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The Associated Press November 10, 2010, 5:21PM ET

Arkansas gov proposes $4.6B budget for coming year

Arkansas Gov. Mike Beebe on Wednesday proposed a nearly $4.6 billion budget for the coming year that would cut the state's grocery tax by a half cent, but said there's no room for other tax cuts without threatening state services.

The proposal presented by the governor's office would increase the state's budget by 2.5 percent, or about $109 million, for the fiscal year that begins July 1, 2011. Lawmakers return to the Capitol for the legislative session on Jan. 10.

The only tax cut Beebe proposed is reducing the state's grocery tax from 2 percent to 1.5 percent, which would cost the state $15.5 million next year. Beebe is not proposing any other tax cuts, or any increases to make up for the lost revenue.

The proposal sets up a potential showdown next year with Republicans in the Legislature, who enjoy their highest numbers since Reconstruction in the majority-Democrat Legislature after last week's election. GOP lawmakers have said they want to look at what other tax cuts the state can afford.

"Anybody that proposes these reductions in taxes has to also say what are you going to cut, specifically," Beebe told reporters at the state Capitol. "We're not going to cut K-12. I think everybody acknowledges that. So it's going to be which colleges are you going to cut or prisons or nursing homes? None of those are viable in my opinion, so anybody that proposes additional tax cuts has a responsibility to propose a corresponding reduction in spending to that particular area of the budget."

The forecast predicts that state revenues will increase by $125.4 million, or about 2.8 percent, for the fiscal year.

Arkansas Department of Finance and Administration Director Richard Weiss told lawmakers that he expects some growth after the economic downturn, and credited the state's balanced budget requirement for helping Arkansas avoid the deep cuts and layoffs other states have faced.

Beebe's budget calls for increasing funding for public schools by $55 million -- or about 2.9 percent -- and increasing the Human Services budget by nearly $6 million -- or about .6 percent.

Beebe, a Democrat, won re-election last week after campaigning primarily on a promise to continue cutting the state's sales tax on groceries. The tax has been reduced from 6 percent to 2 percent since Beebe was elected four years ago, and Beebe has promised to get rid of the rest if the budget allows. A 1/8-cent sales tax would remain because it was approved by voters as a constitutional amendment to fund conservation.

"It's tough. Any reduction in revenue is tough in a tough economic time, but I think we have to keep the momentum going on reducing to ultimately eliminating the grocery tax," Beebe said. "So I tried to strike a balance between what we could squeak by and afford versus continuing the momentum."

Republicans, who will hold at least 44 seats in the 100-member House and 15 seats in the 35-member Senate, have indicated they're interested in looking at cutting other taxes, including the capital gains tax and the tax manufacturers pay on their utility bills.

"It's nice to be in a situation where we're talking about tax cuts instead of tax increases," said Sen. Gilbert Baker, R-Conway, co-chairman of the Joint Budget Committee.

Republicans next year will hold a majority of the seats on the House Revenue and Taxation Committee and half of the seats on the Senate panel.

Baker has said he'd also like to look at cutting the tax on used cars.

Rep. Robert Moore, who will be House speaker next year, said he's leaning toward supporting the grocery tax cut, but says he also wants to look at reductions that could help spur economic development.

"That's just a debate we need to have," said Moore, D-Arkansas City. "We need to explore the direct revenue impact and how it is associated with incentives to invest money, grow the economy and create jobs."

The proposal calls for a 1.86 percent cost-of-living increase in pay for state employees, which will cost about $23 million.

Beebe's budget proposal also includes recommendations for the following fiscal year, even though Arkansas now budgets on a one-year cycle. Voters in 2008 approved a constitutional amendment that requires the Legislature to meet and budget every year, instead of every other year.

Beebe recommended increasing the state's funding for Medicaid by $174 million for the fiscal year that begins July 1, 2012. Human Services officials say the state faces a major shortfall in Medicaid in the coming years because of the program's growth.

Sen. Joyce Elliott, D-Little Rock, called Beebe's budget proposal reasonable but said she wants more details on how the state will deal with growing needs in Medicaid and the prison population. Beebe's budget calls for increasing the Department of Correction budget by $6.4 million, or about 2.2 percent.

"How that's going to impact the budget overall is confounding to me and we've got to starting thinking about this in a more holistic way in the needs that we see," Elliott said.

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