been reduced from 6 percent since he took office.
The tax cut idea faces an uphill fight from Republicans, who have said they want to look at cutting the income tax and other reductions. Beebe said there's no room in the budget for other cuts, but GOP leaders said they were encouraged by his approach on the sales tax cut.
"What doesn't sit well with me is when somebody says we don't have money to do anything except what I want to do," said Republican Sen. Michael Lamoureux, who will serve as Senate president next year. "He did not do that. He just said the money is real tight and I'm not sure what we can do."
Rep. Davy Carter, who was elected Thursday as the incoming House speaker, said he was still reviewing the budget. But he said tax reforms and Medicaid would be key issues for the Legislature next year.
"Those are going to at some point collide," said Carter, R-Cabot. "That will likely be the heart of the session."
The Department of Finance and Administration projected that the state's surplus would be $300 million, increasing its original projection by $100 million. After the Medicaid assistance, that would leave about $160 million in one-time money available for other needs. Beebe said he's looking at several areas for the surplus, including replenishing an economic development incentive fund.
Associated Press Writer Chuck Bartels contributed to this report.
Andrew DeMillo can be reached at www.twitter.com/ademillo