Secretary Jim Hudson. Credit: Arkansas Department of Finance and Administration.

Jim Hudson, secretary of the Department of Finance and Administration and the state’s chief fiscal officer, is confused. Or maybe he’s just not telling the truth.

Hudson, a loyal soldier for Gov. Sarah Huckabee Sanders, used his public platform last week to make the pitch for Sanders’ new wave of tax cuts. If the state has a surplus of revenue in a given year, Hudson argued, it could either spend that money or send it back to taxpayers in the form of tax cuts. Sanders, Hudson implied, was simply taking advantage of the state’s big old surplus this year — $700 million and counting — to “give your money back to you.” (How we wound up with that giant surplus in the first place raises its own set of questions — see more below.)

Sanders said last week in a tweet that she wanted lawmakers to “cut income taxes by nearly $500 million” in this week’s special session. The Legislature is now considering bills that would slash the top income tax rates for individuals and corporations, a move that will disproportionately benefit the wealthy. Those tax cuts are on their way to quickly sail through the Legislature this week.

There’s multiple layers of goofy, low-grade propaganda to sift through here, unfortunately, so before we get to the lunacy of Hudson’s comment, let’s start with the governor’s $500 million number.

The actual projected cost of the tax cuts is $322.3 million per year. But because the cuts are retroactive, it impacts the first six months of the current calendar year, which fall in the previous fiscal year. (State fiscal years run from July to June.) Therefore, that revenue impact carries over and hits as an extra one-time cost in the upcoming fiscal year. (If you want to follow the arithmetic: To add six months, add half of $322.3 million, so about $161.2. You wind up with a total of about $483.5 million — that’s $322.3 million + $161.2 million.)

So the actual impact of the tax cut is $322.3 million, but the governor wanted to boast about a bigger number so she used the one-time cost of $483.5 million and rounded up to 500. Whatever sells, I suppose.

It’s only natural for political hucksters to use those big round numbers — $500 million and $700 million — to try to bamboozle the public into thinking that lawmakers are simply applying a surplus toward tax cuts, a surplus that just so happened to appear. After all, if we overbilled taxpayers, shouldn’t we send that money right back?

But this isn’t just spin — it’s pure bullshit. (Though in fairness, more than a few legislators genuinely seem to believe their own bullshit.) There is no meaningful sense whatsoever by which the surplus money can be said to go toward the tax cuts that are being pushed through this special session.

First, the very basic accounting point: You cannot use a one-time surplus to pay for an ongoing reduction in revenue in the form of tax cuts. Instead, the “pay for” for these tax cuts will be future relative reductions in spending.

Sen. Jonathan Dismang (R-Beebe), the chairman of the Joint Budget Committee, told me that this is often a point of education for legislative members, who may not have a handle on the finer points of the budget. Paying for an ongoing cost of roughly $322 million per year with $700 million in one-time money is not just irresponsible, Dismang explained, it’s nonsensical. If the budget’s revenues are reduced by roughly $322 million every year, the legislature must find a corresponding way to spend $322 million less per year than they would have without the tax cut in order to keep the budget balanced. That’s not necessarily a spending cut in absolute terms because the overall revenue collected could be bigger or smaller depending on economic growth. But if you take away $322 million from the baseline, that means $322 million less in spending somewhere compared to that baseline. It’s as simple as that. There’s no special trick to pull with surplus funds in a given year.

Even describing budgeting this way as “irresponsible” or “risky” — which is how you’ll often hear Democrats respond to propaganda like Hudson’s — almost understates the point. A one-time surplus in a given year is simply irrelevant to the long-term budget picture. It would be like getting a one-time grant of $10 million for higher ed and claiming that could pay for a $10 million annual increase in the higher ed budget. Political rhetoric aside, this is not actually how anyone involved does the budgeting! And there is no legal mechanism for the Legislature to appropriate the surplus in that way. That’s impossible. It’s just pure nonsense.

The second point to keep in mind is that it’s also simply not true that the surplus money is being given back to taxpayers, as Hudson claims. In fact, there’s a very good chance that the state will do precisely what Hudson says they won’t: “find new ways to spend your money.”

Here’s how it works when the state winds up with a surplus: At the end of the fiscal year, all surplus funds are parked in a fund called the General Revenue Allotment Reserve Fund until the Legislature takes action to appropriate the money.

A decade or so ago, surplus money often wound up in various discretionary slush funds — General Improvement Fund allotments for legislators and a “rainy day fund” for the governor. That system created yet another incentive for lawmakers and state officials to skew the budget process toward creating surpluses, as that gave them more money they could directly control outside of the normal lawmaking and appropriation process. The GIF money in particular led to a number of corruption scandals, and even when there was no outright corruption, it tended to result in very small-bore projects that let individual legislators shower goodies on local constituents.

In place of the GIF and rainy day funds, Dismang said, the Legislature has created a series of reserve funds (or made new use of an existing fund) intended to be more transparent and more focused on backup emergency funding and larger capital projects. Each fund has a different process by which the executive branch seeks legislative approval to access them. In the meantime, the funds are interest-accruing.

In recent years, the surplus has been massive: Last year, the state finished with a whopping $1.16 billion surplus, and the year before that it was a record $1.63 billion. Nearly all of that surplus money from recent years has gotten parked in three funds: The Catastrophic Reserve Fund, which can only be accessed due to a shortfall in revenue collection in order to fill funding gaps as needed; Restricted Reserve Funds, which include designated set-aside funds, typically for large, one-time capital projects; and a Reserve Set Aside Fund, similar to the Catastrophic Reserve but designated for specific state services.

So what about the more than $700 million surplus from last fiscal year? Is that being given back to taxpayers like Hudson claims? Nope. According to the bill that enacts Sanders’ new tax cuts, $290 million will go to the Reserve Set Aside Fund, the emergency fund that targets specific services included under the state’s annual balanced budget bill, the Revenue Stabilization Act.

That money won’t be going anywhere unless there is a future fiscal crisis. Keep in mind: It can’t be used to cover the future gap in spending power from the tax rate change that’s being enacted this year. State law requires the legislature to pass a balanced budget based on projected revenues under the current tax rates, year by year. The emergency funds only become available if the forecast undershoots the amount of revenue coming in, leaving the state unable to pay its bills. Such an emergency would not be caused by not enough revenue coming in due to tax rates being too low; a shortfall would be caused because revenues collected via those existing rates came in much lower than anticipated (presumably because of a severe economic downturn). There’s no connection between these funds and a change to the income tax rates.

The rest of this year’s surplus money, meanwhile, will likely wait until the next regular session. Dismang has previously told me it will likely eventually be appropriated to one-time, large-scale capital projects.

In other words, all of the surplus money is either going to new spending or to a break-glass-in-case-of-emergency fund that can only be used for spending on state services.

Not a dime of the surplus is going to this new wave of tax cuts. Again, there is no way to apply that one-time money to ongoing tax cuts even if you wanted to. It is possible to put the money in a fund for one-off tax relief, such as a tax credit only applied to a single year. But that sort of maneuver has nothing to do with paying for a cut to the tax rates, and even that didn’t happen for the current surplus.

Hudson is simply talking gobbledygook. We’ll hear versions of this half-baked propaganda all week, I suspect, but don’t let the politicians bamboozle you: The only way to pay for tax cuts is to spend less, which ultimately means fewer services at lower quality for fewer people.

To be maximally generous to Hudson, let’s say that he was referring to surpluses in general, rather than this year’s surplus in isolation. That’s a strained reading of his tweet, but let’s go with it.

It is certainly true that revenues in recent years have been coming in outrageously higher than the forecasts created by Hudson’s agency to ensure a balanced budget. If that keeps happening, something is amiss. While there’s nothing wrong with building up something of a safety net with funds in the Catastrophic Reserve Fund, it’s now sitting on more than enough cash to cover something akin to the Great Depression, according to Dismang.

A giant annual surplus shouldn’t be occurring as a matter of course; it occurs when the forecast is wrong or when the state intentionally underspends, as with this year’s austerity budget from the governor. In general, the goal is to balance the state budget by spending at roughly the same amounts as the revenue that’s being brought in. But the governor, along with the Legislature, this year enacted a severe austerity budget that didn’t come close to keeping up with inflation. As a result, spending was lower than revenues and the state already projects a surplus for this coming fiscal year of roughly $700 million. That is a policy choice to spend less. That projected surplus will soon be lower because of the tax cut, so surely Hudson will take the opportunity to crow, wrongly, that the surplus paid for the tax cut. But, once again, the “surplus” is not some magic found money. It was simply built into the budget intentionally via reducing spending relative to what was available from the projected revenues. The reduction in the “surplus” is just a corresponding reduction in spending that has been cloaked in fuzzy math. (Indeed, the year-end surplus itself is simply a form of spending, either now or deferred.)

Then there’s the issue of the surplus creeping up throughout the year because the forecast undershot. Predicting the future is hard, and forecasters have some wiggle room in designing their projections. The assumptions used are not empirically set in stone; different forecasters will come up with different projections depending on how they design their model. A cynic might say that a forecaster can essentially put their thumb on the scale by leaning toward undershooting projections. And indeed, critics have argued that Arkansas has systematically been too conservative in its forecasts dating back for years over multiple governors, meaning state officials are essentially artificially creating outsize surpluses.

There’s certainly reason to wonder whether that’s happening now. The state has exceeded its forecast for each and every monthly general revenue report dating back at least several years. This is typically presented as good economic news: Yay, surplus! But it also means that DFA, the department now led by Hudson, is consistently, wildly wrong in their forecasts. And there is little to no public explanation of why, for example, a recent revision led to a sudden leap of more than $400 million above the forecast.

Whether you prioritize lower taxes or higher spending, this is a problem! The process for surplus money is admirably more transparent than the days of GIF and rainy day fund trickery, but it remains a bit hard to follow. The surplus funds ultimately wind up in funds that few in the public are aware of — either sitting there as unspent extras accruing interest or ultimately spent on projects of the Legislature’s choosing that aren’t part of the normal annual budget process.

Surpluses aren’t popping up because there’s a bunch of slack in the budget — in fact, Sanders is pushing an increasingly stingy austerity budget for just about every priority outside of vouchers for private schools. They’re popping up because the forecasts are just totally wrong, creating surpluses that make for good headlines for the governor and more options for spending that money outside of the normal budget process.

They also happen to help with a transparently dopey talking point in support of tax cuts, as Hudson demonstrated last week — even though not a dime of this surplus money is actually going to the tax cuts that will likely fly through this week.

David Ramsey is a contributing editor for the Arkansas Times and the Oxford American. You can follow his writing at his Substack blog/newsletter, Tropical Depression. https://davidbramsey.substack.com